Amazon.com, Inc. Q1 2009 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Amazon.com, Inc. operates as a large accelerated filer with two principal segments: North America and International. The company reported 429.6 million shares of common stock outstanding as of April 17, 2009.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $4,889 million | $4,135 million |
| Gross Profit | $1,148 million | $956 million |
| Income from Operations | $244 million | $198 million |
| Net Income | $177 million | $143 million |
| Diluted EPS | $0.41 | $0.34 |
| Operating Cash Flow | $(585) million | $(645) million |
| Free Cash Flow (TTM) | $1,431 million | $788 million |
| Cash & Equivalents (End of Period) | $1,701 million | $1,496 million |
| Long-Term Debt | $74 million | $409 million (Dec 31, 2008) |
Note: Operating cash flow for Q1 2009 was negative due to seasonal working capital changes, specifically a significant reduction in accounts payable following the holiday season.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18% year-over-year. North America sales grew 21% and International sales grew 15%. Excluding the negative impact of foreign exchange rates, consolidated sales growth would have been 25%.
- Profitability: Operating income increased 23% to $244 million, driven by a 20% increase in gross profit. Gross margin improved slightly to 23.5% from 23.1%.
- Debt Reduction: The company redeemed the remaining €240 million ($319 million) of its 6.875% PEACS debt in Q1 2009, significantly reducing long-term debt obligations.
- Working Capital: Accounts payable decreased by $1,129 million in Q1 2009 compared to a decrease of $1,003 million in Q1 2008, reflecting the seasonal payment cycle where payables decline in the first quarter.
- Shipping Costs: Net shipping costs increased to $168 million (3.4% of net sales) from $128 million (3.1% of net sales), attributed to increased usage of free shipping offers and Amazon Prime.
Guidance, Outlook, and Risks
Q2 2009 Guidance:
- Net Sales: Expected between $4.30 billion and $4.75 billion (6% to 17% growth vs. Q2 2008).
- Operating Income: Expected between $110 million and $190 million (a decline of 12% to 49% vs. Q2 2008, which included a $53 million non-cash gain on the sale of European DVD assets).
Management Commentary: Management emphasized that the company's financial focus remains on long-term, sustainable growth in free cash flow. The increase in free cash flow for the trailing twelve months (up 82%) was attributed to increased operating income and changes in working capital.
Risks and Contingencies:
- Legal Proceedings: The company faces multiple patent infringement lawsuits (e.g., Discovery Communications, Tobin Family Education Foundation) and a sales tax dispute with various states. A settlement regarding Audible's IPO class action was reached with no payment required.
- Tax Contingencies: Tax contingencies totaled $174 million as of March 31, 2009. The company is under examination by the IRS and various international jurisdictions.
- Foreign Exchange: A strengthening U.S. dollar negatively impacted reported sales by $268 million in Q1 2009.
Investor Verification Checklist
- Verify the sustainability of the 18% revenue growth rate given the global economic climate and the negative impact of foreign exchange rates.
- Monitor the trajectory of net shipping costs as a percentage of sales, given the company's commitment to free shipping and Amazon Prime.
- Review the status of ongoing patent litigation and potential financial impact of unfavorable rulings.
- Assess the impact of the redeemed debt on future interest expense and liquidity.
- Track the resolution of state sales tax audits and potential retroactive liabilities.