Amazon.com (NASDAQ: AMZN) turned in a terrific fourth-quarter 2017 earnings report on Thursday evening. The e-commerce giant and cloud-computing specialist’s revenue and operating income soared 38% and 69%, respectively. Earnings per share (EPS) adjusted for a $789 million one-time tax benefit surged 40% to $2.16.
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Top-line results beat Wall Street’s expectation and the bottom line crushed the consensus estimate.
Shares rocketed more than 7% higher at Friday’s open, driven by the better-than-expected results and good news shared on the earnings call. The stock, which gave back much of its early gain, was up 2.9% when the final bell rang. This later-day action wasn’t due to waning enthusiasm about Amazon’s results, but to the tough overall market: The S&P 500 closed down 2.1%, with tech stocks particularly hard hit.
Here are three key things management shared on the earnings call that investors should know.
1. Efficiency increased significantly in the North America e-commerce business
From CFO Brian Olsavsky’s remarks about what drove the expansion in the operating margin (operating income/revenue) in the North America e-commerce business:
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[V]olume was high … and a lot of times in Q4, and in other quarters actually, we see better efficiencies when the warehouses are busy. So it was a very clean operational quarter, I would say. The Ops team did a great job handling record volumes in Q4 and also incorporating all the new capacity we had opened in 2017. If you’ll remember, we have added over 30% to our fulfillment square footage in 2017 coming off a similar increase in 2016.
The increased profitability of the North America segment drove Amazon’s overall year-over-year profitability growth. This business is the company’s largest reporting unit by revenue, so changes in its profitability will have an outsize effect on overall results.
|
Segment |
Q4 2017 Operating Margin |
Q4 2016 Operating Margin |
Q4 2017 Percentage of Total Revenue |
|---|---|---|---|
|
North America |
4.5% |
3.1% |
62% |
|
International |
(5.1%) |
(3.5%) |
30% |
|
Amazon Web Services (AWS) |
26.5% |
26.2% |
8% |
|
Overall |
3.5% |
2.9% |
100% |
Amazon’s cloud-computing service business, AWS, is extremely profitable. But its performance didn’t appreciably add to the company’s year-over-year improvement in operating margin. The unit’s margin ticked up only slightly and the business accounts for just a small percentage of Amazon’s total revenue. (Investors don’t need to be concerned about the declining margin in international: Amazon has been investing heavily in expanding this business.)
2. Advertising revenue was a “key contributor” to growth
From Olsavsky’s remarks:
Advertising was also a key contributor [to year-over-year growth]. … And that was particularly strong in North America. …
[O]ur strategy is to make the customer experience additive by the ad process. We want customers to be able to see new brands and have easier time discovering products that they’re looking for. For brands, we think the value proposition is that we can find ways for them, especially emerging brands, to reach new customers.
The Wall Street analyst who prompted the response about advertising strategy had asked: “[D]o you aim for a … particular ad load across the entire platform? Do you look at sort of tailoring it based on users’ activity?” Not surprisingly, Amazon’s top management didn’t divulge its successful “secret sauce,” which is why the CFO’s answer was quite general. However, we can certainly assume that Amazon is using AWS’s artificial intelligence (AI) capabilities to show users of its site what it deems are the most relevant ads, based upon the immense amount of data the company has on users’ viewing and purchasing history, and so on.
Amazon doesn’t break out its ad revenue, but the bottom line is that the company is an emerging power in advertising — great news for its investors, though competitors for ad dollars, such as Google parent Alphabet, need to watch out.
3. Alexa “far exceeded” management’s “very optimistic” projections
Amazon CEO Jeff Bezos wasn’t on the earnings call, but it’s very telling that his statement in the earnings press release solely discussed Alexa, the company’s AI-driven, voice-activated assistant:
Our 2017 projections for Alexa were very optimistic, and we far exceeded them. We don’t see positive surprises of this magnitude very often — expect us to double down [on investing in this business]. We’ve reached an important point where other companies and developers are accelerating adoption of Alexa. [Emphasis mine.] There are now over 30,000 skills from outside developers, customers can control more than 4,000 smart home devices from 1,200 unique brands with Alexa, and we’re seeing strong response to our new far-field voice kit for manufacturers.
Amazon is winning in the smart-assistant space on two main fronts: The company’s Alexa-enabled Echo line of smart home speakers is the best-selling brand in this category, and other companies are increasingly adopting Alexa to embed in the products they make. This bodes well for Amazon in its race with Google, Apple, and others to dominate the “smart home” space.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
