Amazon’s Q2 Financials: net loss 18 times larger than last year
Customers can be happy about all of the money Amazon is investing to make their lives better. They are spending money on more content at no more cost (for example, hundreds of thousands of more songs for Prime Music), they continue to update devices, they are introducing new devices which lets us do things more of the same way in more places (which is easier).
Investors may not feel the same way about it, though.
Let’s take a stand-out figure, according to this
“Net loss was $126 million in the second quarter, or $0.27 per diluted share, compared with net loss of $7 million, or $0.02 per diluted share, in second quarter 2013.”
That’s a big proportional difference: as I mentioned in the subject of this post, it’s eighteen times larger.
However, a loss of $126 million just isn’t that much for a company the size of Amazon.
The big thing, of course, is that we have to believe that this is an extraordinary circumstance and not a trend.
After, all if the losses continued to grow at the same rate, they would lose two BILLION, two-hundred and sixty-eight million dollars in the second quarter of 2015…and then you’d be talking real money. 😉
Of course, that’s not likely.
Amazon just introduced a whole new hardware line for them with the
Amazon Fire Phone (at AmazonSmile)
Mine arrived yesterday (I’ll make some comments about it at the end of this post).
That’s a very big investment. It’s not just development: I’ve seen full page ads in magazines, for example, and that’s not a cheap thing to do.
Starting up a new service like
also has significant costs.
So, what did investors think about this?
This
shows a drop of 9.65% today…which comes with the smell of fear.
Now, that may bounce back, but my intuition is that investors are actually becoming even less secure with Amazon right now.
What does that mean for customers?
I suspect we may go into a “building” year where there aren’t any more radical product launches (that doesn’t mean we wouldn’t get a new Kindle Fire or Paperwhite…but that they won’t launch any more hardware lines).
They need to show that some of these risks are going to pay off. They need to show a record of success for Kindle Unlimited with an indicator of continued success.
They need the Fire Phone to be accepted and to be in a position for growth (the AT&T exclusivity is likely to only be for a year).
Amazon Web Services (AWS) needs to show it is a solid income stream going forward.
None of this concerns me for the viability of Amazon long-term…but we may see them painting the boats rather than launching new ones for a little while.
You can listen to the webcast of the conference call here:
http://edge.media-server.com/m/p/drh3z532/lan/en
Often the Q&A (Questions and Answers) portion is the best part…there is an index and you can jump right to that, if you want, but I didn’t hear any bombshells in it this time.
I’m actually listening to it right now on my Fire Phone.
I need to use it more until I can give you a real report on it (I’ll use it more over the weekend).
Let’s start out with a few things:
It works. 🙂
It sounds fine as a phone, I set up my e-mail, texting, and calendars. I was able to import everything pretty painlessly from my Samsung Galaxy S4 (which I hate to give up). I was already on AT&T, and they have a wireless transfer app that moves things between the two phones.
I did have one weird thing. Since I’d ordered the phone on one phone number on the account (which was eligible for an upgrade), but wanted it to work on another phone line, I had to call AT&T. The rep there was great, by the way! Surprisingly good.
The negative was that I needed the number on the SIM card on the new phone…and I could not get it to come out of the phone! I actually ended up calling Mayday on my
Kindle Fire HDX (at AmazonSmile: benefit a non-profit of your choice by shopping*)
It was kind of funny, because I had the AT&T rep on speaker phone, and that person could hear the Mayday person.
However, try as I might, I couldn’t get the SIM out. Fortunately, I found the number on one edge of the box for the phone…but I still haven’t gotten th SIM card out.
As to the “dy-per” (what I call Dynamic Perspective)…so far, it’s cool, but I wouldn’t feel like I need it. When I’m looking at the sleep screen, I can tilt the phone to see more of the scene. That’s a little hard to describe…it’s like when you were a kid, and you put your face right up to the mirror and were surprised that you could see things “in the mirror” that weren’t directly in front of it…suggesting it was actually showing you another world. Oh, was that just me? 😉
The Carousel, though, looks really busy. I have to check on how to maybe eliminate some of the data.
For example, if I swipe over to the messaging icon, the most recent messages show below that icon. Same thing with e-mail, the Help menu, Settings…it’s sort of like “customers also buy” on the Kindle Fire HDX…but there is a lot of text.
I haven’t seen it react to where I’m looking, yet, outside of dyper..and I’d really like to be able to scroll my book by looking! I may have to Mayday that (the Help search is unimpressive).
Flicking left and right does bring up some useful things…but it’s so far hard to predict when it will work or what it will show. I think that will come in time (I haven’t used it for a total of two hours of actual interaction time yet). There are people who still don’t right-click…you have to use it to get used to it. 😉
While you would think that this would integrate super well with Amazon’s stuff, I haven’t found Prime Music yet…despite looking for it for a few minutes. I can find my other music, but not Prime.
