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Amazon's (AMZN) Q4 Earnings Beat, Sales View Disappoints

By Zacks Investment ResearchStock MarketsJan 31, 2019 09:38PM ET
www.investing.com/analysis/amazons-amzn-q4-earnings-beat-sales-view-disappoints-200382584
Amazon's (AMZN) Q4 Earnings Beat, Sales View Disappoints
By Zacks Investment Research   |  Jan 31, 2019 09:38PM ET
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Amazon.com (NASDAQ:AMZN) reported fourth-quarter 2018 earnings of $6.04 per share, beating the Zacks Consensus Estimate by 49 cents. The figure surged 61.5% year over year.

Further, net sales of $72.38 billion comfortably surpassed the Zacks Consensus Estimate of $71.93 billion and were within management’s guided range of $66.5-$72.5 billion. The figure increased 19.7% year over year.

However, shares were down 4.7% in pre-market trading, apparently due to disappointing revenue guidance. Amazon expects first-quarter 2019 net sales between $56 billion and $60 billion, lower than the current Zacks Consensus Estimate of $61.19 billion.

North America revenues (61% of sales) increased 18.3% from the year-ago quarter to $37.30 billion. International revenues (28.8% of sales) increased 15.5% year over year to $18.04 billion. Amazon Web Services (AWS) revenues (10.3% of sales) surged 45.3% year over year to $7.43 billion.

Solid 2018 Holiday Season

The 2018 holiday season was the biggest ever for Amazon, with customers purchasing millions more devices compared with the 2017 holiday shopping season. Echo Dot was the #1 selling product on Amazon globally, from any manufacturer, in any category last holiday season.

Amazon stated that during the holiday season alone, tens of millions of customers worldwide started Prime free trials or became paid members.

Further, more than 50% of units sold in Amazon’s stores in 2018 holiday season came from small and medium-sized businesses. Third-party sales grew faster than first-party sales, and nearly 200,000 small and medium-sized businesses surpassed $100,000 in sales in Amazon’s stores last year.

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Amazon launched Amazon Pop-Up stores for customers in six countries across Europe during the holiday season. For the first time, the company presented a curated selection of more than 2,000 products, and carried out 136 events and workshops for its customers in Amsterdam, London, Madrid, Milan, Berlin and Paris.

Prime Expansion Continues

Amazon expanded free grocery delivery and pickup from Whole Foods Market (NASDAQ:WFM) through Prime Now. The service allows customers to place their order via the Prime Now app and choose delivery in as fast as an hour or pickup in as little as 30 minutes.

Grocery delivery is available in more than 60 U.S. metros and pickup service is available in more than 20 U.S. metros, with plans for continued expansion.

Moreover, Prime FREE Same-Day Delivery and Prime FREE One-Day Shipping expanded to more than 10,000 cities and towns in the United States in 2018. Now a majority of Prime members in the United Stated have access to free one-day shipping or faster.

Notably, Amazon Air launched a new gateway operation in Riverside, CA and announced three additional gateway operations scheduled for a 2019 launch. These are in Wilmington, OH; Alliance, TX; and Rockford, IL.

Amazon Air provides gateway operations — onsite airport facilities to load, unload, and sort packages — at more than 20 airports, making two-day shipping possible almost anywhere in the United States.

In terms of streaming, Prime Video is now available on Comcast’s (NASDAQ:CMCSA) Xfinity X1 in the United States. Additionally, Amazon launched NBA League Pass and PGA TOUR LIVE on Prime Video Channels.

Amazon launched ad-supported IMDb Freedive, a free streaming video channel available in the United States on the IMDb website, which can be accessed through laptop or personal computer. It is also available on all Fire TV devices.

Moreover, content strength helped Amazon win awards and accolades. Prime Video Original Series Inside Edge became the first Indian show from a video streaming service to be nominated for the International Emmy Awards.

Amazon Studios’ Cold War was nominated for three Academy Awards — Best Foreign Language Film, Best Director for Pawel Pawlikowski and Best Cinematography for Lukasz Zal.

