Amazon.com’s (AMZN) fourth quarter earnings beat the Zacks Consensus Estimate by 14 cents. AMZN’s results were driven by the very strong revenue growth characteristic of a recession-free fourth quarter. This is very encouraging, as Amazon.com appears to be one of the very few companies to report pre-recession type revenue growth in the December quarter.
The company has a very strong earnings surprise history, with a four-quarter average of 23.58%, signifying that AMZN has beaten the Zacks Consensus Estimate by an average of 23.58% during this period. Shares are up 2% from yesterday’s close in response to the positive news.
Revenue
Revenue for the period was $9.5 billion, up 74.7% sequentially and 42.0% year over year. Revenue exceeded the top end of management’s guidance range of $8.13-9.13 billion, or a sequential increase of 49.2% to 67.6%. Approximately 52% of AMZN sales were generated in North America, which increased 74.3% sequentially and 36.5% year over year. The balance came from the International segment, which increased 75.1% sequentially and 48.5% year over year.
Th revenue growth came from a 37% growth in units and a 19% growth in active customer accounts. AMZN also benefited from third-party sales, where it collects a percentage of sales by its partners on goods sold on its online marketplaces. Active seller accounts were up 24% to 1.9 billion in the last quarter, with seller units at 28% of total units sold on its properties.
Segment Details
The North America Media business grew 48.7% sequentially and 19.8% from the year-ago quarter. The segment gained momentum in the last quarter, after registering the first positive growth in September. The business has not recorded any year-over-year declines, despite the recession.
Electronics and General Merchandise (EGM) increased 105.9% sequentially and 53.5% from the year-ago quarter. Both growth rates were significantly higher than in the third quarter. Results were driven by better pricing from suppliers, better selection and partially offset by more competitive prices offered to customers.
AMZN also benefited from holiday-driven Kindle sales in the December quarter and higher sales of consumer staples under the Subscribe and Save program. Management stated that Prime continued to do well in the last quarter.
AMZN started recognizing revenue from Zappos for the first time, which added another $200 million to North America revenue.
The International segment also grew very strongly, with the media business (27% of total revenue) growing 70.1% sequentially and 36.6% year over year. EGM, which was over 20% of total revenue in the last quarter, grew 83.0% sequentially and 68.7% year over year.
Gross Margin
North America generated a gross margin of 23.6%, down 284 basis points (bps) sequentially and up 210 bps year over year. The year-over-year increase was largely due to higher Other revenue, better inventory management and better supplier prices, offset by weaker customer prices and mix. The sequential decline was on account of offers and other holiday-related incentives and discounts.
International generated a gross margin of 17.7%, down 233 bps sequentially and 79 bps year over year. The decline in international was related to lower customer prices and unfavorable mix, although the company did benefit from better inventory management and vendor pricing.
The pro forma gross margin on a consolidated basis for AMZN was 20.8%, down 260 bps sequentially and 65 bps year over year.
Operating Margin
Operating expenses at AMZN of $1.4 billion were higher than both the previous quarter’s $932 million and the year-ago quarter’s $997 million. The operating margin was 6.1%, down 21 bps sequentially and up 82 bps year over year. The higher COGS (as a percentage of sales) was partially offset by lower technology & content costs (as a percentage of sales) and flattish fulfillment, marketing, G&A and other expenses (as a percentage of sales).
North America generated an operating margin of 5.6%, up 12 bps sequentially and 200 bps year over year. The International operating margin was 7.0%, down 45 bps sequentially and 43 bps from the year-ago quarter.
Net Income
Including stock-based compensation, AMZN generated a pro forma net income of $386 million, or a 4.1% net income margin, compared to a $158 million, or 2.9% in the previous quarter and $231 million, or 3.4% net income margin, in the same quarter last year. Our pro forma estimate in the last quarter excludes a small loss on equity earnings on a tax-adjusted basis. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
The GAAP net income was $384 million ($0.85 per share) compared to $199 million ($0.45 per share) in the previous quarter and $226 million ($0.52 per share) in the prior-year quarter.
Balance Sheet and Cash Flow
AMZN ended with a cash and investments balance of $6.4 billion, an increase of $2.4 billion from the end of the previous quarter. Cash generated from operations was $2.6 billion, of which $128 million was spent on repayment of long-term debt and other obligations. AMZN had $109 million in long-term debt at quarter-end, amounting to a net cash balance of $6.3 billion. Including long-term liabilities, the debt-cap ratio was a mere 18.5%.
Guidance
Management provided guidance for the first quarter of 2010. Accordingly, revenue is expected to come in at around $6.45-7 billion, or up 32-43% sequentially. Including stock based compensation and amortization of intangibles of $110 million, the GAAP operating income is expected to be $275-365 million.
Estimate Revisions
Estimates for the March quarter 2010 have been edging upwards over the past three months for AMZN, with 4 of the 34 analysts covering the stock making positive revisions over the past 30 days.
The Zacks Consensus Estimate on AMZN is currently $0.57, which means a 39.02% increase from the March quarter of 2008. This seems to indicate an upside potential of 3.51% for AMZN’s upcoming quarter.
Despite the strong revenue and positive earnings surprises, we note the significant decline in margins. Consequently, we believe there could be downward revisions for AMZN over the next month or so, which could throw off the momentum in prices.
Our short-term view on AMZN is reflected in the Zacks Rank #3 (Hold) allotted to the shares.
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