EP162 - Amazon Q4 2018 Earnings Hot Take

EP162 - Amazon Q4 2018 Earnings Hot Take 

Jason & Scot will be podcasting live from the eTail West which is held Feb 19-22 in sunny Palm Springs, CA. As a special gift to listeners, you can use the code JASONSCOT for 20% off.

This episode is a hot take on Amazon Q4 2018 earnings

Amazon Q4 Earnings Highlights $72.4BB, which is a 20% y/y increase $19.4B in Free cash flow Amazon grew North America 18% y/y and International 15% y/y, for a blended growth rate of 17% Unit growth decelerated to 14% from 15% in Q3 Revenue from brick and mortar down 3% Amazon Web Services - Grew 45% to $7.4B for the quarter and generated $2.2b in operating income which was up 61% y/y Marketplace 52% of units, down from 53% levels in Q2 and Q3 Wingo GMV estimate -> 150B GMV for the quarter.  $450B GMV for the year ($300B GMV in North America). Amazon Ad Business - grew 95% y/y  to $3.49B (Estimated $10B for the year) Pivotal estimates $38B by 2023

Jason & Scot will be podcasting live from the eTail West which is held Feb 19-22 in sunny Palm Springs, CA. As a special gift to listeners, you can use the code JASONSCOT for 20% off.

Don't forget to like our facebook page, and if you enjoyed this episode please write us a review on itunes.

Episode 162 of the Jason & Scot show was recorded on Thursday, January 31st, 2019.

Join your hosts Jason "Retailgeek" Goldberg, Chief Commerce Strategy Officer and Scot Wingo, CEO of GetSpiffy and Executive Chairman of Channel Advisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.

New beta feature - Google Automated Transcription of the show:

Transcript

Jason:
[0:24] Welcome to the Jason and Scott show this episode is being recorded on Thursday January 31st 2019 I'm your host Jason retailgeek Goldberg and as usual I'm here with Scot Wingo.

Scot:
[0:37] Hey Jason welcome back Jason Scott show listeners Jason big question it's -50 there in Chicago how are you hanging.

Jason:
[0:46] I am enjoying the modern technology of central heating so I'm doing I'm doing terrific my dog who hasn't had a walk outside in like 3 days is doing less well for MacGyver.

Scot:
[0:59] Your dog doesn't have four dogs can't take minus 50.

Jason:
[1:03] I really like this is a rescue dog from Detroit that thinks he's like a Southern California dog like he goes on strike below about 40 degrees.

Scot:
[1:13] Got it Caldwell.
Earlier this evening Amazon announced their 4th quarter results that we've been on pins and needles waiting to see how they did so this episode is going to be exclusively Amazon news and we're going to give you a hot take on the result.
But first Jason are going to be live podcasting from etail West which is held February 19th to 22nd at Palm Springs California
and it's a special guest gift exclusive gift to our listeners you can use the code Jason Scott there's no and in there so j a s o n s c o t Scott with one t
looks like Jason Scott is another way to think about it,
for 20% off and we are going to put a link quick Link in the show notes for you to be able to apply for that and come to the show and see Jason I'd life podcasting would love to chat with you if you're going to be there.

[2:11] So with that housekeeping all the way let's jump into Amazon results first I kind of wanted to frame the discussion so the companies have already announced we had Facebook and eBay come out and,
Facebook really kind of exceeded expectations because they've been in this kind of
poop storm of negativity and controversy that was interested or expecting it to be bad because advertisers was bailed on them.

[2:39] Turns out if you have a way to get in front of customers people want then they don't really care about the controversy I guess,
eBay's results were below expectations so so kind of another e-commerce company there and was eBay's results or a lot of talk about this kind of.
End of 4th quarter slowed down
so if you recall we had camera from Adobe on the show and Adobe has come out and said look it really kind of fell off a cliff kind of December 15th
through to Christmas I needed to the back of the year they talked a lot about that where the holiday was semen along and then kind of died there towards the end which was interesting
so the net net of that for them is there Marketplace crew 1% if you exclude the impact of foreign exchanges so
a heading in and outs two days ago I believe I'm so heading into Amazon there's Otay people are a little kind of wobbly can I see some mixed results coming in to Amazon and where were they
so that set up Jason wants you walk us through the high-level pieces.

Jason:
[3:42] Yeah well spoiler alert they landed very solidly like they basically had a complete beat they beat all the the
analyst expectations so top line revenue came in at 72.4 billion,
that was against a expectation of 71.9 billion and was a growth rate of 20% year-over-year,
earnings per share came in at.
A little over six bucks and the expectations were like 5:55 so that was a solid beat.

