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3 posts from October 2011

October 27, 2011

Analysis of Amazon's Q3 Results -should seller's be concerned?

Tuesday (October 25th, 2011), Amazon reported Q3 results and Wall St. puked all over them sending the shares down a cumulative 20%+ to below $200.  Because of all the negative press, I've had some 3P Amazon seller's ask if everything is ok, should they worry about their sales on Amazon this holiday season, etc.

In this post we'll peel the onion on the quarter and look at Amazon's Q4 forecast to answer those questions.

Note: for this post, unless explicitly called out - everything is what is know as ex-fx - it factors OUT any changes due to currency changes.  In this Q, that tends to bring the growth rates down, so what you read here may differ from what you have seen else-where, that is due to currency factors.

Amazon's Q3 Highlights

First of all, it's important to put this Q in perspective.  Amazon is coming off a huge Q2 that we reported here and last Q3 they had monster EGM sales of ~80% so they have a tough 'comp'.

That being said, here were some of the highlights from Q3:

  • Revenue came in at $10.88b (now well over a $40b run-rate)
  • Active customers surged 26% to 152m users - the highest growth rate since 2004 (bodes well for future growth).
  • Paid unit growth was strong at 53% (compared to 56% in Q2)
  • Amazon indicated they are now planning on 17 additional Fulfillment Centers (FCs) in 2011 - up 2 from just last Q!
  • Amazon said that due to Kindle Fire pre-orders, they are making 'millions' more.
  • Amazon opened in Spain and the first product ordered was: "a Blu-ray pack of "Star Wars: The Complete Saga" to a new Premium customer in Madrid." (Premium = Prime) - who knew those Spaniards had such good tastes?
  • 9/28 was a historical record for Kindle pre-orders (beating last holiday season)
  • 3P units inched up to 38% of overall sales (up from 36% last Q - indicating that 3P continues to 'take share' from 1P)
  • Amazon's "Other" business is on fire - this is due to the success of their cloud computing platform - AWS which is an amazing system and LOB.

Digging into the Q3 growth rates

When Amazon announces, I always look at the different y.y growth rates they report.  I've always mentally mapped them to quadrants (US/Intl/Media/EGM) and came up with a handy visual this time around to show the growth rates.  I call it the Amazon growth quadrants:


I find this handy because it let's you see how each of the four quadrants is doing and also shows you five other data points that summarize each part of the quadrant.  For example, you can immediately see that the fastest growing 'quadrant' at Amazon is North American EGM (Electronics and General Merchandise) at 56%.  You can also see that Intl only grew at 33% overall, but that was due to slowness in the media segment, as you can see that EGM Intl was cooking at 51%.

Amazon is 54% NA vs. 46% Intl and 38% media, 58% EGM and 4% 'other' (AWS, ads, etc.).  So you can see from this quadrant-view that as EGM continues to be a bigger piece, it will nudge all of the growth rates up as media is weighing those down.

That's the snapshot view, here is a trend view over the last two years (8 Q's):


Here you can see that growth rates are all down somewhat with the exception of Amazon Overall (which may not make sense, but it's due to the mix shift to the faster growing EGM).

While it's never good to see downward trends, you have to put these in perspective:

  • E-commerce - E-commerce is growing at 15%-17% (depending on whose numbers you go with).  
  • Scale - Amazon is much much larger than it was 2yrs ago.  As you grow, the laws of large numbers start to catch you.

Bottom line: every amazon segment is growing faster than e-commerce and US EGM is growing 4X e-commerce and they are doing this at a $40b/yr scale.

This chart shows Amazon vs. eBay vs. e-commerce in NA:


This helps put the Q3 slight dip in growth into perspective.

What's new with Prime?

Amazon doesn't announce any Prime numbers, but in the 10Q they do disclose some details around shipping costs.  I've seen this mentioned as a negative on the quarter, so let's look (this table is from Mark Mahaney @ Citi's report):

So what you see is that Amazon's shipping cost as a % of sale goes up.  There's two ways to read that:

  • Shipping costs are going up faster than sales (this would be the case for a standard retailer) and eating into Amazon's margins
  • More prime users are signing up and thus Amazon is spending more in free shipping.

Of course, I tend to think it is the latter situation.  What's interesting is many retailers spend 10-30% on Sales and Marketing where Amazon spends around 3% on marketing - crazy right?!  Well, crazy like a fox - I believe Amazon believes that they'd rather put 5% in free/subsidized shipping vs. putting it into marketing.  Said another way, that 5% drives more sales in free shipping than it ever could in marketing.  Consumers love free shipping.

 Q4 guidance - gloom and doom or conservative?

Those were the Q3 highlights, now let's look forward to Q4 and beyond, here's what we learned from the conference call.

