The Most Important Information From Amazon's Q1

| About:, Inc. (AMZN)
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Amazon (NASDAQ:AMZN) posted a better than expected quarter and the stock reacted favorably. Below is the key information from the conference call.

Financial Metrics:

  • Trailing 12 month operating cash flow increased 1% yoy to $3.05bn, but trailing 12 month free cash flow declined 39% yoy to $1.15bn.
  • Return on invested capital was 12%, down from 24% last year.
  • Repurchased 5.3 million shares in the quarter or $960 million.
  • Worldwide revenue increased 34% yoy to $13.18bn. Excluding currency effects, revenue increased 34% yoy.
  • Media revenue increased 19% yoy (+19% excluding currency).
  • EGM revenue increased 43% yoy (+43% excluding currency); EGM represents 60% of total revenue, up from 57% last year.
  • Worldwide unit growth was +49% (+46% last quarter).
  • Active customer count was 173 million, up from 164 million last quarter.
  • Worldwide active seller accounts were more than 2 million, which is the same as last quarter. Seller units were 39% of paid units, compared to 36% of paid units last year.
  • Cost of sales was 76.1%, down 110 bps from 77.2% last year. Previous quarter cost of sales was 79.3%.
  • Fulfillment was 9.5% of revenue, up from 8.4% last year and 9.3% last quarter.
  • Technology and content was 6.5%, up from 5.3% last year and 4.5% last quarter.
  • Marketing was 3.6%, up from 3.2% last year and up from with 3.3% last quarter.

Revenue and income by segment:

  • N.A. revenue increased +36% yoy (media +17% and EGM +44%); operating income increased 20% with a 4.7% operating margin vs. 2.9% last year.
  • International revenue increased 31% yoy, or 32% excluding currency. Media revenue +21% (+22% ex. currency); EGM +40% yoy, or +42% excluding currency; operating profits decreased 72% and the operating margin was 0.9% vs. 2.4$ last year.
  • GAAP operating income declined 40%, or 1.5% of sales, which is the same margin as last year.
  • Tax rate was 51% for the quarter.
  • Net income of $0.28 vs. $0.44 last year.

Balance Sheet:

  • Cash and equivalents decreased $1.17 billion yoy to $5.71bn.
  • Inventory increased 47% yoy; inventory turns decreased to 10.4x from 11.6x last year and 10.3x last quarter. The company is expanding selection, added more sku's, and introduced new product categories.
  • Accounts payable increased 24%; A/P days increased to 62 from 66 days last year and 74 days last quarter.
  • Capex was $386m as the company invested in "business growth", Amazon web services, and capacity to support fulfillment operations.


  • Q2 revenue of $11.9bn - $13.3bn, growth of 20% - 34% (about 2.4% unfavorable impact from currency)
  • Operating income of a loss of $260m to positive $40m, a decline of 229% to 40% (this includes stock based comp); ex. stock based comp, operating income expected to be between zero and $300 million.
  • Capex for 2Q of $800 million - $900 million

Questions & Answers: (This section is where we paraphrase the question and answers. Our goal is to capture the core meaning of the question and response, but in an easy-to-consume format).

  • Update on fulfillment centers in 2012? Have announced 13 new centers in 2012. The business is experiencing very strong growth and fulfillment by Amazon is booming (up 60% last quarter).
  • What is happening with U.S. vs. International operating margins? They are investing very heavily in Spain, Italy, and China, so that is hurting margins. But the CFO said China is "growing very fast" and "we like what we see".
  • Employee count growth? With 73% yoy growth in employees, the business is aggressively adding to operations and customer service. Management said that growth is driving the need for employees.
  • What will happen now the Justice Department will allow the wholesale model? Look for Amazon to aggressively lower e-book prices, and growth will remain robust.
  • Why did gross margin improve? Part was mix shift, part was much more 3rd party fulfillment.
  • Can you talk about the Kindle Fire? The acceleration in revenue growth from Q4 to Q1 (+17% vs. +8%) is largely a result of more people consumer media on the Kindle Fire. Also, it sounds like an international expansion is on the way.

Takeaways: Revenue growth remains strong, but importantly, the company is finally outperforming operating income expectations. This implies that the worst of the "investment phase" is behind Amazon, and a slow return to more normal margins is likely. The business is benefiting from a wide array of products, massive geographic reach, and an operational advantage.

At nearly 82x 2013 EPS, Amazon is pricing in the continuation of strong revenue growth and massive margin expansion over the next few years. It's hard to justify this stock price unless the company massively outperforms operating income expectations. On normalized earnings, we can get to $175 as a fair valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.