The other big feature that make the phone a stand-out is Firefly, the “real world recognition” functionality.
I pointed it at a superhero sticker today…it thought it was looking at a thermos with that superhero.
I pointed it at a can of Dust-Off which I had bought from Amazon: it first linked me to an inhalant abuse website that was on the can, then I repointed it at the SKU (the zebra stribe Stock Unit number) and it got it then.
It also got a toner cartridge package…again, by pointing it at the SKU.
I think at this point, the features are ahead of the functionality: I suspect there will be some killer apps for both Firefly and dyper, but casual use of the phone at this stage may not reveal their power.
What do you think? Do you have specific questions about the Fire Phone? Will Amazon raise consumer prices to make lower losses for investors? Feel free to let me and my readers know by commenting on this post.
Join hundreds of readers and try the free ILMK magazine at Flipboard!
* I am linking to the same thing at the regular Amazon site, and at AmazonSmile. When you shop at AmazonSmile, half a percent of your purchase price on eligible items goes to a non-profit you choose. It will feel just like shopping at Amazon: you’ll be using your same account. The one thing for you that is different is that you pick a non-profit the first time you go (which you can change whenever you want)…and the good feeling you’ll get. 
Shop ’til you help!
This post by Bufo Calvin originally appeared in the I Love My Kindle blog. To support this or other blogs/organizations, buy Amazon Gift Cards from a link on the site, then use those to buy your items. There will be no cost to you, and a benefit to them.
I Love My Kindle 
July 27, 2014 at 9:48 pm |
Notwithstanding the negative news, and generally downbeat reaction of the press and the investor community, this conference call was one of the most interesting and informative in a long time.
As you say the $126 million net loss — while significantly higher than past losses — is a drop in the bucket against the $19.34 revenue for the quarter. Two things are really causing investor concern. No sooner has Jeff Bezos convinced everyone that his model is to sell devices at cost (or slightly below) and make it up on usage, then he announces two products (Fire TV and Fire Phone) both premium products priced at premium prices instead of Amazon’s more usual practice of premium products at bargain basement prices. But even worse: that $126 million net loss is expected to grow to a $400-800 million loss in the current quarter (that is their official guidance).
Amazon’s CFO gave 3 reasons for the increased loss: 3Q is when they incur extraordinary expense in the ramp-up for their big 4Q holiday selling season; cloud computing (AWS) has suddenly become much more competitive — reducing revenue growth, and necessitating increased investments to add features to AWS; and the entertainment business landscape is changing radically necessitating much more being spent on content deals (in fact the CFO said that they expect to spend an additional $100 million on new original content in the current quarter — one can expect these kinds of expenses to become ongoing and to keep increasing).
Not mentioned in the call, but it is my opinion that Amazon is not finished with new product and service announcements for 2014 — not by a long shot. At the very least I expect to see Kindle and Kindle Fire device refreshes announced in the run-up to the holiday selling season. They have already announced the addition of 600,000 new titles in Amazon Music since its launch — I expect more such additions across all its media offerings. It would not surprise me if there aren’t a sweetener or two out there for Prime subscribers as well.
To gain additional insight, let’s look at revenue and expense a little more closely. Revenue was $19.340 billion; cost of sales was $13.399 billion for a very gross margin of 44% — not too shabby. The other big expense items (beyond cost of sales) are Fulfillment ($2.382 BN), Marketing ($.943 BN, and Technology & Content ($2.226 BN). G&A and other operating expenses combine with the above to generate an operating loss of $15 million — which isn’t large, but this is the first time in a while that Amazon has recorded an operating loss. Marketing and Technology are both up 40% over last year while fulfillment is up 29% (more on this below). Provisions for taxes add another $99 million to the loss — I’ll have more to say about taxes below.
Amazon doesn’t provide much segment detail on its sales breaking them out only into EGM (Electronics & General Merchandise), Media (Movies, Music, Books), and Other (for the first time Amazon clarified that North American “Other” revenues consist mostly of AWS). All three segments continue to grow: AWS is fastest (although revenue growth here has declined markedly due to recent drastic AWS price reductions in response to aggressive discounting on the part of Google) followed by EGM, and Media bringing up the rear.
Media continues to decline as a proportion of Amazon’s total revenue picture — in 2Q it is only about 25% of total revenue. Within media books are probably the smallest part of that pie — giving the lie to the idea that somehow Amazon’s negotiations with Hachette and the other big 5 tradpubs is designed to “fix” their net income problem. I suspect that these negotiations are part of a more general attempt to get the best possible media deals across the board in light of the changing media distribution and business model landscape.
