NOVEMBER 12, 2018 AGENDA 1. DO Q3 RESULTS SHOW A SHIFT IN FOCUS - PowerPoint PPT Presentation

NOVEMBER 12, 2018

AGENDA 1. DO Q3 RESULTS SHOW A SHIFT IN FOCUS FROM SALES TO PROFITS? 2. 3P MARKETPLACE – WHAT DOES IT MEAN FOR AMAZON? 3. IMPORTANCE IN PARTICIPATING WITH AMAZON IN MARKETING/ADVERTISING 4. AMAZON BUSINESS – WHAT IS THE GOAL? IS THIS A THREAT OR OPPORTUNITY?

DO 3Q RESULTS SHOW SHIFT FROM SALES TO PROFITS FOCUS?

PAID UNITS CONTINUE TO MODERATE Worldwide Paid Unit Growth Worldwide Paid Unit Growth: 2-year Stack Basis 30% 60% 50% 40% 40% 20% 30% 20% 15% 10% 10% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company reports Source: Company reports • Part of the paid unit decline is attributable to lapping the reduced shipping threshold (2Q17) and migration to subscriptions vs. transactions (Music/Kindle)

INTERNATIONAL METRICS CAUSE SOME NT CONCERN International Growth and Expenses Both Show a Meaningful step-down from prior trend International OpEx Growth (y/y%) International Growth (ex-currency) 30% 40% 30% 20% 20% 10% 15% 9% 10% 0% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company reports Source: Company reports • Amazon cited a shift in the Indian Diwali holiday; lapping Souq acquisition LY • Lapping a strong Prime Day internationally – no issues domestically in the past

SHIFT FROM GROWTH TO PROFIT EVIDENT ACROSS 3Q RESULTS Amazon Rolling 4Q Gross Margin Amazon Segment Op Margin N. America, 10.0% 45.0% 5.9% 40.0% 5.0% 36.6% 34.8% 0.0% 35.0% 32.6% -5.0% Int'l, -2.5% -10.0% 25.0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company reports Source: Company reports, Edgewater estimates • The high- end of the company’s 4Q guidance would imply FY18 Op Income of ~$12B compared to $4.1B last year

HEAVY INVESTMENT GIVES WAY TO EXPENSE MANAGEMENT Two nearly unprecedented items within 3Q results • While both of these metrics reflect meaningful gains in efficiency it also points to a company likely moving to another stage in its lifecycle Amazon Employees WW Shipping Costs (+bps y/y) (Excludes WFM Revenue) Employees Y/Y Growth 700,000 80% 1,400 70% 1,186 1,215 600,000 1,079 1,029 1,200 60% 1,000 805 701 500,000 50% 800 965 978 400,000 40% 296 600 400 30% 300,000 200 20% 293 (166) 0 200,000 10% (200) 100,000 0% (400) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company reports, Edgewater Research estimates Source: Company reports, Edgewater estimates

OTHER KEY TAKEAWAYS 1. FC CAPACITY SQUARE FOOTAGE EXPECTED TO SLOW TO ~15% VS ~30% FROM 2016-2017 2. REVENUE OUTLOOK FOR Q4 IS 10-20% VS EXPECTATIONS FOR ~20% • PROFIT GUIDANCE REMAINS STRONG 3. AMAZON ADVERTISING CONTINUES TO INCREASE ~60%

3P MARKETPLACE – WHAT IT MEANS TO AMAZON

WHAT HAS CHANGED IN THE LAST ~5 YEARS? Common supplier refrain on Amazon in ~2013: • “We can’t get Amazon to forecast enough inventory of our product, so we’re selling as a 3P” 2018 2013 Common supplier refrain on Amazon in ~2018: • “Amazon CRaP’d -out all of our SKU’s, so we’re selling as a 3P”

3P MIX HAS BEEN A MATERIAL GM% CONTRIBUTOR Amazon Rolling 4Q Gross Margin Amazon 3P Penetration 45.0% 60% 53% 40.0% 36.6% 50% 34.8% 35.0% 32.6% 40% 30% 25.0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company reports Source: Company reports

