07:19am EST 27-Jan-99 Morgan Stanley\DW (Meeker, Mary (212)761-8042) AMZN
AMAZON.COM: WEEEE HAAAAVE LERNED TO FOLLO THE METRICS.../P2
Sales and marketing rose $11MM Q/Q to $49MM or 19% of revenue (down
from 24% of revenue in CQ3). Although it did not provide details, the
company stated that customer acquisition costs declined during the
quarter. By our math, marketing spending per new customer added
declined from $31 in CQ3 to $29 in CQ4. Product development rose $4MM
Q/Q to $17MM or 7% of revenue (down from 9% in CQ3). And G&A
increased $0.5MM Q/Q to $5.5MM or 2% of revenue (down from 3% in CQ3).
Operating loss significantly better than expectations - Operating loss
of $17.8MM was significantly better than our expectation of $21.5MM.
As a percentage of revenues, operating loss declined from 14% in CQ3
to 7% in CQ4.
Headcount during the quarter rose from 1,600 to 2,100. Personnel
additions came from recent acquisitions and from staff expansions in
the Germany and UK sites.
Merger and acquisition costs totaled $24MM in CQ4. These costs
include amortization of goodwill and other purchased intangibles
associated with the April 1998 acquisitions of Bookpages, Telebook,
and Internet Movie Database, and the August 1998 acquisitions of
Junglee and PlanetAll. We are treating these non-cash expenses as non-
operating costs, and accordingly, they will have no impact on
operating net income or operating EPS. The company anticipates these
expenses to total approximately $90MM in 1999, $67MM in 2000, and
$33MM in 2001.
Balance sheet fundamentals healthy - Cash and cash equivalents rose
from $337MM in CQ3 to $373MM in CQ4 - operating cash flow was a
positive $39MM, reversing the previous three quarters operating cash
flow losses and leaving Amazon with a total operating cash flow for
the year of positive $31MM. Long-term debt ended the quarter at
$348MM.
AMZN's impressive cash conversion machine remained in place. Amazon's
working capital needs benefit, as always, from two factors - almost
all of its transactions are credit card based (so accounts receivable
are negligible), and the company's business model has so far required
very little inventory. As we've pointed out before, this is a company
with a negative cash conversion cycle - it gets cash from customers
before it gives cash to suppliers. Here are the details for the
quarter - at the end of CQ4, inventory days were 14, accounts payable
days were 52, and receivables days were 2. That translates into a
negative cash conversion cycle of 36 days.
Inventory turns rose to 32 in CQ4 from 26 in CQ3. We've been
predicting that as the company increases its on-hand inventory to stay
ahead of demand, its inventory turns would fall and likely settle in
the 15-40 range. We've also pointed out that this is still more than
an order of magnitude better than traditional retailers.
CQ4:98 METRIC DETAILS:
Cumulative customer accounts grew to 6.2MM, up 311% Y/Y and 38% Q/Q -
well above our 5.9MM estimate. (Amazon had announced on January 5th
that it had gained 1MM new customers during the holiday season.) The
number of new customer adds rose to 1.7MM from 1.2MM in CQ3. The
1.7MM customer add amount was AMZN's largest ever. We estimate that
Amazon's customer accounts now constitute around 8% of total worldwide
Internet users - and we believe this percentage will only get higher.
Repeat purchases constituted 64% of sales in CQ4, up from 64% in CQ3.
(Management noted that customer acquisition rates in January have been
ahead of pre-holiday levels.)
The AMZN Associates program, an effective, low-cost means of customer
acquisition, grew to over 200,000 in the quarter, up from an estimated
140,000 at the end of CQ3. Our estimate of the number of visits per
day was approximately 1.6MM during the quarter, and we estimate that
the number of books sold (at an $17 ASP) rose to over 11MM in the
quarter.
Basic Growth Metrics for AMZN, CQ1:98 - CQ4:98
CQ1:98 CQ2:98 CQ3:98 CQ4:98
Revenue ($MM) $87 $116 $154 $253
Q/Q Growth 32% 33% 32% 65%5
Customer Accounts (000s) 2,260 3,280 4,500 6,200
Q/Q Growth 50% 45% 37% 38%
Customer Adds (000s) 750 1,020 1,220 1,700
Associates (000s) 40 90 140 200
Amazon.com has become one of the most popular destinations on the
Internet and is the leading Web shopping site - According to Media
Metrix, Amazon.com was the 14th largest Web property in terms of reach
(16.1% combined home/work reach) in December - up from #17 in
September. And in the Web shopping category, Amazon ranked second,
behind BlueMoutainArts (21.7%), a free, electronic greeting card
service, but ahead of such e-tailers as eBay (9.7%),
barnesandnoble.com (8.3%), and eToys (6.8%).
