Amazon.com, Inc. 10-Q Summary: Q1 2018
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended March 31, 2018. Amazon.com, Inc. operates as a large accelerated filer. The financial results include the operations of Whole Foods Market, Inc., acquired in August 2017. The company adopted new revenue recognition guidance (ASU 2014-09) on January 1, 2018, using the modified retrospective approach, which resulted in a reclassification of Prime membership fees and advertising services, increasing service sales and decreasing product sales.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total Net Sales | $51.04 billion | $35.71 billion |
| Operating Income | $1.93 billion | $1.01 billion |
| Net Income | $1.63 billion | $0.72 billion |
| Diluted EPS | $3.27 | $1.48 |
| Operating Cash Flow | $(1.79) billion | $(1.62) billion |
| Free Cash Flow (TTM) | $7.27 billion | $10.13 billion |
| Cash & Equivalents (End of Period) | $17.62 billion | $16.30 billion |
| Long-Term Debt | $24.64 billion | $24.74 billion |
Note: Operating cash flow for the quarter was negative due to seasonal working capital changes, specifically a reduction in accounts payable following the holiday season.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 43% year-over-year. North America sales grew 46%, International sales grew 34%, and AWS sales grew 49%.
- Profitability: Operating income nearly doubled to $1.93 billion. AWS operating income increased to $1.40 billion, while the International segment reported an operating loss of $0.62 billion.
- Segment Performance:
- North America: Driven by increased unit sales, third-party seller activity, and the Whole Foods acquisition.
- International: Sales growth was offset by increased operating expenses for fulfillment network expansion and marketing.
- AWS: Growth driven by increased customer usage, partially offset by pricing changes and infrastructure investments.
- Foreign Exchange: Changes in foreign currency exchange rates negatively impacted net sales by approximately $1.6 billion and operating income by $29 million compared to prior year rates.
Guidance, Outlook, and Risks
Q2 2018 Guidance:
- Net Sales: Expected between $51.0 billion and $54.0 billion (34% to 42% growth).
- Operating Income: Expected between $1.1 billion and $1.9 billion.
- Assumptions: Guidance assumes no additional acquisitions, investments, or legal settlements.
Management Commentary: Management emphasized continued investment in fulfillment networks, technology infrastructure, and content to support growth. They noted that operating income is a more meaningful measure than gross profit due to the diversity of product categories.
Risks and Contingencies:
- Tax Liabilities: Ongoing uncertainty regarding the 2017 Tax Act implementation. The company is under examination by the IRS regarding transfer pricing (2005-2006) and faces a European Commission state aid decision regarding Luxembourg taxes (approx. €250 million deposited in escrow).
- Legal Proceedings: Active patent infringement lawsuits (e.g., Smartflash, SRC Labs) and ongoing reviews of transactions involving sanctioned entities (Iran).
- Market Risks: Exposure to foreign exchange fluctuations, interest rate changes, and intense competition.
Investor Verification Checklist
- Working Capital Seasonality: Verify the impact of the Q1 cash outflow on accounts payable, which is typical post-holiday seasonality, against the strong trailing twelve-month operating cash flow of $18.2 billion.
- Free Cash Flow Definition: Note that Amazon reports multiple non-GAAP free cash flow measures; the standard measure (Operating Cash Flow minus CapEx) was $7.27 billion for the TTM, down from $10.13 billion, due to increased capital spending.
- Accounting Changes: Review the impact of the new revenue recognition standard on the mix of product vs. service sales, specifically the reclassification of Prime membership fees.
- International Losses: Monitor the widening operating loss in the International segment ($622 million) as the company expands fulfillment and marketing in these regions.
- Tax Provision: Track the resolution of the European Commission state aid case and the IRS transfer pricing appeal, as these could result in significant additional tax liabilities.