Amazon’s Sales Jumps, But Fail to Meet Holiday Forecasts

Net sales jumps to $43.7 billion, but lower than expectations for $44.68 billion

Retail behemoth Amazon.com Inc. (NASDAQ: AMZN) announced its Q4 FY16 and full-year FY16 financial results on February 02nd, 2017.

The Seattle, Washington-based company provides online retail shopping services to consumers, sellers, enterprises, and content creators. It designs its websites to enable its products to be sold by the company and by third parties across dozens of product categories. The company also serves developers and enterprises of all sizes through Amazon Web Services, which provides technology infrastructure to enable virtually any type of business.

The company operates through three segments: North America, International, and Amazon Web Services (AWS). The North America segment includes retail sales of consumer products and subscriptions through North America-focused websites such as www.amazon.com and www.amazon.ca. The International segment includes retail sales of consumer products and subscriptions through internationally focused websites. AWS includes global sales of compute, storage, database, and other AWS service offerings for start-ups, enterprises, government agencies, and academic institutions. Read more about Amazon’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Amazon’s net sales jumped 22% to $43.7 billion compared to $35.7 billion in Q4 FY15, and lower than expectations for $44.68 billion. Excluding the $558 million unfavorable impact from Y-o-Y changes in foreign exchange rates in Q4 FY16, net sales grew 24% versus Q4 FY15. Operating income jumped 13% to $1.3 billion versus $1.1 billion in the year-ago comparable period. Amazon’s stock fell by more than 4% after its holiday season sales fell short of expectations and the Company’s disappointing guidance.

In all, Amazon’s profit jumped to $749 million in Q4 FY16, or $1.54 per share, from $482 million, or $1.00 per share, a year earlier, marking the seventh straight quarter of profitability.

Amazon’s biggest investment during the year were the setting up of 23 new fulfillment centers in H2 FY16, sourcing Academy Award-nominated original content with pricey talent for its Prime Video services, Alexa and Echo devices, and expansion into India. Amazon also focused on its Prime loyalty program, bundling more services into Prime membership. Prime members can now choose from over 50 million items with free two-day shipping, up 73% since 2015. Prime Video is now available in more than 200 countries and territories. Prime Now added 18 new cities, which mean millions more members now get one and two-hour delivery. However, Amazon is faced with increasing competition; Wal-Mart Stores Inc. (NYSE: WMT) announced it would offer free two-day shipping on over two million items when customers spend more than $35.

Amazon also announced that it hired a whopping 110,600 full and part-time employees in 2016, and now has 341,400 employees worldwide. It said earlier this year it planned to hire an additional 100,000 US employees in the next 18 months.

FY16 financial highlights

During FY16, Amazon’s net sales jumped 27% to $136 billion versus $107 billion in 2015. Excluding the $550 million unfavorable impact from Y-o-Y changes in foreign exchange rates throughout the year, net sales jumped 28% versus 2015. Operating income surged to $4.2 billion from $2.2 billion in 2015. Net income soared to $2.4 billion, or $4.90 per diluted share, compared to net income of $596 million, or $1.25 per diluted share, in 2015.

Fulfillment by Amazon (FBA) delivered more than two billion units on behalf of sellers in 2016, and the number of active sellers using FBA grew more than 70%. Using the FBA service, Amazon sellers from more than 130 countries fulfilled orders to customers in 185 countries. In 2016, there were over 100,000 sellers with sales of more than $100,000 selling on Amazon. In Q4 FY16, FBA units represented more than 55% of total third-party units.

During FY16, Amazon also launched Amazon Go in Seattle, a new kind of store with no checkout required. This kind of checkout-free shopping experience is made possible by the same types of technologies used in self-driving cars: computer vision, sensor fusion, and deep learning.

Amazon Music Unlimited expanded to Austria, Germany, and the UK with over 40 million songs, hand-curated playlists, and personalized stations. Prime members in those countries can access Amazon Music Unlimited at a breakthrough price (€7.99/£7.99 per month), while the exclusive “for Echo” subscription plan is available to all customers for only €3.99/£3.99 per month.

Alexa-enabled devices were the top-selling products across all categories on Amazon.com this holiday season. Customers purchased and gifted a record-setting number of devices from the Amazon Echo family with sales up over 9x compared to last holiday season. Thousands of developers are using the Alexa Voice Service to integrate Alexa into their products, including Dish DVRs, Ford and Volkswagen vehicles, GE C Lamp, Huawei Mate 9, LG Smart Instaview fridge, and Whirlpool appliances.