  • Amazon gave an unusually broad range for Q4 - $16.45b and $18.65b - which represents 27% and 44% growth respectively.  The mid-point is 36% growth which is pretty conservative coming off a 39% trajectory.
  • On the bottom-line they forecasted a big $500m swing of $(250m) and $250m.   
I'm not a public-company CEO, but the game on Wall-st is managing expectations.  One thing none of us can predict is how consumer confidence will look in Q4.  A lot of people have pointed out that the congressional super-committee is suppose to solve our budget problems by their deadlines.  Who is the genius that put these at 11/23 and 12/23?
The big concern in the World of e-commerce and retail is you have this Thanksgiving-Christmas storm of bad news and politics that further erodes not only confidence in our leaders, but causes consumers to pull back on holiday shopping.
That's a long way of saying that given the world today, it's hard to say: "Q4 will be like Q3", because we know these things have and can derailed consumers.  So personally, I think they are being prudent to give themselves a lot of wiggle room.
Amazon's CFO, Tom Szkutak said this on the call:

 In terms of the guidance for revenue for Q4, as we've done in previous years, we've given a wide range of guidance in Q4 just because of the seasonality and it's difficult to predict. But we feel very good about the demand that we've seen to date. And certainly, at the high end of the guidance, you can see there's an acceleration that's possible that's reflected in that guidance.

As for the bottom line, I was an early Bull on Kindle Fire and I think what we are seeing is Amazon is a bit surprised by the demand (or they wouldn't have to order 'millions' more units).  I'm starting to think my 5m number maybe blown out of the water and I've seen Wall St. analysts now nudging up to 6m Fire units for Q4.

With any razorblade model, you have a margin hit at the beginning razor sale and then make it back as the consumer adds razorblades.  I think Amazon is being prudently cautious here.  They certainly know the profile for normal Kindles, but for Fire - who knows.  It' s best to assume a low Prime take-up (say 5%) and then pleased that it comes in at 20%.

Amazon Prime'd to set Q4 on Fire

When I look at everything Amazon is doing - new FCs, 3P ramping, Prime usage increasing, Fire orders growing, it suggests they really wound the Q4 rubber band tight and if the consumer can just hang in there, we should see a monster Q4 from Amazon, that I think will quiet the critics.


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




October 24, 2011

Amazon Q3 results preview / cheat sheet for retailers

Amazon is set to announce their Q3 results on the heels of solid results from eBay and Google.

Our SSS data suggests that Q3 for 3P EGM (non-media -electronics/general merchandise) came in about 72% across the quarter.

Financially, Wall St is looking for:

  • Revenue: $10.9b
  • EPS: $.19
  • Y/Y US Revenue growth:  43%
  • Y/Y Intl Revenue growth: 33%

Other areas we'll be watching closely that are more forward looking and relevent to sellers/retailers:

  • Overall GMV trends - Amazon reports on four segments (Domestic/non-domestic/Media/EGM) and we always look for trends there
  • User growth - Amazon in Q3 reported 144m active users, and that metric has been growing nicely.
  • Seller unit % - The percentage of units that are 3P vs. 1P (Amazon sold directly)
  • Paid unit growth - Q2 grew 56% in Q2, it will be interesting to see if Q3 was up or down here y/y.

We'll also be listening very carefully for any news around Kindle Fire, how many FCs are online and any other tidbits around how Amazon feels about Q4.

Q4 guidance

In true 'what have you done for me lately' fashion, the most important part of the Q3 release is the Q4 guidance. Specifically, folks on Wall St. are very concerned about the margin pressure that may come from the Amazon Fire (which doesn't ship till Nov 15, but we forecast 5m units will sell).  Our rationale on this:

  • Let's say worst case, Amazon loses $50 / Kindle Fire (most break-downs show $10)
  • Amazon sells 5m units-> $250m in Q4 extra losses due to Fire.

So $250m is the worst case 'margin hit' that Amazon faces in Q4.

On the revenue side, let's look at what I think is a conservative scenario.  Let's put the 5m fire units into some buckets:

  1. Existing prime users (I'm in this bucket) - We are part of the Amazon ecosystem (Kindle, video, music, Prime) and the Fire is a must have as it gives us more+better access to our content.
  2. Non-prime users, that will become prime users - You are a light part of the Amazon ecosystem - you have some Kindle books, you have the $2 GaGa album and some free cloud storage.
  3. Non-prime users, that won't become prime users - You are new/light to Amazon and just want to use Fire as a low-end Tablet.  You'll browse, email and maybe shop, maybe read some Kindle books, but don't join Prime because you hate free 2-day shipping and access to thousands of streaming videos.


If you agree with me on these three use-cases, then here's what I think the economic impact of each of these is:

  • Existing prime users - The cream of the Amazon customer crop and Amazon is already making a killing on these folks.  Their spend is 4X non-prime.  To be conservative let's say that economically from a Fire perspective, we actually get the least amount from these guys - let's even say their spending habits increase 0.  In reality, I could see them maybe going from 4X to 5X, or decreasing any Prime churn, but let's say 0.  Think of this as a customer loyalty program.
  • Non-prime users, that will become prime - This is the lucrative group.   The Fire will bump them over the hump and get them into Prime. They'll spend $80 for the video and 2-day shipping, then their average Amazon spend will go up 4X. Let's say they spend $100/yr on Amazon and that becomes $400 @ 10% margin - that's $30+80 in incremental margin or $110.
  • Non-prime users that don't become prime - Getting the Fire will naturally cause this group to consume more Amazon digital content - kindle ebooks, VOD, and even physical products.  Let's say these guys spend $0 today, and they bump to $200 - $200*30% = $60 incremental margin (digital goods have higher margins).