…AND MIX IS NOT THE ONLY BENEFIT AMAZON HAS USED 3P TO KEEP SELECTION BUT DIVERT PRODUCT THAT IS: • CRAP (CAN’T REALIZE A PROFIT) • SLOWER TURN • OFTEN PROMOTED • LOW-PRICED • NOT A CRITICAL CX

LARGE DEGREE OF VARIABILITY IN 3P TAKE RATES THIS IS ONE INFLUENCE TO WHERE PRODUCT ENDS UP Amazon likely takes ~15-20% in higher- margin categories • Apparel • Home goods • Within office products, things like tech accessories/cables is a good example Take rate is more in the ~6-8% range for lower-margin categories • Consumer electronics • Commodity office products (lower price hurts as well)

AMAZON’S SOLUTION Amazon dictates whether a product is sold on 1P or 3P Expectation is more product will shift to 3P/FBA Amazon 1P items will likely only consist of: Important items/categories for Higher-margin goods Important brands/PL the customer experience

PROFITABILITY FOCUS - OUR EXPECTATIONS ‘Easy’ growth likely even harder to come by Knowing 3P/FBA may be more critical Amazon push for exclusives, bundles, and private label partnerships Slower unit growth, higher profitability for Amazon overall

IMPORTANCE OF ADVERTISING REVENUE

AD REVENUE SIGNIFICANCE – OUR ESTIMATES • GROWTH RATE ~60%Y/Y Amazon Ad Revenue $21,485 • ESTIMATE 70-75% OF AD REVENUE IS FROM NORTH AMERICA $15,346 $9,460 • ON TRACK FOR ~$9.5B IN 2018 $5,581 $3,463 • WE ESTIMATE A 60% OPERATING PROFIT FY16A FY17A FY18E FY19E FY20E Source: Company Reports, EW Estimates

AD REVENUE SIGNIFICANCE – OUR ESTIMATES ANOTHER WAY TO LOOK AT IT: WHAT AMAZON REPORTS (2017): NA OP INCOME $493MM NA OP INCOME $2.84B INT’L OP INCOME ($4.07B) INT’L OP INCOME ($3.06B) AWS OP INCOME $4.33B AWS OP INCOME $4.33B TOTAL OP INCOME $758MM TOTAL OP INCOME $4.11B **PLUS $3.35B of Advertising Profit**

AD REVENUE SIGNIFICANCE – CONTEXT FOR 2018 WE EXPECT ADVERTISING WILL BE RESPONSIBLE FOR: • ~40% OF AMAZON PROFIT GROWTH • ~50% OF TOTAL AMAZON OPERATING PROFIT AWS vs Advertising Op Income REVENUE $20,000 • AWS ~$25.6B (2018), ~17.5B (2017) $18,000 $16,000 $14,000 • ADVERTISING ~$9.6B (2018), ~$5.8B (2017) $12,000 $10,000 $8,000 $6,000 OPERATING PROFIT $4,000 $2,000 $0 • AWS ~$7.2B (2018), $4.3B (2017) FY16A FY17A FY18E FY19E FY20E FY21E • ADVERTISING ~$5.8B (2018), ~$3.5B (2017) AWS Op Income Advertising Op Income Source: Company reports, Edgewater estimates

WHY ~50-60% GROWTH IS SUSTAINABLE: 1. CURRENT 3P/SPONSORED ADS DYNAMIC 2. TRADITIONAL AD AGENCY UNLOCK 3. INCREMENTAL CAPABILITIES 4. GLOBAL EXPANSION 5. LAUNCH IN SUB-VERTICALS (BUSINESS, PRIME NOW)

AMAZON BUSINESS – WHERE ARE THEY TODAY?

