A week and a half ago I was watching some portfolio manager on CNBC. He was explaining why the Amazon (AMZN) purchase of Twitch made so much sense, and why Amazon shares will go higher. "Amazon has about $8 billion in cash on its balance sheet," he said, "so this won't (ahem) be a problem for them."
He almost made that statement with a straight face, but he had to clear his throat in the middle of the sentence. Probably because he knew he was not telling the whole story, but he needed the television audience to believe him. I don't know if he was busy selling his Amazon stake while making these comments, but it would not have surprised me. You see, what he failed to mention is that while Amazon had $8 billion of cash on its books at the end of Q2, it also had $10 billion in accounts payable. When taken together, those deep pockets at Amazon don't seem quite as deep.
For those not in the know, Amazon.com made a purchase of a company without having the cash to do it. The current assets and current liabilities from Amazon's Q2 2014 balance sheet clearly show this (all amounts in $ millions).
| Assets | |
| Cash, Equiv and Short Term Investments | 7,986.00 |
| Receivables | 4,125.00 |
| Inventories | 6,644.00 |
| Total Current Assets | 18,755.00 |
| Liabilities and Shareholders' Equity | |
| Payables | 10,457.00 |
| Accrued Expenses,Current | 6,688.00 |
| Deferred Liabilities,Current | 1,606.00 |
| Total Current Liabilities | 18,751.00 |
| Source: MSN Money |
Any college student with a B average in Accounting 101 could look at that balance sheet and tell you there is no money to purchase Twitch before year's end without an awesome Q3. Lo and behold, Q3 will be awesome, as Amazon expects to lose between $400 to $800 million in that quarter. So, as many contributors on Seeking Alpha have already pointed out, there was no doubt that some sort of capital raise was coming. The only questions were when, and if would it be a debt or equity issuance. On Friday, September 5th Amazon gave us the answers. Like a thief in the night, Amazon disclosed to the SEC on Friday after hours that it had obtained a $2 billion line of credit from Bank of America. This is how Amazon intends to pay for the Twitch purchase. Not convinced? Well take a look at this excerpt from the filing (bold italics added for effect):
"Borrowings under the Credit Agreement may be used for working capital, capital expenditures, acquisitions, and other corporate purposes."
Lines of credit are typically given to help a business with cash flow, often during time periods when access to cash will allow the normal course of business to run unimpeded. For example, if a clothing retailer needs to buy a large amount of inventory prior to back-to-school, it may use a line of credit to fund the purchases. In my 20-plus years of business experience I don't recall ever hearing of a line of credit used for an acquisition. So based on the evidence of the balance sheet and this filing, it is safe to assume that $970 million dollars of the line of credit will be used to pay off Twitch shareholders.
On September 3rd Thomas Szkutak, CFO of Amazon for the past 12 years, announced his plan to retire in mid-2015. The stock market greeted this news with a collective yawn as the shares traded down a mere 1% on under two million shares in volume. The next day, shares rose nearly 3% on an upgrade from an analyst at Bernstein ($450 price target). Again, not sure if Bernstein's clients were using the opportunity to dump Amazon shares, but that is beside the point. The bigger question is why is Szkutak leaving now?
Amazon has a lot on the line. The shares are down 13% year to date, vastly underperforming the overall market. Twitch is its largest acquisition ever. A $2 billion dollar investment has been earmarked for India. Expansion is planned in China. More expansion is planned in the U.S. Alibaba (BABA) is raising $20 billion through an IPO. Pricing conflicts with Disney and Hachette persist. Furthermore, in what may be the biggest challenge of all, competition with Google (GOOG) is increasing in AWS, same day delivery, advertising, and (snicker) DRONES. I won't even address the 900 multiple, because who cares about that?
In moments like these the legacies of executives are made. Consider Szkutak's future should Amazon succeed at navigating these challenges, and realize the massive profits that have long been promised. Szkutak would be a god. He would be the CFO at the helm of the company that successfully executed an entirely new business strategy. He could tell Warren Buffett to take his dividends and stuff it. He would be a household name on Wall Street, and would receive CEO offers that would be at least five times his 2013 Amazon stock based compensation.
With such a bright future on the horizon, I would have expected Szkutak to stay until he proved his doubters wrong. Drive Amazon to $10 billion in profits per year and show them all. It is so much sweeter to make money while sticking it in your critics' eye at the same time.
But Szkutak seems to be cut from a different cloth.
Szkutak, at this critical junction for Amazon, has decided to… retire. He has decided that it would be grand to spend more time with his family now. Maybe that is the truth. Maybe Szkutak is tired, has done the work of the good soldier, and simply wants to enjoy the fruits of his labor. This would sound reasonable to anyone who has never experienced life as a senior executive at a large multinational company. But for many who reach that level of success, the logical next career move is to at some point take over as the CEO of their current company or take the top job somewhere else. Szkutak is only 53 years old, quite young by C-suite standards.
There is a second possible reason for Szkutak's departure. Perhaps shareholders were no longer content with the sub-par earnings and demanded a change. This would suggest Szkutak is not getting the job done any longer. It suggests that he is being removed before reaching the promised land. I'm not buying that one, as it would mean Jeff "Long Haul" Bezos listened to his shareholders, and we know he does not do that.
A third possibility is more troubling. What if Szkutak and Bezos had a falling out? Bezos is known as a confrontational business leader, challenging his staff every step of the way on new ideas. Perhaps the two executives had irreconcilable differences on the future direction of Amazon, and Szkutak decided it was time to go. If this is what happened, then shareholders better pray that Jeff is making the right moves, or there could be some pain ahead.
A fourth possible reason for Szkutak's departure is the worst of all for shareholders. He may feel that Amazon's financial situation is spinning out of control, and he has decided to jump ship before it hits the rocks. Amazon bulls will dismiss this possibility of course. But consider the following, based on Amazon's year to date filings:
- Cash Flow from Operating Activities, Q1-Q2 2014: -$1.64 billion
- Free Cash Flow, Q1-Q2 2014: -$4.01 billion
- Expected Operating Loss, Q3 2014: $400 to $800 million
In addition:
- Amazon will now have to spend more cash to develop the new Twitch acquisition
- No one on the east coast owns a Fire phone, best I can tell
- No one remembers what Pantry or the Fire TV were intended to do, which is indicative of the failed projects that will continue to hurt financial results going forward
Amazon bulls likely will not see a problem with any of this, and dismiss it all as "Jeff investing for the future." But it looks to me that more cash will be needed in six months or so, or there will be liquidity questions again.
With all these challenges, it really strikes me as strange that the CFO would choose now to bail - I mean, retire. I do not know Szkutak, and so of course my scenarios are all speculation. But I am not an Amazon believer. There are too many challenges, the balance sheet is weak and getting worse, and there is no focus in this company. In addition, I don't trust organizations that sneak around on Fridays after the close with SEC filings. Especially if those filings are about increasing the debt load. I think Szkutak is getting out while the getting's good.