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Amazon (AMZN) Q4 Earnings Beat, Revenues Miss Estimates

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Amazon.com’s (AMZN - Free Report) fourth-quarter 2016 earnings per share (EPS) of $1.54 cents surpassed the Zacks Consensus Estimate of $1.40.

However, revenues of $43.74 billion lagged the consensus mark of $44.87 billion. The stock was down 4.15% in Thursday’s after-hours trading in response to the lower-than-expected revenues, higher operating expenses and weak guidance.

Over the last one year, the stock has however outperformed the Zacks  Electronic Commerce industry. It has gained 56.63% compared with the industry’s gain of 47.98%.

Last quarter, despite an increase in operating expenses, the company showed much better financial discipline. The spike in operating expenses was due to buildout of fulfillment centers, and increased spending on original TV shows and movies. Amazon Web Services (AWS) and India expansion-related expenses also resulted in higher spending.

The North America and AWS segments contributed to profits while investments in international continued. Improvements in AWS were the result of operating efficiencies and increased utilization of assets.

The numbers in detail- 

Revenues

Amazon reported revenues of $43.7 billion, up 33.7% sequentially and 22.4% from the year-ago quarter. Quarterly revenues were at the mid-point of the guidance range of $42-$45.5 billion.

For the full year, revenues were $136 billion, up 27% from $107 billion in 2015.

Both product and service sales were up sequentially and year over year. Service sales grew much stronger than product sales from the year-ago quarter (up 43.7% compared with product sales growth of 15.1%). Revenue distribution between the two was 70%/30%.

The company generated record sales during this year’s holiday season, primarily led by its devices strategy. Echo Dot, Fire TV Stick, Fire tablet and Amazon Echo topped the best-sellers list.

Segment Details

The North America segment accounted for around 60% of sales, representing a sequential and year-over-year increase of 39% and 22%, respectively. The International segment accounted for 32%, up 31.6% sequentially and 17.9% year over year. The AWS segment was up 9.4% sequentially and a massive 47% year over year with revenue share at nearly 8%.

North America: Media was up 30% sequentially and 7.1% year over year. EGM was up 40.9% sequentially and 24.8% year over year. Other was up 42.6% sequentially and 80.4% year over year.

International: Media was up 35.6% sequentially and 2.6% from last year. Sales from EGM were up 30.5% sequentially and 23.8% from last year. Other revenue was up 19.35% sequentially and 17.9% year over year.

AWS: The business contributed $3.5 billion in the fourth quarter. AWS is gaining momentum with customers including McDonald’s, Workday, Capital One, Salesforce, GE Oil & Gas, Kellogg’s, Brooks Brothers, Ferrara Candy Company, GPT Group, Hoya Corporation, Lionsgate, Macmillan Publishers India, RWE Czech Republic, and Bart & Associates Inc. Amazon ended the quarter with 42 available zones across 16 infrastructure regions. The Mumbai (India) region was added in the third quarter, which became the sixth region in the Asia Pacific. Amazon remains the cloud infrastructure leader, well ahead of Microsoft (MSFT - Free Report) , International Business Machines Corporation (IBM - Free Report) and Alphabet (GOOGL - Free Report) .

Gross Margin

Gross margin was down 122 basis points (bps) sequentially but up 189 bps year over year to 33.8%. Sequential variations in gross margin were largely mix-related, although increased investments were also a factor. Growth in AWS had a positive impact on margin. Pricing is also an important factor, given the increase in product categories all over the world and Amazon’s strategy of heavily discounting products and services while building a position in any market. Third party sites did better than retail, which was also a positive.

Gross profit dollars were up 29.8% from last year. The consistently rising gross profit dollars from the year-ago period reflects the success of Amazon’s strategy.

Net income was up 197.2% sequentially and 55.4% year over year.

Operating Metrics

Amazon’s operating expenses of $13.5 billion were up 24.3% sequentially and 31.4% from the year-ago quarter. Amazon’s heavy investing activities (headcount, fulfillment centers, content, etc) over the past few quarters have been driving up its costs. Cost of goods sold increased 121 bps sequentially as a percentage of sales with marketing expense increasing 45 bps and technology and content increasing just 5 bps. All other expenses declined as a percentage of sales.

The net result was an operating margin of 2.9%, up 111 bps sequentially but down 23 bps from the year-ago quarter. Amazon reported an operating profit of $1.3 billion compared with $575 million in the previous quarter and $1.1 billion in the year-ago quarter.

North America segment’s operating margin of 3.1% was up 176 bps sequentially and 15 bps year over year. The International segment’s operating margin of 4.07% shrank 315 bps sequentially but was up 100 bps from the year-ago quarter. Operating margin of AWS was 26.2%, down 46 bps sequentially but up 207 bps year over year.

Consolidated segment operating income (CSOI) was up 111 bps sequentially but down 23 basis points from the year-ago quarter.

Net Income

Amazon generated fourth quarter net income of $749 million, or 1.7% of sales, compared with $252 million, or 0.8% in the previous quarter and $500 million, or 1.3% of sales in the same quarter last year. There were no one-time items in the fourth quarter. Therefore, the GAAP EPS was the same as the pro forma EPS of $1.54 compared with 52 cents in the previous quarter and $1 in the year-ago quarter.

Amazon.com, Inc. Price, Consensus and EPS Surprise

Balance Sheet and Cash Flow

Amazon ended the quarter with cash and short-term investments balance of $19.81 billion, down $146 million sequentially. The company generated $10.65 billion of cash from operations, spending $2.01 billion on fixed assets (including internal-use software and website development costs) and $3 million on acquisitions. Principal repayments of capital lease obligations were $1 billion in the fourth quarter.

Guidance

Management provided guidance for the first quarter of 2017. Revenues are expected to include a 250 bps positive FX impact and come in around $33.25–33.75 billion. The Zacks Consensus Estimate is pegged at $35.83 billion. Operating income is expected to come in at approximately $250-$900 million.

To Conclude

Retail: Amazon’s retail business remains very hard to beat on price, choice, convenience, you name it. The company has a solid loyalty system in Prime and its FBA strategy, and content addition continues to add selection to Prime memberships. If Amazon is able to replicate its domestic success internationally, investors could see far more growth. At the moment, international contributes a third of revenue but generates just a fraction of profits.

AWS: Amazon Web Services on the other hand is the cash cow for Amazon. The business generates much higher margins than retail, so it has a positive impact on Amazon’s profitability. We remain optimistic about the functionality, partner ecosystem and the experience AWS offers and believe this will lead to continued customer wins.

IoT: Amazon has converted the nascent smart home market into a potential area of growth, in a very short time, backed by its Alexa-powered Echo devices. With third-party partnerships, Amazon is making Alexa the central point of connecting IoT devices used in any household. , It appears that Echo is well poised to penetrate every stream of business on the back of Amazon’s robust performance.

The company has accelerated signing on third-party device makers, so that these companies integrate Amazon’s voice assistant – Alexa – which brings them into the respective eco systems.

Currently, Alexa is equipped with thousands of skills and can connect to any stream of business. We believe that Amazon has just started to unfold what it could do with Alexa.

Zacks Rank and Stocks to Consider

Currently Amazon has a Zacks Rank #5 (Strong Sell).

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