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):
- 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.
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.