Marker 02

[4:17] Last year they had a quarterly Revenue this quarter of like 60 billion so that means this year they added about 12 billion dollars in sales just in this one quarter so they continue to be clicking along.
So if you look at an annualized basis for 2018 total revenue from Amazon comes in at 233 billion.
Corso remind listeners.
Ecommerce the revenue isn't really the most important number we like to talk about their gross merchandise value which I'm going to let Scott break down and in just a bit.
But if you listen to Jeff talk.
She's not as big a fan of the sort of Revenue and earnings metrics is he is that free cash flow metric so.

[5:10] Yeah that's really the the metric the Amazon Rise Against is that hundred percent free cash flow and you know once again this was a good quarter for that,
free cash flow more than doubled from 8.3 billion last year to 19.4 billion this year.
So that's a first world problem you got to find a lot of place to spend all that loot.

Scot:
[5:30] Yeah but how's that possible Jason I thought Amazon wasn't problem.

Jason:
[5:34] Yeah it's almost like that some some misnomer from 10 years ago or something.

Scot:
[5:43] Fun fact I would call 19 billion dollars of free cash flow pretty not too shabby.

Jason:
[5:53] Yeah and the one I get now though to be honest I guess you're like a Amazon is not profitable what it What I Hear now which is also a misnomer is 100% of their profits from AWS.

Scot:
[6:04] Yeah yeah let's talk about that so is repealed the onion on on the
the 800-pound gorilla that is Amazon overall North America grew 18% year-over-year and as a reminder to listeners we talked a lot about the e-commerce Baseline of 15%
retail Baseline is 3 to 4%
Amazon has historically clocked around kind of 20 to 30% so this is where the first quarter is when they've actually slowed a little bit and part of it is the concert is getting monstrous in the fourth quarter you mentioned a $12 increase your rear which is you know.

[6:38] Adding a chunk of any other,
retailer but they are specifically in Q4 starting to see things slow down because they've created these massive comps your ear and things like
launch an echo now can create headwinds on that and then you also have to hide window when products move from one p to 3 p.
Prepuce growing faster than one PS4 creates a headwind on Revenue growth cuz they collect a lot less from from third-party
set also a like item going from 1 Peter 3 p as brands do things like hybrid that creates a little bit of slow down and rub you also.

[7:13] So that being said North America grew 18% year-over-year International grew 15% year-over-year for Blended rate of about 17% on the retail side
taking out a WIC etcetera overall they grew 20% but the retail pieces group of three bases 3% slower,
that international number was a little bit of an acceleration which was good to see that they've been kind of facing some headwinds there on the international side so it's good to see that and then profit-wise in North America that took
the 2.3 billion so the North America business inside of Amazon is profitable even so it is not true that that if you
all the profits come from a Tab S but certainly the Lion's Share do and then International is still losing business money
but it it kind of shrink the Lost 30% to 642 million so
even an aggregate if you add up the North America and international the retail part of Amazon is still profitable
including the marketplace so and that International Peace is on its path probability it's just so honking big is going to take a little while to get.

[8:23] North American margins ticked up 60 basis points and that was attributed on the call to getting some really good leverage out of fulfillment center expenses so Amazon 2018 was a. Of time where Amazon
you know they only Built a 15 to 20 centers
I'm a percentage standpoint that was a pretty low capital expenditure year for them so instead of adding all the capacity they needed to
to ship all the packages they utilize more of the film Center squeeze more out of them,
so that being said another thing that I always watch is 2% of units that come from third parties this is the
the the metric.
Give around third-party versus turtle useful that was 52% which is a tick down slightly from 53%
I wear it wasn't Q2 and Q3
reading the tea leaves that was probably driven by as a swing in the fourth quarter you know the the 1p kind of bumped up a little bit I believe because of all the private label that we
Racine going on I think there's over a hundred fifty private label Brands and then what you call owned Brands so things like echoes in the whole X family,
I think that pushes up that first party unit side during the holiday. I'm talking about 1% you're so not a lateral move.

[9:51] One area of a little bit of concerned that for Wall Street is they look at this total unit gross and that decelerate a tad
even at 14% that's down from last quarters 15% so
yo a lot people asking how can unit growth be 14% but then they totally grew 17% so what you have is unit growth in ASP mix coming out a little bit higher to multiply together to give you like the total,
so when Amazon on a quarterly basis doesn't give you the pieces you need to unpack the DMV
astrix and I'll come back to that so what they do is in their annual report which will come out and I think they have another 30 to 45 days to put in your Port out then they will provide the
mechanism for 410A backing into the DMV so.
But astrix is I go to a model I've used over the years that that is relatively close so so what that model tells me is now.
I'll say this is not an official number this is just kind of Scott napkin calculation to,
I just give you an idea of the scale but we don't have to wait for the annual report and if you take Amazon's overall Revenue this quarter of 72 billion.
AWS with 7.4 and you take that out and then if you also take out the other AD business you're left with 61 billion dollars of kind of retail Revenue.

