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April 27, 2011

Amazon surprises with Q1 results - Fastest unit growth in over 10 years!

Note in this post I try to use numbers that take out any currency fluctuations (ex-fx in wall st speak).  Whenever I have a number that is not ex-fx, I will denote it. I do this to keep things apples to apples. EGM stands for Electronics and General Merchandise - non media items in other words.  Click to enlarge any images.

Yesterday after the close, Amazon announced Q1 2011 results.  There was a lot of great content and tidbits of information I wanted to over that pertains to retailers that partner or are looking to partner with Amazon.  Be sure to check our Amazon Q1 preview here if you are curious to see how Amazon did against expectations leading into the announcement.

The one sentence summary for the Q and 2011 outlook would be - Grow and Invest like crazy.  Some short term focused investors may lose confidence due to the heavy investment, but when you look at the growth (accelerating in many instances) at Amazon, you can see why management is looking to invest in capacity.  In this post, we'll look at the details of the growth, investment and highlight some other areas of interest for online retailers.

Grow, Grow, Grow

Amazon blew away the top line estimates which were $9.5b and came in at $9.86b, not too far off their Q4 performance and came darn close to their first $10b non-Q4 quarter (which I suspect they will easily hit in Q211).

That $9.8b represents a 38% y/y growth (36% ex-FX) which is down slightly from Q4's 36% growth rate, but very impressive when you look at the leap Amazon took a year ago.  Also, keep in mind that e-commerce is growing in the 11-13% range (11% - comscore, 14% - emarketer), so Amazon continues to grow 3X of e-commerce, and thus is gobbling up share.

The first thing I always decode in Amazon's results is their different segments.  I like to look at five segments (US media, Intl media, US EGM, Intl EGM and Overall).  This chart details the growth trends for these five segments over the last two years: (all are ex-FX):

Amzn_1

From this chart you can clearly see some highlights:

  • All EGM categories continue to show tremendous performance with the US growing at 63% (down due to the tough comp) and 49% internationally.  ChannelAdvisor's customers are largely in this bucket and it's good to see that our SSS report was in-line (but ahead) of the rest of Amazon.
  • The US media category saw a material acceleration from 13% y/y growth to 18%.  I didn't hear Amazon explain what is going on there, but I thought it was of note.

Another really interesting trend this quarter was that Amazon enjoyed it's largest unit growth in over ten years, coming in at 51%.  In the call, they did attribute some of this to digital goods (Kindle books, MP3s, etc.).  Jeetil over at DB had a great chart on this that shows Unit growth over the last couple of years.

Amazon_2

Taken alone, Unit Growth isn't really a useful metric, but in the holistic sense, it's another indication that consumers are increasing their usage of Amazon, which can only mean more growth is in the cards as we all enjoy pin action from that activity.

Finally, I think it's important to look at the third-party (or seller business) aspect of Amazon's growth story.  Amazon reported that 33% of units shipped were third party, which is a pretty consistent slice of the pie, but when you think of the pie growing 51%, it's pretty darn impressive and must mean that 3P was on a serious ramp to keep that share.  A picture is worth a thousand words on this one so again I turn to  Jeetil for a great chart that shows the growth of 3P vs. 1P:

Amazon_3

What we see here is an impressive ramp up in 3P unit growth to 60% in Q1 11 vs. 50% in Q4.  In fact, 3P growth has DOUBLED since Q1 2010.  We hear a lot of concerns from retailers about competition with Amazon, this chart clearly shows that in the macro-sense, Amazon is growing 3P much much faster than 1P.

Here's the real kicker on growth - Amazon moved their Q2 forecast up to between 35%-47% growth (41% at the mid-point) which was way ahead of expectations and a signal they feel very bullish about Q2 and presumably the back half of 2011.

Invest, Invest, Invest

 While Amazon dazzled on the top-line, they disappointed on costs/profits.  The company is rapidly increasing 'capacity' (their term for both data centers and fulfillment centers) to handle the growth.

My favorite quote from the conference call really summarizes Amazon's stance on this:

But what we are seeing is, as you would expect with this great growth that we're experiencing, there is just more demand for capacity and that's both from a fulfillment capacity, that's both from our core retail business as well as fulfilled byAmazon. - Amazon CFO, Thomas Szkutak..

So quite simply, you can't grow an e-commerce business 40% y/y without also having to invest in front of it.  Amazon is really smart about this though and with FBA, Prime and ever increasingly short delivery times across the network of FCs, uses it as an ever widening 'strategic moat' around the Amazon e-commerce castle.

To put it in perspective, Amazon built 13 FCs in 2010 and has already announced 9 in 2011 and Szkutak was pretty clear they may build more if growth warrants.

To get a feel for what we're talking about, I did some napkin math and came up with this:

  • Amazon spent $1.1b in capex over the last year
  • 80% of that was for 'capacity' - FCs and DCs
  • That's ~$900m 
  • If you figure half and half, they invested ~$400-500m in fulfillment capacity.  

That's a SIGNIFICANT investment a competitor is going to also have to make to catch up with.  Also with 50 FCs, Amazon is a good 20-40 FCs ahead of everyone else.  In software we have a cliche for this - you can't make a baby with 9 people in a month - some things are inherently 'linear' and can't be scaled faster.  FCs and DCs definitely fit that profile.  For comparison's sake, eBay's $2.4b acquisition of GSI gets them 7 non-shared FCs.

Other tidbits of interest from the Q

There were a couple of other items I thought were very interesting this Q summarized here:

  • Media is now 40% and EGM is 57% (even though both are growing faster than ecomm)
  • US is at 55% and International is 45% (US ticked up due to FX)
  • Amazon ended the Q with an impressive 127m active users accounts - 20% y/y growth - so not only are they getting more and more activity from existing users, they are layering in 20% net-new growth on top of increasing monetization
  • (This warrants saying twice) Amazon expects Q2 growth to be between 35% and 47% - 41% at the mid-point - a possible acceleration into the year
  • Units/customer increased 26% y/y - in other words existing customers purchased 26% more year on year (Prime and 3P are key drivers of that IMO).
  • Amazon saw a nice cashflow bump from increased days payable to suppliers moving up to 66 days from 60 days.  This is an interesting tidbit for all retailers.  As you grow, you can continue to negotiate terms with your suppliers to achieve more favorable cash flow characteristics.

Conclusion and resources if you want more info

Those are the highlights of Amazon's quarter from an online retailer's perspective. There were lots of great lessons to be learned in here, but perhaps most importantly the Amazon train keeps rolling at 3X e-commerce driven by third-party sales.  We feel strongly that we are still early in this story and there's lots of room for retailers to partner with Amazon and enjoy some of this growth trajectory.

If you want to learn more about the quarter:

  • Amazon's press release is here
  • The earnings transcript at SeekingApha is here.
  • A presentation and other info is available from amazon's IR site here.

 

SeekingAlpha Disclosure - I am long Amazon and Google. eBay is an investor in ChannelAdvisor where I am CEO.

 

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