1999 EXPANSION PLANS:
Management believes that 1999 will be a pivotal year for Amazon in
particular and for online retailing in general. Accordingly, Amazon
is planning significant capacity expansion and an increase in sales
and marketing and product development expenses.
Specifically, Amazon plans to increase its distribution infrastructure
during the year. On January 7th, AMZN announced that it had obtained
a highly mechanized distribution facility in Fernley, Nevada - its
third distribution center (DC). This facility, which should become
operational this summer, will more than double Amazon's existing
capacity. Management announced that it expects to open one or more
additional DCs in the next few months.
The goals of the capacity expansion are to create deeper inventory,
improved customer service, and higher gross margins in the long-term.
Gross margins should eventually benefit from Amazon's increased
ability to order direct from publishers, from mechanized operating
efficiencies, and from lower shipping costs. Customer service should
improve due to the greater shipping proximity of DCs to customers.
Management estimates that the Fernley facility will reduce standard
shipping times to key markets in the western U.S. by a full day.
Amazon is also planning to increase its product offerings in 1999
beyond books, music, video, and gifts, although it gave no further
details. And finally, AMZN is planning to significantly expand its
personnel.
Jeff Bezos states that Amazon's goal is to be "customers' first choice
in finding and discovering anything that they might want to buy
online." Amazon is aiming to be a company with multi-billion dollar
sales and tens of millions of customers.
FINANCIAL OUTLOOK:
CQ1:99 should see total revenue of $266MM, up 204% Y/Y and 5% Q/Q.
Opex should rise to $97MM, up 231% Y/Y and 36% Q/Q. Operating net
income should come in at a loss of $45MM or a loss of ($0.29) EPS. We
continue to estimate breakeven in C2000. Customer accounts at quarter
end should be 7.6MM.
For C1999, we are looking for $1.4B in total revenues, up 122% Y/Y and
operating expenses of $413MM, up 111% Y/Y. Operating net income
should be a loss of $136MM, with EPS of a loss of ($0.86). Customer
accounts at year end should be 12.2MM.
COMPETITIVE LANDSCAPE:
In the online book market, AMZN's most direct competitor is
barnesandnoble.com. On October 6th, Bertelsmann AG announced a $200MM
investment in barnesandnoble.com for a 50% stake. With its 30MM book
club members (primarily in Europe) and ownership of Random House,
Bantam Doubleday, and BMG Entertainment (Arista Records and RCA
Records), Bertelsmann should be able to become a significant
competitor in several markets. Bertelsmann is expected to formally
launch its online efforts in Europe shortly.
A comparison of Amazon and barnesandnoble.com's CQ4 reveals the extent
to which barnesandnoble.com is playing catch-up. Amazon's revenues
for the quarter were approximately 10x that of barnesandnoble.com and
its revenue growth was greater - 65% to 45%. Directly comparing
Amazon.com book sales to barnesandnoble.com, Amazon's book sales were
almost 8X greater, although its 37% book sales growth was lower than
that of barnesandnoble.com (what a typeful!.).
Given its strong entry into music and videos, we believe AMZN is
capable of leveraging its business model across many different product
sectors. Amazon.com's competitive challenges will no doubt increase,
but we are confident AMZN will respond effectively.
Competitive Metric Comparisons: CQ4:98
AMZN BKS.com CDNow N2K
Revenue ($MM) $253 $25 $20 $18
Q/Q Growth 65% 45% 44% 71%
Customer Accounts (000s) 6,200 1,300 983 734
Q/Q Growth 50% 86% 33% 40%
Note that results for CQ4:98 for barnesandnoble.com, CDNow, and N2K
are estimates based on company pre-releases. Barnesandnoble.com
announced on January 7th that its sales for the seven-week holiday
season ending January 2nd were $17.8MM.
In the music category, we notice that AMZN's $33.1MM music sales in
CQ4 were greater than leading music etailers CDNow and N2K, with
significantly greater sales growth (130% Q/Q) to boot. Amazon
surpassed CDNow and N2K to become the largest online music retailer in
CQ3. And it now looks like AMZN might surpass the combined sales of
CDNow and N2K at some point. A merger between CDNow and N2K is
expected to be completed prior to March 31, 1999.
As a final note, we see that Onsale announced on January 19th Onsale
atCost, an initiative to sell computer products (and potentially other
merchandise) at wholesale costs. Instead of a retail markup, Onsale
would receive a $5-$10 per item fee from the customer. We find the
business model interesting and note that other companies are
attempting to go the same route. Still, we don't believe it will have
a material impact on Amazon. For one, we've seen this movie before -
NetMarket attempted to challenge AMZN sometime back with zero gross
margins backed up membership fees. Didn't happen. Further, as Jeff
Bezos is always quick to point out, low price models need to be backed
up by reasonable service offerings. And so far, no one has been able
to match Amazon's high value service offering.
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