[11:18] So I use that to back into a 1 p.m. to 3 p mix and what I get is 52 billion and 1 p
and then you're left with eight or nine billion dollars in revenue from creepy Amazon's take rate is about 10% so you have to multiply that by 10
so you end up with first party DMV of 52 billion third party DMV of 95 billion for a total of about 150 billion in the fourth quarter, global stamp
again this is an approximation and we'll have a lot more clarity when they're in the report comes out more working into one of our new shows
6 interesting is if you take sat and soaked it with those of you that have her to say this before you know Amazon's easily
twice as large as you think it is to take my calculations from q1 to Q4
I get an annual number of Total Gym v-force partying third-party F450 Glen Jason is you know Walmart is kind of it a 500 billion
your Revenue rates
we we talk a lot about how I think you agree with me but that's that's the better comp is Amazon's total gmbh versus Walmart sales and
so so Walmart is still bigger than Amazon but I do think the lines are going to cross in 2019
I'm so that's going to be the first time somewhere in 2019 probably you wanted you to.

[12:44] Yeah we'll be able to say that GMB to GMB Apples to Apples Amazon is bigger than Walmart that's going to be interesting to keep an eye on.

[12:54] Last little bit on the marketplace side is Amazon it's kind of funny that press releases now are like 16 Pages cuz they usually put like a little. Of some highlights through the year and they have so many highlights now it's like
12 pages of highlights are they really highlights.
I'm the only one that picked out of there that I hadn't seen release somewhere else I thought was hers would find interesting is the announced that 200,000 sellers on the third-party platform are now generating over $100,000 a year in GMT
so I pre nursing small business platform there where you know if that's an international number but I would imagine it's split price 60% us 40% International and then correlated with that I've been seeing a lot of.
Amazon's running a TV ad campaign and it shows a train out of an a bunch of Amazon Fulfillment boxes with third-party seller stuff on it so they're really kind of,
camping up the third party aspected left.

Jason:
[13:55] Yeah it's always chuckle to read those highlights because you'll get like one highlight will be like.
We added a PGA event to Amazon Prime video and then the next highlight will be and we sold a hundred million Alexa devices or so you don't seem seam
super ration.

Scot:
[14:17] Can we handle the trillion workloads on the AWS cloud.

Jason:
[14:21] Exactly.

[14:23] Yeah and the the Walmart Amazon is definitely becoming a horse race is pretty interesting and not just a reminder.
A ton of Walmart's revenue is grocery even with the Whole Foods acquisition very little of Amazon's revenue is grocery inside.
Amazon 30 crushing Walmart on General Merchandise Walmart's crushing Amazon grocery.
It certainly is the case that Amazon's probably growing grocery a lot faster than Walmart's growing general merchandise so if that doesn't doesn't bode well for for Walmart in the.
In the short term is those lines start to converge and then of course Amazon has all these other fabulous business so you know we mentioned,
the AWS gets a lot of the the buzz that's that's not entirely unfair cuz that you know that they continue to be going gangbusters that you're getting there the.
The clear market leader they have a huge weed over there their primary competitors Google and Microsoft.
Until you do when you're that big and have that much market share it's really hard to grow fast but AWS still grew 45% for the quarter so that was.
7.4 billion in revenue and you know much more profitable business so that that's been off 2.2 billion in operating income which is up 61% year-over-year so.
That is not a bad side hustle to have if your if your Amazon.

[15:52] And then of course they they have this other increasingly big category that they still call other the big chunk of other is this advertising Revenue.
Hopefully at some point in the not-too-distant future.
This gets spun out as a separate number but other came in at 3.4 billion which is up almost 100% 95% from last year and so you know.
If you think of that as.
The primarily that ad business is actually the growth rate is starting to decelerate so lightly as they do start to get a critical mass but it's still a huge.
Chunk of gross if you add up that the.
Portion of other for the last four quarters that are likely add sales it's it seems pretty clear that it's over 10 billion and add sales and.

