After the bell on Thursday, Amazon (AMZN) reported a top and bottom line beat with its fourth quarter earnings results. Revenues of $72.4 billion (up 20% year over year) topped the consensus of $71.87 billion, and earnings per share of $6.04 (up 61% year over year) exceeded expectations of $5.67. Operating Income of $3.8 billion (up 81% year over year) was slightly more than the $3.735 billion consensus.
Before we get into the results, let's take a look at guidance. Net sales are expected to be between $56 billion and $60 billion, representing growth of between 10% and 18% year over year. This guidance includes an unfavorable impact of approximately 210 basis points from foreign exchange. At a midpoint of $58 billion, management's guidance is light compared to the $59.542 billion consensus. The company also expects first quarter operating income to be between $2.3 billion and $3.3 billion. At a midpoint of $2.8 billion, this is also light to the $2.982 billion consensus. Just like when management issued its forward quarterly guidance last time, management's expectations came in short of what the consensus anticipated. So how did Amazon fare in the fourth quarter against management's initial expectation? The $72.383 billion revenue number is at the very top end of management's previous $66.5 to $72.5 billion guide. Meanwhile, operating income of $3.8 billion exceeded management's initial forecast of $2.1 billion to $3.6 billion.
Weighing on guidance is e-commerce regulation uncertainty in India. Management's believes in the long-term opporunity in the region, however, the local laws may force the company to change the way e-commerce platforms sell products through affiliated companies.
Another factor weighing against the stock in the after-hours market is spending growth for 2019. In the fourth quarter 2018, total capex increased by 17%, and management views that as a "low number" in terms of what is needed to support the fast-growing Amazon Web Services business as well as fulfillment services. CFO Brian Olsavsky said on the call that he considers 2018 as a "lighter investment year" and he noted that investments are expected to pick up relative to 2018. This might suggest the potential for a step-up in spending which may spook some investors tonight.
Shares were down about 5% to $1,632 in after-hours trading after rising by 2.89% during the regular session. It's worth noting that this decline puts the stock back around Tuesday's prices.
Next, we provide CEO Jeff Bezos' comments from the earnings press release.
"Alexa was very busy during her holiday season. Echo Dot was the best-selling item across all products on Amazon globally, and customers purchased millions more devices from the Echo family compared to last year," said Bezos. "The number of research scientists working on Alexa has more than doubled in the past year, and the results of the team's hard work are clear. In 2018, we improved Alexa's ability to understand requests and answer questions by more than 20% through advances in machine learning, we added billions of facts making Alexa more knowledgeable than ever, developers doubled the number of Alexa skills to over 80,000, and customers spoke to Alexa tens of billions more times in 2018 compared to 2017. We're energized by and grateful for the response, and you can count on us to keep working hard to bring even more invention to customers.
The Amazon press release also highlights many of the company's recent achievements. For a full list, please see the company's press release here.
Online Stores and Physical Stores (Retail)
At Online stores, the heart of Amazon's e-commerce business, revenues in the quarter were $39.822 billion, topping the $38.446 billion consensus. In this quarter which included the retail holiday season, sales increased 14% year over year when excluding FX. Overall, management was pleased with the results from the holiday season and the overall strength in the quarter.
At Physical Stores, which is Amazon's business that includes items that customers physically select in stores (primarily Whole Foods), revenue was $4.401 billion in the quarter, short of the $4.731 billion consensus. The results represented a 3% decline in sales year over year excluding FX. Although this drop may be alarming at first glance, management discussed on the call how there were some timing adjustments in the fourth quarter of 2017, and importantly, Prime Now app orders for delivery or pickup count under the "online store" component. Accounting for this all in an "apples to apple" approach, management said the business would have grown 6%.
Amazon Web Services
At Amazon Web Services, revenue of $7.43 billion topped the expectation of $7.285 billion. Sales grew 46% year over year excluding FX, the same pace of growth as the third quarter of 2018. Unlike in the third quarter when AWS operating margin improved from the second quarter's 26.9% figure to 31.1%, the fourth quarter's operating margin rate decelerated in-between those two levels to 29.3%--which is still an improvement of 280 basis points year over year and a key driver of the company's impressive earnings power. The lower result in Q4 was impacted by an increase in capital lease expenditure compared to the prior three quarters.
Management acknowledged on the call how operating margins will bounce around from quarter to quarter, but they were happy with the result nonetheless. Essentially, the jumpy margins are the cost of having a fast-growing business that as Director of IR Dave Fildes said on the call is "lowering prices, expanding geographically, adding people to build, especially tech teams and sales teams to build new and innovative products and staying very relevant and ahead of our customers' minds." There may be variability in margins, but AWS' leadership in the secular industry of cloud-computing continues to driver impressive sales growth. We'll take this every day of the week and twice on Sunday.
In subscription services, which includes annual and monthly fees associated with Prime, audiobook, e-book, digital video, digital music, and more, revenues increased 26% year over year to $3.959 billion. This result was light compared to the $4.320 billion consensus. Even though the cost of Prime is higher compared to what it was a year ago, there was a sharp deceleration in revenue growth (26% vs. 52% in the third quarter). Part of this was due to a $300 million "headwind" related to an accounting change for Prime but factoring that number into the results would still result in a slowdown. Management acknowledged how they saw record Prime signups during the quarter, but that might not be enough to prevent questions on the saturation of the Prime membership market from being raised.
Third-party Seller Services
In this segment, which includes commissions and any related fulfilment and shipping fees, and other third-party seller services, sales were $13.383 billion. This topped the expectation of $13.562 billion and represented year over year growth of 28% when excluding FX.
Other (Primarily Advertising Services and Other Service offerings)
Sales in "Other" was $3.388 billion, which fell short of the $3.527 billion consensus. Still, we continue to be impressed with how fast this business is growing, as sales increased 97% excluding F/X year over year. Investors might not like how that figure is a deceleration from the third quarter's growth rate of 123%, however, management was asked if the business had slowed and they chalked up the lower figure to comping periods of rapid growth. We don't think there is an issue with Advertising as the business is believed to be taking share from the large players in the industry (Facebook (FB) and Alphabet (GOOGL) ), while also expanding features and installing improvements to make the service friendlier to other companies.
Overall, this was another strong quarter from the company with plenty of beats in key areas, as well as good growth in North American operating profits and International top line sales. We'll hear about guidance getting nitpicked again tomorrow, and spending growth might be on top of mind too, however, you won't find another company as innovative as Amazon that's also churning out profits at a torrid pace. Plus, the company has a ton of cash ($18 billion in net cash at the end of the year) and is sneakily improving its free cash flows too. We reiterate how pullbacks are long-term buying opportunities and our ONE rating.