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January 31, 2013

Part I/III: Solving Amazon's Q4 puzzle. And: You know what's cool?

Yesterday, Tuesday, January 29th 2013 Amazon announced Q4 2012 results after the market closed.  Since the announcement, we have had an unusual number of inquiries from customers about the quarterly results and what it means for Amazon, e-commerce, Amazon's 3P business, etc.  Therefore instead of our usual short-form summary of the q, we are going to expand our coverage this quarter into a three-part series:

  • Part I: High level overview of Amazon's Q4 (you are here)
  • Part II: Deep dive into Amazon's Q4 3P performance  (available here)
  • Part III: Under the hood of Amazon's FC network (FC = Fulfillment Center) (available here)

Before we dive into our usual dashboard and cube discussions, there was an important new 'first' for Amazon we wanted to share.

You know what's cool?

One of favorite scenes from the movie, The Social Network, is when Sean Parker (played by JT) says that a million 'isn't cool', a billion is cool - in that context it's dollars, but in the context of Amazon's Q4, you know what's cool?  

For the first quarter, our analysis shows that Amazon sold over 1B paid items for the first time in a quarter.

Doing the math on this is fun:

  • That's 126 items sold a second
  • Or 7,548 items sold a minute
  • OR 452,899 items sold an hour
  • **OR** 10,869,565 items sold a DAY

Think about that - 10.8m items sold a day during Q4 2012.  Oh and BTW, 1b is from rounding down from 1.05b.  While some of these are digital goods and what-not, the bulk are still physical.  39% of these items are 3P (410k) and the other 640k are 1P.  This helps explain why Amazon has announced 8+ 1,000,000 sq-ft FCs already for 2013 - that's a LOT of items to deliver.

The detailed analysis of 3P and unit sales is in part II and a look at Amazon's FC network is coming in part III.

Finally, with that in mind, here's a clip for you:

Amazon Q4 2012 Key Performance Indicator (for sellers) Dashboard

Every Q we go over some of the highlights from the Q that we believe online retailers/sellers should takeaway from Amazon's results.  They are collected in this handy dashboard that has columns for the results, Wall St's consensus estimates and Amazon's guidance.  This Q we have added two new Key Performance Indicators: 

  • 1P unit growth - Amazon discloses the % of sold item growth as well as the % that are 3P.  From there you can deduce the 1P unit growth and 3P unit growth.
  • 3P unit growth - see above

Amazon_q4_dashboard

Highlights from the Q:

  • Revenue and profits - when you look at the results this way Amazon 'missed' expectations on both fronts - this is what most of the headlines out of the Q have focused on.  This has caused a lot of retailers to ask us: "Ok, Amazon's profit and revenue were down, why did the stock go up and why is everyone on Wall St. so excited?!"  We have details on that below.  The short answer is: profits and profitability are actually up and significantly above expectations due to 3P and other factors we'll dig into.
  • Growth rates  - in our regular feature, the quarterly Amazon growth rate cube in the next section we detail these.
  • Active users - Wow, Amazon grew active users to 200m - up from 188m last Q and this represents 22% y/y growth.  To put this in perspective, eBay grew active users 12% to 112m - with a big chunk coming from new mobile users.  Amazon doesn't disclose the source of user growth, but given the popularity of their mobile apps and the kindle devices plus their aggressive international segments, those would be our best estimates of drivers of this metric.
  • Paid unit growth - Paid units grew 32% which was a bit of a step down from Q3's 39%. The real story here though is looking at the 1P/3P mix.
  • % paid items from 3P - Amazon reported that 39% of paid items were from 3P sellers.  That initially feels like a step backwards because in Q3 we were at 41%.  But if you look at Q411, the metric was 36% so it's actually seasonally quite a bit of an up-tick.
  • 3P paid unit growth - Amazon' reported that 3P unit growth was > 40% y/y - note this is 2-3X the growth rate of e-commerce (14% as per ComScore)
  • 1P paid unit growth - When you do the math on the datapoints (paid unit growth, %3P, 3P unit growth), you can deduce that 1P paid unit growth was in the 23-25% range.

 

Other highlights not in the dashboard: 

  • Amazon added 20 FCs in 2012 (more on that in part III)
  • 57% of revenue is NA and 43% is international
  • Amazon continues to invest heavily in China
  • EGM is now 65% and media 31% (other is the remainder).  Looking back, this is the a new high water mark for EGM.

 

Q4 2012 Amazon growth rate cube

Note: EGM stands for Electronics and General Merchandise - Amazon-speak for anything that isn't a (e)book, movie, dvd, cd, mp3, videogame. Also, the industry 'watermark' we use is ComScore who has widely reported that Q4 2012 e-commerce growth (ex travel and grocery) was 14% y/y.

In the following cube we summarize all of the different Y/Y growth rates that Amazon reports (ex-FX).  We find this helpful as you can quickly see where the growth is (Intl EGM) and where things are slowing (intl media).