[16:47] You know it is interesting it's like obviously becoming a much more important business for Amazon I think it was an analyst that counted how many times they mention the ad business on this call versus last year's call
and last year it was like 12 mentions this year was 25 mentioned so it's getting more mindshare.
And you know we're seeing all these wild projections of how fast I could grow so I think it was a new one out from pivotal research that said that by 2023.
Their ad business could be a 38 billion dollar business and even more so than eight of us.
Add business is hugely profitable and so you know if if they do grow that kind of trajectory is very likely that the ad business is is both bigger and more profitable than the AWS business in the next 5 years.

Scot:
[17:35] Yats commit arson to see if they can get it to be that size it at that pace it would be bigger than Facebook I believe without a SIM Facebook Stan.

Jason:
[17:44] Yeah it would be bigger than Facebook is now but yeah.

Scot:
[17:48] Episodes it's clear it's going to be a three-horse race so so it's going to be Google Facebook Amazon I think dirty bigger than Snapchat.

Jason:
[17:57] No I think they already are numbered if they hit 10 billion there they're probably number three.

Scot:
[18:01] Snapchat I think is a Twitter somewhere around there so hard like 6 or something.

[18:07] Another part that I we always look at kind of your lie is that was all the past and this is kinda looking forward so Amazon
you know the way they do things they don't give annual guidance so they do tell you how it's coming in the next quarter so their practices
so looking towards 2019s the first quarter so the first thing they did as they kind of gave an overall warning which said hey 2018 we didn't spend a lot on centers industry,
data centers and employees but we are going to ramp that up in 2019.

[18:48] Unemployed fact that hit 675,000 people so I think in,
the not-too-distant future in the next three or four years Out imagine to get to a million people unless they dramatically changed the the workforce switch to robots or something
zipper that perspective last year capex grew 12% iron grew 14% so kind of signaling reading the tea leaves are I kind of got the vibe that is going to be more towards the high teens on those numbers may be excited,
120 kind of get the feeling again this is just kind of reading the body language which is very hard with Amazon
to be totally wrong I get the feeling they almost felt constrained by fulfillment capability in the fourth quarter that the maybe maybe they left a little bit on the table cuz they
they just couldn't get as much product in and out or something let me just be me while I have to see if any of the Wall Street analyst pick up.

[19:42] So so that's kind of you know it'll be interesting I think the stock will be a little kind of muted because.
While she keeps it when he comes on goes into a spending days until the groceries up
so for fourth-quarter projections Amazon put out a range of 56 to 60 billion that was below the Wall Street consensus estimate of 61 billion that add.
I'm at the midpoint that's 13.6% year-over-year growth,
and the high point and gets up towards 15% then the guy did towards pretty much what Wall Street was expecting on.
And then there a couple other tidbits executed since I'm going to have a couple to you go first.

Jason:
[20:25] I did want to mention like one specific thing that came up a little bit in the
in the lower guidance was was what brought International is getting some traction there was recently a new e-commerce law that was passed in India that's going to be.
Potentially very challenging for Amazon and Walmart and so I and I think Amazon called out several times that there's some uncertainty about their their speed there.
Speed of growth in India as a result of this this new new regulation there.

Scot:
[21:03] It is such a size u.s. space companies can't do business in India if you've beautycounter read the headline.

Jason:
[21:08] Yeah if you like there's there's some ambiguity and how to get interpreted so people are hoping it's not that extreme but there's no version of it that's good news for for Amazon and Walmart who both invested a ton.
In that market and you know you know I'm not going to get that clearly has good access as they were hoping to that market so that's interesting but even with that that sort of.
You know what kind of muted level of enthusiasm that still puts Amazon's market cap white as of tonight at at like 840 billion and of course
you know they did briefly go over a trillion last year but to put things in perspective Walmart who you talked about.
Being larger than Amazon in terms of total revenue Walmart's market cap is like 278 billion tonight so so Amazon's market cap is the equivalent of the next seven largest retailers in the USA
they're the equivalent of Walmart + Home Depot + Costco Buffalo's plus Walgreens plus TJ Maxx and Target which is pretty mind-boggling of you
if you still think about it.

Scot:
[22:15] It's a girl thing so I Walmart overall I think Walmart's growing low-single digits is that right at all.

Jason:
[22:22] Yak like four.

Scot:
[22:23] So is that that's what it is it's you you look at one point time you know the order about the same size as best we can tell right now, Jambi perspective but you know what will she loves his growth and when you have a.
1 / 200 billion dollar business growing in the mid-teens there's not many.
Accept apple and an Amazon that if you know to do that.