Moreover, Amazon Studios won two Golden Globe Awards. Rachel Brosnahan won Best Actress in a Television Series – Comedy or Musical for her performance in The Marvelous Mrs. Maisel for the second year in a row. Ben Whishaw won Best Supporting Actor in a Series, Limited Series, or Motion Picture Made for Television for his role in A Very English Scandal.

In India, Amazon partnered with ICICI Bank to launch the Amazon ICICI Bank credit card to preselected customers in India. Further, Prime Video introduced localized Hindi, Tamil, and Telugu language user interfaces in the country.

In Brazil, Amazon announced fast and free delivery on hundreds of thousands of in-stock items sold and shipped by Amazon. Customers can now shop from 12 categories, with products shipped across Brazil from a new Amazon fulfillment center located in the Greater Sao Paulo area, the first fulfillment center in South America.

Amazon.com.br now offers consumers 15 categories, with total selection of more than 20 million products from Amazon and its selling partners.

Further, Amazon Fashion launched Prime Wardrobe in Japan and the U.K.

Smart Home Expansion: Alexa, Ring, Key

Amazon introduced new smart home features for Alexa.

Customers can now choose from more than 28,000 Alexa compatible smart home devices from more than 4,500 unique brands. There are now more than 150 different products available with Alexa built-in, from headphones and PCs to cars and smart home devices.

Moreover, Alexa Guard helps Echo customers keep their homes safe through Smart Alerts, Away Lighting, and voice control of security systems from Ring and ADT.

Ring had its best quarter ever, selling millions of devices globally. The Ring Video Doorbell 2 was the best-selling Ring product this holiday season. Ring Stick Up Cam, the company's first indoor/outdoor camera, began shipping to customers.

Additionally, Key by Amazon introduced new ways for customers to control and monitor their homes. These include the Schlage Encode Smart Wi-Fi Deadbolt for Key; integration with the Ring app; Key for Garage, which includes remote monitoring and in-garage delivery for eligible Prime members; and Key for Business, a new B2B pillar for the service.

Alexa Becoming Smarter

The Alexa Skills Store now offers more than 80,000 skills. Alexa customers can now access Apple (NASDAQ:AAPL) Music’s library of 50 million songs on their Echo devices.

Amazon has included a new unsupervised self-learning system that detects the defects in Alexa’s understanding and automatically recovers from these errors. This helps Alexa learn at a faster pace.

Amazon also introduced a new text-to-speech system, which helps Alexa and other services to adopt different speaking styles based on different contexts.

Moreover, the company introduced new tools for Alexa developers to make it easier to build engaging skills.

AWS Momentum Continued

AWS revenue growth was driven by an expanding customer base and strengthening services portfolio.

AWS’ enterprise customer base continued to expand with the addition of Ellie Mae, Korean Air, Santander’s Openbank, Pac-12, Mobileye (F:0ME), Guardian Life Insurance, Amgen (NASDAQ:AMGN) and National Australia Bank.

Amazon launched AWS GovCloud (US-East) and AWS Europe (Stockholm) Regions in the reported quarter. The company also announced plans for both the AWS Africa (Cape Town) and the AWS Europe (Milan) Regions.

AWS now provides 60 Availability Zones across 20 infrastructure regions globally. Notably, another 12 Availability Zones and four regions in Bahrain, Hong Kong SAR, Italy and South Africa will be available by the first half of 2020.

AWS added new capabilities to Amazon SageMaker. The company also announced Amazon SageMaker RL (cloud’s first managed reinforcement learning service), AWS DeepRacer (1/18th scale autonomous model race car, driven using reinforcement learning models), and the AWS DeepRacer League (world’s first global autonomous racing league).

AWS also announced AWS Outposts that comes in two variants. The first one is an extension of the fast-growing VMware Cloud on AWS that runs on AWS Outposts. AWS Native Outposts is the second variant.