Finally, if you generally buy into those economics, the real key to this whole thing is the mix of each bucket.   Rest assured that Amazon completely 'gets' this and it's the clear reason why they are packing so much new content and benefits into Prime and will continue to do so.  I believe they will make Prime so compelling you will see this mix:

  • 33% - Existing prime users - 1.65m units - $82.5m in cost, no offsetting margin.
  • 45% - Non-prime that become prime - 2.25m units - $110m in cost, and $247m in margin for a net positive contribution of  $135m
  • 22% - non-prime users that become prime - 1.1m units - $55m in cost, and offsetting margin of $66m for a net positive of $11m

Bottom line, you have $250m in costs and $313.5m in revenue bump for a net positive of $63.5m.  Think of this as a first year analysis.  For year two, you have NO COST (because they already have the fire) and in year two you make $313.5m (which has upside as some of the third group move up to group 2).  Now you may argue, ok I get what you are saying, but all the cost will be incurred in Q4 and the revenue will come over the following 12 months - into 2012.  Perhaps, but I actually think the most high margin events (prime sign-up and digital goods) will actually come right after the device is opened and that component alone ($66m+180m = 250m) will offset my $50 unit costs and if the unit costs are actually $10: $250m (revenue bump) - (5m*10=50m) = $200m incremental profit that is actually upside on Q4.

Now, Amazon is notoriously a) tight lipped on these kinds of things and b) conservative on guidance, so I think what we'll hear in Q3 is that they are conservative here and then in Q1 when they announce, we'll hear -surprise, surprise, the amount of content consumed was amazing and we not only filled the margin dip from the device, but created a handy surplus.

What do you think?

Do you think Amazon will be conservative on guidance?  Do you think my numbers are totally off? Sound off in comments.

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









October 05, 2011

AMAZON LEAK: Amazon Kindle Fire already has 250k pre-orders!

As everyone knows, Amazon is super tight lipped about sales of Kindle, Prime membership, etc.  But the folks over at Cult of Mac/Android have secured a screenshot of Amazon's internal order management system called Alaska (Availability Lookup and Sku Aggregator) that you can see in the original post here and I've provided here for you to look at as well.



I've never personally seen ALASKA, but Amazon insiders have mentioned it to me and based on my pretty deep knowledge of Amazon, this looks to be the real deal:

  • ASIN number matches at the top
  • The core US FCs are listed on the left using airport like designators I've heard them use before.

It is unusual that Amazon would leak this information, clearly a) someone maybe on their way to getting fired or b) they are uncharacteristically so excited by the Fire sales so far they want to pop the balloon of the naysayers out there.

What does this mean?

Lots of folks on Wall St. thought I was crazy with my Q4 5m unit number so let's 'stress test' that here.

  • This represents a pre-order rate of 50k/day (yes you can argue that may taper off, I'd argue it's going to grow).
  • At this pace, Amazon will have 2.5m pre-orders before the ship date of 11/15
  • The original iPad sold 300k on it's launch date and Amazon is set to get in front of that easily.
  • iPad2 had 2.5m units in it's first month
  • Thus - Kindle Fire is on pace to be the largest tablet launch in history.  Not just lame existing Android tablets, iPad too!

So doing some math here, there are 90 days in Q4, which @ 50k/day would give you - 4.5m units sold.   Of course it won't 'work' like that I think what we'll see is:

  • 2.5m pre-orders or 11/15
  • Big marketing push, crazy low price point and buzz makes Kindle Fire a huge gift this holiday
  • You get another 3m orders between 11/15 and 12/19
  • 12/19-12/25 - pause for holidays
  • 12/26-12/30 - everyone that wanted a Fire, but got a tie, sweater or socks instead, orders one for themselves. ;-)

Skeptics beware, this is going to be a very big game changer for Amazon and if they layer on top of this a 10", it could be even bigger!

Scot, why are you so excited about this thing?

I'm a gadget freak (some would say geek?) and already have an iPad2, iPhone and some Android devices and a bunch of kindles as well.  So someone at work asked why I was excited.  I'm definitely excited about the software and the device itself, but as we have tons of retailers that sell on Amazon's third-party marketplace here's what gets me excited:

  • 5m people buy Fires
  • 2.5m are already Prime users and they use it to just buy more - bumping them from 3-4x to 4-5x
  • 2.5m are not in prime, 80% of them sign up
  • We have 2m new prime users, moving us from 12m to 2m (a 16-20% bump)
  • Those prime users make Amazon their default e-commerce store and they bring in an incremental surge in demand
  • That's just Q4!!

My only regret is that Amazon doesn't have a physical store I can go camp out at on November 15th.

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




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