In my opinion going forward media for Amazon will not be a big profit generator — rather it will be a loss leader designed to entice ever more customers into the Amazon fold. Media will increasingly be offered for free or at attractive break-even prices.
In past calls fulfillment has always been a big focus. Amazon did reveal that they plan to add 6 net new fulfillment centers, and 15 or more “sortation” centers. Sortation centers are new: they are designed to facilitate Sunday deliveries, and to act as a hedge when traditional shippers are unable (as happened with UPS this past holiday season) to guarantee on-time delivery. When a fulfillment center completes a package for an order, they normally would give it to one of their shippers (USPS, UPS, FedEx) for delivery. Now if the shipment is to a zip code covered by a sortation center, Amazon will internally deliver that package to the sortation center where in will be placed in bins according to zip code. All the packages for a zip code can be handed off to the local USPS, or (perhaps) delivered to the customer by Amazon itself. Sortation centers will be located close to the zip codes that they cover. IMO Sortation centers will be even more impacted by the use of Kiva robots than fulfillment centers(for a change there were no questions about Kiva on the call).
In the past there has been a lot of concern about what the imposition of sales taxes might do to Amazon. They are now subject to sales tax collections in a lot more locations, but it doesn’t seem to be having a big effect. On the other hand provision for income taxes are up — I expect this to get worse especially in the EU where regulators are starting to look at US technology company’s aggressive use of disparate corporate tax rates across the EU.
They are starting to aggressively expand in China and India — this also is putting pressure on expenses.
Amazon stock is down markedly. Investors are clearly unhappy. One has to ask what impact this is going to have on Amazon. Beyond a dramatic reduction in the paper net worth of Jeff Bezos, probably not much. Bezos seems unmoved by Wall St concerns, and seems determined to pursue a high customer/revenue growth low/no profit strategy for the foreseeable future.
July 28, 2014 at 3:06 am |
Just a few thoughts on the Fire Phone. i don’t own an FP, but I plan to get one in the fall — I have met with my ATT rep, and have determined that I can add a second phone to my account, and add unlimited text and talk for only about $15 more a month (:grin).
I have been reading all the FP reviews, however. They are all over the map — but mostly negative. Many reviewers think that DP and FF are noting more than frippery gimmicks. The few positive reviews seem able to get beyond the “gimmick” label and see the true potential — particularly of FireFly.
Smartphone partisans fall mostly into two buckets: tech wienies (like moi — it takes one to know one 😀 ), and the inescapably style conscious — those lusting after the latest cool (:grin). The latter can’t see beyond their iPhones, and the former want to be as close to the bare metal as possible with unlimited customization possibilities — these prefer some kind of Android smartphone.
A phone reviewer will be given a phone to review for a couple of weeks to a month. During that time — even if he uses it every day — he will be trying to fit the new phone’s capabilities into the framework of his preferred/usual operating environment — either IOS or Android. If the UI of the new phone is radically different, this will be an exercise in frustration — of trying to pound a round peg into a square hole — not guaranteed to lead to a positive review. UI’s may seem simple and intuitive, but they take a considerable investment of time and emotion to master them well — years not weeks. Once having made such an investment, it’s difficult to change.
Most top tier smartphones are very good at voice, text messaging, and email communications — they are great communications devices that can also do many other things — limited only by the availability of apps.
To me (perhaps) it seems as if the FP is not primarily a smartphone — it’s something else that BTW is also a very good smartphone communications device. Even Jeff Bezos commented that he occasionally uses his FP to make phone calls (:grin).
What then is the FP? One of the next great things (we are told) is the Internet of Things (IoT). I posit that the FP is the first Google-like search appliance for the internet of things. Scan any item in the real world with your FP, and you can be taken to the Amazon store (of course 😉 ), but it can do so much more: it can take you to Wikipedia, or IMDB, or even to Google search. Amazon has opened up the development environment for the FP so that other retailers can hook in to the firefly capabilities. Your FP could become your essential shopping appliance as you walk the aisles of your local bricks and mortar stores.
Dynamic Perspective has been illustrated as a kind of 3D display technology, and most reviewers while entranced, can’t see it as more than a gimmick. Some have said that perhaps it could improve something like Google’s street-view, some see it as adding a new wrinkle to video games. It’s best IMO to look at DP not as a 3D technology — instead focus on the four cameras that enable the effect, and see how they can be leveraged. Amazon has already demonstrated some interesting UI variations from tilting or shaking the FP to bring up various UI menus. The cameras could be used for facial recognition sign-on. If the cameras can detect an eye blink, then a whole raft of new UI possibilities unfold.