• REVENUE: • AMAZON BUSINESS IS ALREADY DOING $10B OF ANNUALIZED SALES • THAT WAS ~$1B IN 2015 • WHAT IS ACTUALLY INCREMENTAL THOUGH? • AMAZON SERVES (US): • NEARLY 80% OF THE TOP 100 LARGEST ENROLLMENT EDUCATION ORGANIZATIONS • 55 OF THE FORTUME 100 COMPANIES • 50%+ OF THE 100 BIGGEST HOSPITALS • 40%+ OF THE 100 MOST POPULOUS LOCAL GOVERNMENTS

• WHAT AMAZON DOES NOT DO WHEN THEY ENTER AN INDUSTRY: • TAKE MASSIVE AMOUNTS OF MARKET SHARE SELLING BELOW COST • LOSE MASSIVE SUMS OF MONEY • WHAT AMAZON DOES WHEN THEY ENTER AN INDUSTRY: • TAKE A DISPROPORTIONATE AMOUNT OF SHARE IN CATEGORIES THAT ARE CONDUCIVE FOR THEIR BUSINESS WHERE THEY CAN BE AGGRESSIVE ON PRICE. • TAKE FAR LESS SHARE IN CATEGORIES THAT PRESENT CHALLENGES BUT SERVE AS THE PRICING POLICE AND PRESSURE MARGINS. • INVEST MASSIVE SUMS OF MONEY • END RESULT – OFTEN MORE PROBLEMATIC FOR INDUSTRY MARGINS (SELLER) THAN ACTUAL SHARE.

AMAZON ENTERING AN INDUSTRY: RETAIL/INDUSTRIAL • HOME GOODS / BED, BATH & BEYOND • COMPARABLE STORE SALES DO NOT TURN NEGATIVE UNTIL 2016 • MEANWHILE GROSS MARGIN RATE CONTRACTS ~400BPS (41.4% TO 37.5%) IN JUST A FIVE-YEAR STRETCH

AMAZON ENTERING AN INDUSTRY: GOVERNMENT AND EDUCATION • THE US COMMUNITIES CONTRACT • NOT FULFILLING A HUGE PORTION OF THE CONTRACT • GRAB LONG-TAIL ITEMS THAT FIT THEIR MODEL, LEVERAGING SELECTION • GROWING SALES FORCE

LIKELY POINTS OF EMPHASIS - CATEGORIES THE PERFECT AMAZON PRODUCT: • HIGH TURN • SMALL • EXPENSIVE • PREDICTABLE • RARELY PROMOTED

LIKELY POINTS OF EMPHASIS - CATEGORIES THE IMPERFECT AMAZON PRODUCT: • MINIMAL TURNS / EXCESSIVE SKU PROLIFERATION • HAZARDOUS MATERIAL • A POOR COST/SHIP RATIO (LARGE AND/OR CHEAP) • HIGH RETURN RATES • SEASONAL (LESS PREDICTABLE) • HEAVILY PROMOTED

WHERE HAVE THEY SUCCEEDED? • SMALLER BUSINESSES • VALUE EQUATION BETTER • LOW TOUCH/SELF SERVE • OTHER B2B RESELLERS • LARGE VOLUME – USING TO FILL INVENTORY GAPS • HOSPITALS, GOVERNMENT CONTRACTS (SORT OF) • WIDE INVENTORY OFFERING HELPS • OFF-CONTRACT ITEMS • COST/SELECTION DYNAMIC BETTER THAN CORE, HEAVY-USE ITEMS

PRIVATE LABEL AS A DISRUPTIVE FORCE

PRIVATE LABEL IS THE NEW ‘AGGRESSIVE PRICING’ MANY CATEGORIES LIKELY TO BE 25-30% AMAZON BRANDS IN NEXT 2-3 YEARS; SIGNIFICANTLY LOWER BARRIERS FOR GROWTH THAN PHYSICAL RETAIL: • REVIEW ECOSYSTEM HELPS LEGITIMACY • ABSENCE OF PHYSICAL SPACE LIMITATIONS • DATA-SCRAPING BY AMAZON ALLOWS GREATER LEVEL OF SKU-EFFICIENCY • UNDERSTANDING OF THE COMPANY’S OWN ADVERTISING NETWORK • VOICE ORDERING MEANS EVENTUAL POLE PLACEMENT FOR OWN BRANDS

SEEING HEALTHY ADOPTION ACROSS ECOMMERCE • WAYFAIR (FURNITURE): HOUSE BRANDS HAVE GONE FROM 5% OF UNITS IN 2015 TO 67% OF UNITS IN 2017 • STITCH FIX (APPAREL): MORE THAN 20% OF REVENUE FROM PRIVATE LABEL

CONCLUSION