Segmental highlights

North America: Amazon’s Q4 FY16 sales in this segment were at $26.24 billion versus $21.5 billion in the year-ago same period. Operating income grew to $816 million versus $636 million in Q4 FY15.

International: Amazon’s Q4 FY16 sales in this segment came in at $13.96 billion versus $11.84 billion in the year-ago comparable period. However, Amazon reported a loss of $487 million, steeper than its loss of $108 million a year ago, mainly due to spending on expansion, including in India, which is expected to continue into Q1 FY17.

Amazon Web Services: Amazon’s Q4 FY16 sales in this segment surged to $3.53 billion versus $2.40 billion in the year-ago corresponding period. According to Synergy Research Group, AWS has a 31% share of the cloud market, with Microsoft Corp.’s (NASDAQ: MSFT) Azure running far behind at 9% and Alphabet Inc.’s (NASDAQ: GOOG) Google at 4%. AWS accounted for 8% of the company’s total revenue and its operating income was $926 million.

AWS announced that customers migrated more than 18,000 databases using the AWS Database Migration Service in 2016 including:

  • Workday selected AWS as its preferred public cloud infrastructure provider for customer production workloads;
  • Capital One selected AWS as its predominant cloud infrastructure provider;
  • Shipping carrier Matson has closed all of its data centers, completing migration to AWS;
  • McDonald’s is transforming its digital-facing properties with AWS;
  • Financial Industry Regulatory Authority (FINRA) is using AWS for its data analytics platform, which analyzes up to 75 billion market events daily.

AWS accelerated its infrastructure expansion in 2016, opening 11 Availability Zones across the US, Korea, India, and most recently, Canada and the UK. AWS now operates 42 Availability Zones across 16 infrastructure regions globally and plans to open an additional 5 Availability Zones in two regions – France and China in the coming months.

AWS continues to accelerate its pace of innovation with the release of 308 significant new services and features in Q4 FY16, bringing the total number of launches in 2016 to 1,017. AWS announced three Artificial Intelligence (AI) services that make it easy for any developer to build apps that can understand natural language, turn text into lifelike speech, have conversations using voice or text, analyze images and recognize faces, objects, and scenes. Amazon Lex, Amazon Polly, and Amazon Rekognition are all based on deep learning and machine learning.

AWS also announced a significant investment in MXNet, an open source distributed deep learning framework. AWS will contribute code and improve the MXNet developer experience to enable machine learning scientists to build scalable deep learning models that can significantly reduce the training time for their applications.

AWS announced Amazon Athena, a pay-as-you-go, interactive query service that makes it easy for customers to analyze data directly in Amazon Simple Storage Service (Amazon S3) using standard SQL. With a few clicks in the AWS Management Console, customers can point Amazon Athena at their data stored in Amazon S3 and begin using standard SQL to run queries and get results in seconds. With Amazon Athena there are no clusters to manage and tune, no infrastructure to setup or manage, and customers pay only for the queries they run. AWS announced AWS Greengrass and AWS Snowball Edge, hybrid services that help customers extend the power of the AWS Cloud to connected devices and other environments that exist beyond the network edge.

Other highlights

Cash flow: Operating cash flow increased 38% to $16.4 billion for the trailing twelve months (TTM), compared to $11.9 billion for the year-ago comparable period. Free cash flow increased to $9.7 billion for TTM compared to $7.3 billion for Q4 FY15. Common shares outstanding plus shares underlying stock-based awards totaled 497 million on December 31st, 2016, compared with 490 million one year ago.

Guidance for Q1 FY17

For Q1 FY17, Amazon’s net sales are expected to be between $33.25 billion and $35.75 billion, or to grow between 14% and 23% compared to Q1 FY16. This guidance anticipates an unfavorable impact of approximately $730 million or 250 basis points from foreign exchange rates. Operating income is expected to be between $250 million and $900 million, compared with $1.1 billion in Q1 FY16. This guidance assumes, among other things, that no additional business acquisitions, investments, restructurings, or legal settlements are concluded.

Stock Performance

Amazon’s stock finished the day at $807.64, falling 0.32%, at the close on Monday, February 06th, 2016, having vacillated between an intraday high of $810.72 and a low of $803.00 during the session. The stock’s trading volume was at 3,812,462 for the day. The Company’s market cap was at $397.85 billion as of Monday’s close.

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