Amazon_q4_cube

Looking at the categories of media/egm - Amazon's media business is now growing slower than e-commece (10% vs. 14%), and Amazon's EGM business is growing 2X. From a geographical standpoint, each region is actually growing at the same rate 23%.  In the US, media is growing in-line with ecomm and whereas internationally it is growing quite a bit slower (perhaps they aren't as far down the Kindle/eBook adoption cycle as we are in NA).

If you think of another dimension to this cube which would overlay the 1P and 3P growth rates, you can see that the fastest growing segment at Amazon would be: 3P international 3P followed by North America 3P EGM.  Amazon doesn't disclose that detailed segmentation, but given that 3P units grew over 40%, each of these segments are growing at least that fast and probably 2-5%  higher - giving the non-media Amazon 3P business a growth rate 3X that of e-commerce (14% as per ComScore).

Amazon's revenue and profits are down - why is the stock up!?

And now we come to the big question of the Q (and for the last 5 Q's really.  Why is everyone on Wall St. viewing what looks on the surface like a terrible quarter with lower then expected revenue and lower profits as a huge win?

The answer lies in several important profitability measures that we haven't covered yet:

  • EBITDA - (This stands for Earnings Before Interest Tax Depreciation and Amortization you can read more here) Amazon's Q4 EBITDA was expected to be around $1b up from $821 last year and came in at $1.3B
  • Amazon's gross margins last year Q4 were 20.7% and expectations were for an improvement to 22.7%.  Amazon's Q4 came in at 24.1%
  • Finally, Amazon releases CSOI (Consolidated Segment Operating Income) which is a way to look at how the business is doing in different segments (e.g. NA vs. Intl) when you take out some things like stock-based compensation.  CSOI margin was expected to be 2.2% and Amazon came in at 3.2% - the fifth straight quarter they have blown away CSOI expectations.
  • Gross profit was up 41% y/y.

If I lost you in some accounting alphabet soup,  Colin Sebastian @ RW Baird has a great chart that show this in a way we can all understand:

Amzn_q4_chart2

If you agree now that several key measures of profitability are up, then that begs the question of how can a business be getting more profitable as revenue growth rates come down.  This is actually a very unusual combination and the reason lies in three areas:

  • 3P - There's a 'hidden' part of Amazon's business that is growing > 40%, but amazon only recognizes revenue on 10% of it vs., 1P where they recognize 100% on 1P - therefore if a single $100 item to be sold moves from 1P to 3P, you lose $90 in revenue, yet you gain the same/more profit.  It's very counter intuitive unless you live in our e-commerce world.  Now play that out to the tune of 40% growth in 3P and only 25% in 1P and you can see that creates some serious revenue growth headwinds and actually masks what (IMHO) what really matters - GMV growth rate (more on this in part II).
  • High margin businesses are growing rapidly - in addition to 3P, Amazon has a couple  VERY high margin businesses (because little or no incremental costs)- Amazon Web Services (AWS) and advertising.   Those are outside the scope of what we cover here.
  • Last but not least, Amazon's shipping costs are coming down.  details on that coming up.

So you can see that in the Oct 2009 Q, Amazon had good shipping margins that deteriorated as the company started to make heavy investments (FCs, DCs, Kindle, AWS, intl, etc.) and since September 2011, that trend has reversed with Q4's results getting us back to that early point.  Also, international ticked up nicely which could be promising.

Amazon's fulfillment costs are going down??

One thing that I've been discussing with retailers is that Amazon's fulfillment costs are going down - one of the reasons they are opening massive FCs and agreeing to tax nexus in states like CA and TX.  The logic is that if they can get a FC next to a big population center (SFO, LAX, DFW, etc.) then the costs to transport goods actually go down because the product is closer to the people  When this cost goes down, they can...lower prices! And if they are doing this at scale, the prices they get from scale and a better mousetrap can make their products a better value after-tax than they were pre-tax.

Here's a chart that says all that in one picture:

Amzn_q4_chart1

Amazon is shipping more and more products, but the net shipping costs are effectively going down.  We are getting a lot of questions about Amazon's FC capabitities so have more coming in part III.

 

 

Conclusion and up next:

Amazon's Q4 results sounded rough on the surface, but when you dig a layer down, you realize that while growth has come down to the low 20's, Amazon's metrics around profitability were way up and dramatically exceeded expectations.  Shipping costs and the growth of high-margin items such as AWS and ads played a role, but we (of course we are biased) believe that 3P played the biggest role in this interesting trend. 

In the next installment, we'll do a deep dive into Amazon's Q4 3P sales where we'll highlight some other amazon 'firsts' and then in part III we'll look at Amazon's growing fulfillment center network.

Written by Scot Wingo, CEO, ChannelAdvisor.  eBay is an investor in ChannelAdvisor.

 

 

 

 

 

 

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