Moreover, AWS announced Amazon Timestream and Amazon Quantum Ledger Database (QLDB), two purpose-built database services. The company also announced Amazon DocumentDB, a fast, scalable, highly available and fully managed document database service that supports MongoDB workloads.

Furthermore, AWS introduced Amazon Managed Blockchain, a new service that uses open source Ethereum and Hyperledger Fabric frameworks.

AWS announced six new instance offerings for Amazon Elastic Compute Cloud (Amazon EC2). A1 instances are powered by custom-designed AWS Graviton processors, based on the Arm architecture, for scale-out workloads. The P3dn GPU instances are ideal for distributed machine learning and high performance computing (HPC) applications featuring 100 gigabits per second (Gbps) network bandwidth.

C5n instances deliver 100 Gbps network bandwidth for running advanced compute-intensive workloads. Moreover, the new general purpose (M5 and T3) and memory-optimized (R5) instance types powered by Advanced Micro Devices' (NASDAQ:AMD) EPYC processors are 10% less costly than the current M5, T3, and R5 instances.

Two custom chips, AWS Inferentia and AWS Graviton, were also announced. Additionally, the company announced four new services — AWS Control Tower, AWS Security Hub, AWS Lake Formation and AWS Backup.

AWS also introduced the Amazon FSx family and additional storage classes for Amazon Simple Storage Service (S3).

Quarter Details

Product sales (61.8% of sales) increased 8.2% year over year to $44.70 billion. Service sales (38.2% of sales) surged 44.7% from the year-ago quarter to $27.68 billion.

Operating expenses were almost $68.60 billion, up 17.6% from the year-ago quarter. Cost of sales, fulfillment, marketing, technology & content, general & administrative and other operating expenses increased 16.3%, 11.7%, 42.8%, 21.5%, 7% and 43.3%, respectively.

As percentage of revenues, operating expenses declined 170 basis points (bps) on a year-over-year basis to 94.8%. Cost of sales, fulfillment and general & administrative expenses declined 180 bps, 100 bps and 20 bps, respectively.

However, technology & content and marketing expenses increased 20 bps and 110 bps, respectively, from the year-ago quarter.

Notably, Amazon’s $15 hourly minimum wage was put into effect in the United States and the U.K. (£10.50 in the London area and £9.50 in the rest of the U.K.) on Nov 1, 2018 for all full-time, part-time, temporary (including those hired by agencies) and seasonal employees.

The new Amazon minimum wage benefits more than 250,000 employees in the United States and 17,000 employees in the U.K. It also benefited more than 200,000 seasonal employees who were hired during 2018 holiday season.

Operating income jumped 78% from the year-ago quarter to $3.79 billion. Operating margin expanded 170 bps from the year-ago quarter to 5.2%.

Segment wise, North America operating income came in $2.25 billion, which surged 33% from the year-ago quarter. AWS operating income were $2.18 billion, up 60.8% year over year.

International segment reported a loss of $642 million compared with the year-ago quarter’s loss of $919 million.

Notably, Amazon announced plans to install solar panels on its fulfillment centers across the U.K., with an installed capacity of 20 megawatts. This is enough clean energy to power more than 4,500 U.K. homes. Currently, Amazon hosts solar panels on 43 fulfillment centers worldwide.

Guidance

For first-quarter 2019, Amazon expects net sales to grow 10-18% on a year-over-year basis. Management projects an unfavorable impact of approximately 210 bps from foreign exchange rates.

Operating income is expected between $2.3 billion and $3.3 billion compared with $1.9 billion in first-quarter 2018.

Zacks Rank & Another Stock to Consider

Currently, Amazon carries a Zacks Rank #2 (Buy).

TripAdvisor (NASDAQ:TRIP) with a Zacks Rank #1 (Strong Buy) is a stock worth considering in the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

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Amazon's (AMZN) Q4 Earnings Beat, Sales View Disappoints
 

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Amazon's (AMZN) Q4 Earnings Beat, Sales View Disappoints

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