Jason:
[22:46] Yeah dumb president is pretty awesome to be then.
So a couple other tidbits one thing that's getting a little bit of attention is you know they do not have a line item on the income statement for brick-and-mortar retail which is,
mostly Whole Foods and so this what is the first quarter when they now have a complete year of,
data from Whole Foods that is the first time that want the Amazon rather has his had sort of the true
look at same-store sales comps and the look isn't entirely favorable so it looks like they're brick-and-mortar sales are down 3% from last year.
And you know it it first you go huh does that mean Whole Foods is.

[23:35] Shrinking which Whole Foods West facing some some possible
but you know you also have to remember that that Amazon makes him aggressive price promotions in Whole Foods so the revenue from from some of those price promotions has some.
Some impact on sales but the the big item that that Amazon talked about was.
That when they do a by online curbside pickup from one of the the 60 Whole Food stores that supports that or they do delivery.
In one of the market that supports that that Revenue gets recognized as e-commerce Revenue rather than brick-and-mortar Revenue so for them brick-and-mortar means.
You you walk to the store and pick the fruit yourself instead of having a an Amazon pick our picket for you.

[24:32] And so they're they're alleging that that that contributed to the the lower sail brick-and-mortar sales some of that sales just shifted from.
From brick-and-mortar tab to digital in the in Amazon's version of the story but at the minimum it means.
Those stores aren't like wildly growing and it it also means that the fleet of other brick-and-mortar stores that Walmart has put out there the.
The increasing number of bookstores in nine go stores those still aren't having a material impact on revenue and.

[25:07] So that was interesting.
I did also you know it always comes up one of the big line items and cost in Amazon has every year and it always goes up by a big number is shipping so shipping cost went up 23% for the quarter.
I'm as you pointed out earlier they shipped 14% more units so.

[25:28] That accounts for you know a big chunk of that growth but also means their cost per unit had to creep up.
And it's it's always interesting to me a UPS had their earnings call today as well they actually had a good.
Good earnings call but but the.
The headline to me was that the CEO of ups for the first time and knowledge that yes Amazon's a big customer but they also are a competitor and we track them as such and that's a.
Basically a 180 from previous statements from UPS the day they really didn't think Amazon would be a competitor there's and that they purely saw them is.
A customer and I always like to talk about the fact that UPS isn't growing fast enough,
they're not growing a shipping capacity fast enough to accommodate all the
growth Amazon getting much worse want to get so it's almost imperative for Amazon to have some of their own shipping capacity and
really highlighting that I sort of backed into
do UPS as package number for 2018 and it looks like UPS shipped in in North America UPS shipped 1.5% less packages this year than they did last year so I wonder if UPS is ability to deliver,
some of their own packages which you know now they estimate that about 12% of their total volume if that's starting to have them internally impact on UPS.

Scot:
[26:53] When I drive to work I go through a couple interstates and on a daily basis I C 5 + Prime delivery Vans the stasis is crazy.

Jason:
[27:07] And I'm surprised like I mean aren't you in like autopilot and you're reading a book or something while you got so I'm surprised you can see them.

Scot:
[27:13] I'm counting I just kind of play Amazon smile bingo.

Jason:
[27:17] I like it.

Scot:
[27:22] Cook's one of the other tidbits to the more detailed Wall Street reports will come out in the morning I'll treat anything that's kind of interesting there
but the ones I saw they do hot take kind of thing as well I saw her folks kind of.
Reappearing in sang Hey we're in a we are really interesting are overweight or whatever they're the recommendation is so it looks like everyone's bumping up their price targets to kind of the $2,500 share range
which is it comes true over the next 12 months or so that'll put Amazon squarely back into that trillion-dollar club.

[27:58] Summarize I would say Amazon had a great quarter. It was a really nice worth quarter but it is interesting you know over the years having all this for a while Amazon's always been growing
accutest 3x clip of e-commerce and now at a 70 70 billion dollar quarter ton of a scale though the rule of large numbers is kind of catching up to them and they're starting to kind of
get closer into that mid-teens e-commerce procrit so you know it's munition to see,
what does Amazon do to accelerate that do they care a lot of noise around the healthcare business and some other things that the Amazon to get into you than just wrapped up that.
When you're when you're clocking along that at over 250 billion dollars,
you have to take big swings at at the plates are the kinds of things are going to go through and disrupt are going to be there got to be a hundred billion dollar kind of opportunities for them to really move the needle and get that growth going to be,
reversing the see what they do to recover.

Jason:
[29:03] Yeah I'm looking forward to watching it and podcasting about it and that's going to be a perfect place to leave it because it's happening again we've used up all our allotted time as always if you have any questions or comments about the show you can keep the dialogue going on our Facebook page or you can hit us I just got a ride up on
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Scot:
[29:53] Thanks for joining us everyone.

Jason:
[29:55] Until next time happy commercing.