As we get close to Amazon.com's (AMZN) earnings report for Q2 2013, here I will be updating my preview for the upcoming earnings release. This article will follow the model used on my previous Q1 2013 preview, which came quite close to what Amazon.com ultimately reported.
Amazon.com should report earnings on July 22, after the market closes.
Amazon.com's present earnings consensus evolved as follows during the last 90 days:
As we can see, Amazon.com again saw a massive reduction in estimates. Expectations fell from $0.22 EPS all the way down to $0.06. This is nothing new, though, as Amazon.com has basically guided down powerfully in the last 9 quarters, to the point where estimates are really incredibly low for a $125 billion market capitalization. (You will notice that this entire paragraph is verbatim from the last earnings preview …)
Revenue consensus estimates for the quarter stand at $15.74 billion. These, too, were revised lower after Amazon.com guided slightly lower during Q1 2013. These revenue estimates imply 22.7% growth in revenues, which makes them likely to be missed as I recently wrote, due to my ChannelAdvisor-based model. Indeed, in the past earnings preview this expectation was for a +24.2% growth and there, too, I warned that expectations were likely to be revised lower.
Q3 2013 consensus revenues, at $17.0 billion and implying 23.2% growth are also likely to be guided lower, since Amazon.com's revenue growth rate has consistently headed lower and there is nothing at this point indicating re-acceleration of growth. However, there's a slight wildcard here: the quarter where the new generation gaming consoles ship -- be it Q3 or Q4 - will be helped by the initial flurry of sales on these devices.
For Q2 2013, Amazon.com guided as follows:
Second Quarter 2013 Guidance
- Net sales are expected to be between $14.5 billion and $16.2 billion, or to grow between 13% and 26% compared with second quarter 2012.
- Operating income (loss) is expected to be between $(340) million and $10 million, compared to $107 million in the comparable prior year period.
As we saw, the revenue consensus estimates are quite a bit above the +19.5% midpoint. Also noteworthy is that the midpoint stands below +20%.
This guidance also constituted another massive guide-down on operating earnings, though as we will see, it again looks as if Amazon.com is sandbagging a bit even if it ends up printing below prior expectations.
The Model assumptions
I will again use 2 different models. These will be:
- Model 1 - calculates gross margin through a relationship with product margins.
- Model 2 - calculates gross margin through a relationship with GMV (Gross Merchandise Value), the value of goods sold by Amazon.com or third parties.
Both of these relationships have been stable in the past, hence their use. Also, the values have converged significantly for this quarter, as we will see.
This said, the model assumptions were as follows:
A brief explanation of what changed in each of these assumptions is presented below. More detail can be found in the Q1 2013 earnings preview article:
- Growth 1P. This is the growth rate, year-over-year, that Amazon.com product sales are predicted to exhibit. Q1 2013 saw 1P growth of +18%. For this quarter I will be modeling +17% year-on-year.
- Growth 3P. This is the growth rate, year-over-year, that third party sales are predicted to exhibit. Q1 2013 saw estimated 3P growth of +39.3%. For this quarter and as a result of the most recent ChannelAdvisor data, I will be modeling +33.5% year-on-year.
- Growth Other. This is the growth rate, year-over-year, that Amazon.com's other initiatives, like AWS and advertising, are predicted to show. Q1 2013 saw other revenue growing at a 59.6% rate. For this quarter I will be modeling +58% year-on-year.
- Product Margins. This is used in model 1. It's an estimate of the gross margins Amazon.com has in its product sales. Amazon.com's reported COGS (Cost of Goods Sold) reflects just the costs sustained in selling its own products. AWS and 3P are carried at 100% gross margin. Q1 2013 saw product margins of 11.2%. For this quarter I will be modeling 11.2% as well.
- Gross Margin on GMV. This is used in model 2. It's an alternate way to model Amazon.com's gross margins. This takes into account the fact that Amazon.com's gross margins exhibit a rather stable behavior when compared to its GMV (Gross Merchandise Value), that is, the value of everything Amazon.com sells, be it in its own name or the name of third parties. GMV is estimated by dividing 3P revenues by 11.5%, an estimate of the average commission Amazon.com gets, and then adding the result to 1P revenues plus other revenues. Q1 2013 saw gross margins on GMV of 13.6%. For this quarter I will be modeling 13.6% as well.
- Marketing/GMV. This is used to calculate the "marketing" operating cost line. Q1 2013 saw marketing/GMV of 2.01%. For this quarter I will be modeling 2%.
- Fulfillment/GMV. This is used to calculate the "fulfillment" operating cost line. Q1 2013 saw fulfillment/GMV of 5.71%. For this quarter I will be modeling 5.75%. It should be noticed that this sometimes goes higher in Q2 over Q1, so there's some risk to estimates here (costs might come in higher than estimated).
- Technology/Other. This is used to calculate the "technology" cost line. Q1 2013 saw technology/other of 173.31%. For this quarter I will be modeling 175% since Q2 is usually somewhat higher in this metric.
- G&A/GMV. This is used to calculate the "G&A" cost line. Q1 2013 saw G&A/GMV of 0.78%. For this quarter I will be modeling 0.85% since Q1 is usually a low point in this metric.
This is it. These are all the inputs the earnings model needs to produce its estimates. So let us see what comes out of it next.
The Model output
Using the assumptions I described, we get the following results (model 1 is using the product margins, model 2 is using gross margins calculated using GMV):
As we can see, model 1 yields an EPS of $0.08 and model 2 yields and EPS of $0.07. Neither is very far from the earnings consensus at $0.06. As usual analysts bring estimates down enough for the company to beat them marginally - a phenomenon that's not exclusive to Amazon.com, it affects the whole market. An analyst always predicting earnings $0.01 above consensus would be more accurate than consensus due to this fact.
Again, after so many guide downs, Amazon.com is producing earnings near zero and these are not incredibly hard to meet or beat. Also dejá vu: the model yields a revenue miss (20.6% revenue growth rate versus 22.7% expected).
The model is consistent with Amazon.com having sandbagged its operating income, for while it predicts lower revenues than expected and EPS at consensus, the operating income is predicted to be between $130 million and $134 million, or $120 million above Amazon.com's high end of guidance.
Amazon.com has again increased 3P (Third Party) commissions on some products during Q2 2013. This might provide some extra growth for 3P if it doesn't impact quantities right away.
Any of the segments (1P, 3P, AWS) might end up slowing down more than assumed. It's especially likely that the media segment might slow down farther and even turn negative internationally because the new generation gaming consoles were announced by Sony (SNE) and Microsoft (MSFT) during Q2. Demand for the old generation might have fallen substantially while the pre-orders for the new consoles cannot yet be booked as revenue in this quarter.
The model is predicting Amazon.com earnings will be very close to the present consensus after suffering 2 years and a half of massive guide-downs. On the other hand, all the signs indicate that Amazon.com will miss revenue estimates and guide down revenues for Q3 2013 unless the new generation gaming consoles launch in time to book revenues in Q3 2013.
These earnings continue not to be consistent with Amazon.com trading at a $125 billion market capitalization.