Perhaps the biggest problem I have with the reviewers is that they assume that Bezos target audience are existing smartphone users. Instead I think the initial target audience is the existing Amazon customer base — particularly Prime subscribers. Bezos could care less whether the legions of iPhone and Android partisans decide to switch or not.
This is the mark 1 Fire Phone. Assuming that it’s not a total fail (a la Microsoft’s Kin Phone :grin), and assuming it gets some traction among developers to use FF and DP, then the really interesting stuff will come with mark 2 and 3. When has it ever been different in the technology world?
July 28, 2014 at 2:03 pm |
Thanks for writing, Edward!
An interesting analysis…and one on which we largely agree. 🙂
You said:
“Perhaps the biggest problem I have with the reviewers is that they assume that Bezos target audience are existing smartphone users. Instead I think the initial target audience is the existing Amazon customer base — particularly Prime subscribers. Bezos could care less whether the legions of iPhone and Android partisans decide to switch or not.”
I said:
“Here is what I think a lot of the tech blogs haven’t been getting.
I’ve seen people ask, “Why would anybody give up an iPhone or a Galaxy for this?”
Wrong question.
Amazon doesn’t need anybody at all to give up their current SmartPhones.
Only about half of the people in the USA own SmartPhones.
Now, admittedly, a lot of people (infants, for example) don’t own phones at all…but even if you only look at people with mobile service, something like a quarter to a third of them still don’t have SmartPhones.
That’s what will make the Fire Phone succeed (knock virtual wood).”
–https://ilmk.wordpress.com/2014/06/21/i-ordered-a-fire-phone-and-why-a-lot-of-other-people-will-too/
We also agree on the potential.
When people first bought automobiles, and there weren’t purpose-built roads for them, their utility was severely limited.
Firefly and dyper (dynamic perspective) are new cars…we still need developers to build roads. Of course, where we’re going, we don’t need roads… 😉
I’ll write a review of my Fire Phone…oh, in a couple of days. I’m not feeling an urgency…I’d be very surprised if they sell out for the holiday season. I want to use it in real world conditions.
My biggest disappointment so far is that head tracking for reading doesn’t happen in Kindle books! I was really looking forward to being able to read with endless scroll…no artificial page hurdles to jump every couple of hundred words. Not available, though, currently…
July 28, 2014 at 9:27 pm |
I received my FirePhone last Thursday and overall I have mixed results that inevitably will lead to a return (assuming I can!)
To stay on a positive note, first I have to say that two features I found that were very nice are:
– Ability to “Silence the phone for 3 hours” from the volume rocker.
– Translate selected portion of text from a kindle book to another language — and hear played to you audibly. Very cool.
Unfortunately, being a pretty heavy smartphone user the os has many fallbacks that need to be addressed. Many of the quick change features available in other phones (and the HDX) have been buried in system settings require lots of action change (Auto Rotate anyone). Reviewing a contact and being presented with an option to text every phone number in the contact (whether it has that capability or not) is kind of ridiculous. No voice recorder, Apps that work on the HDX don’t always work on the FirePhone (Flixter). Its a long list.
I was excited about the phone but its still too costly for a Beta.
July 28, 2014 at 11:44 pm |
Thanks for writing, Bruce!
I’m still using mine before I write much about it…probably by the end of the week (it could be sooner).
It’s growing on me a bit, as I figure it out more.
It makes sense that an app like Flixter would need to be configured twice for a tablet and for a phone (due to screen size differences, for one thing)…many more Fire Phone apps are likely to come out pretty quickly.
So far, it sounds like your concerns are about software…software can always change. 🙂
They certainly may give us more native capabilities (and I’ve been told an update is coming soon…talk to Mayday to make suggestions). For now, you could use an app for voice recording. I just tested this free one for you:
Easy Voice Recorder (at AmazonSmile)
It was the highest rated one, and it was free. 🙂 It has ads, but otherwise was functional.
Personally, I was disappointed that it didn’t have built in OCR (Optical Character Recognition), except for what Firefly does (and that isn’t recognizing pages). I’ve found one I might try, but it is $5. I’ve requested that in an update. 🙂
July 28, 2014 at 9:30 pm |
Bufo –
I’m leaving this as a separate comment which will go thru moderation. But I apologize in advance.
Its disappointing but I could find no way of contacting you directly except via a comment reply. I found no area in the “About area” either. I’m sure this is somewhat intentional but still I would have liked to reach out in some other way.
Bruce Kessel
Long time reader
July 28, 2014 at 11:48 pm |
Thanks for writing, Bruce!
The trick (and it’s not an intentional trick) 🙂 on the About page is to scroll to the bottom. That’s where you can leave a comment, and you can just tell me it is private, if you like.
Several readers have also found an e-mail address for me, but I don’t recommend that…I’ll respond to a comment much more quickly (and that’s easier for me as well).