Amazon.com, Inc. 10-Q Summary: Q2 2019
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended June 30, 2019. Amazon.com, Inc. operates as a large accelerated filer with three primary reportable segments: North America, International, and Amazon Web Services (AWS). The financial statements are unaudited and reflect the adoption of new lease accounting standards (ASC 842) effective January 1, 2019, which resulted in the recognition of approximately $21 billion in operating lease assets and liabilities.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 |
|---|---|---|---|---|
| Total Net Sales | $63.4 billion | $52.9 billion | $123.1 billion | $103.9 billion |
| Operating Income | $3.1 billion | $3.0 billion | $7.5 billion | $4.9 billion |
| Net Income | $2.6 billion | $2.5 billion | $6.2 billion | $4.2 billion |
| Diluted EPS | $5.22 | $5.07 | $12.31 | $8.34 |
| Operating Cash Flow | $9.1 billion | $7.4 billion | $11.0 billion | $5.7 billion |
| Free Cash Flow (TTM) | $25.0 billion | $10.4 billion | (Trailing Twelve Months ended June 30) | |
| Cash & Marketable Securities | $41.5 billion (as of June 30, 2019) | |||
| Total Debt | $25.1 billion (Face value as of June 30, 2019) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 20% year-over-year in Q2 2019. AWS sales grew 37%, North America sales grew 20%, and International sales grew 12%.
- Profitability: Operating income increased to $3.1 billion in Q2 2019 from $3.0 billion in Q2 2018. AWS operating income rose significantly to $2.1 billion (from $1.6 billion), while the International segment reported an operating loss of $601 million (wider than the $494 million loss in Q2 2018).
- Expense Trends: Marketing expenses increased 48% year-over-year to $4.3 billion, and Technology and content expenses rose 25% to $9.1 billion, reflecting continued investment in infrastructure and customer acquisition.
- Foreign Exchange Impact: Changes in foreign currency exchange rates negatively impacted net sales by $814 million in Q2 2019 and operating income by $58 million.
- Balance Sheet: Total assets increased to $191.4 billion from $162.6 billion at year-end 2018, driven largely by the new lease accounting standard and growth in marketable securities.
Guidance, Outlook, and Risks
Q3 2019 Guidance:
- Net Sales: Expected between $66.0 billion and $70.0 billion (17% to 24% growth vs. Q3 2018).
- Operating Income: Expected between $2.1 billion and $3.1 billion (compared to $3.7 billion in Q3 2018).
- FX Impact: Guidance anticipates an unfavorable impact of approximately 30 basis points from foreign exchange rates.
Management Commentary:
- Management emphasizes that operating income is a more meaningful measure than gross profit due to the diversity of product categories.
- Continued investment in fulfillment networks, technology infrastructure (AWS), and price reductions for customers are driving growth but pressuring margins.
- Free cash flow for the trailing twelve months ended June 30, 2019, was $25.0 billion, a significant increase from $10.4 billion in the prior year period.
Risks and Contingencies:
- Legal Proceedings: Neodron Ltd. filed petitions alleging patent infringement regarding Amazon Fire HD 10 tablets and other devices. Amazon disputes these allegations.
- Tax Contingencies: Amazon faces ongoing tax examinations in the U.S. (IRS transfer pricing) and the EU (Luxembourg state aid). Tax contingencies totaled approximately $3.7 billion as of June 30, 2019.
- Sanctions Compliance: The company disclosed processing orders for entities potentially covered by the Iran Threat Reduction and Syria Human Rights Act, with a total value of approximately $35,100. The company is enhancing processes to prevent future transactions.
- Market Risks: Significant exposure to foreign exchange fluctuations, particularly regarding the Euro, British Pound, and Japanese Yen.
Key Facts for Investor Verification
- Segment Performance: Verify the widening operating loss in the International segment despite revenue growth, and the margin expansion in AWS.
- Capital Expenditures: Review the $11.0 billion in net purchases of property and equipment for the trailing twelve months, noting the shift toward finance leases under new accounting rules.
- Debt Structure: Confirm the total debt load of $25.1 billion and the specific terms of the $509 million outstanding under the Credit Facility.
- Stock-Based Compensation: Note the $1.97 billion expense in Q2 2019, which is a significant non-cash add-back to operating cash flow.
- Unearned Revenue: Verify the $7.5 billion in unearned revenue, primarily related to AWS and Prime memberships, indicating future revenue recognition.