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

15% 10% 20% 30% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Worldwide Paid Unit Growth

Source: Company reports

40% 10% 20% 30% 40% 50% 60% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Worldwide Paid Unit Growth: 2-year Stack Basis

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

15%

10% 20% 30% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

International Growth (ex-currency)

Source: Company reports

9%

0% 10% 20% 30% 40% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

International OpEx Growth (y/y%)

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

• The high-end of the company’s 4Q guidance would imply FY18 Op Income of ~$12B

compared to $4.1B last year

32.6% 34.8% 36.6% 40.0%

25.0% 35.0% 45.0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Amazon Rolling 4Q Gross Margin

Source: Company reports

• N. America,

5.9% Int'l, -2.5%

• 10.0%
• 5.0%

0.0% 5.0% 10.0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Amazon Segment Op Margin

Source: Company reports, Edgewater estimates

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

0% 10% 20% 30% 40% 50% 60% 70% 80% 100,000 200,000 300,000 400,000 500,000 600,000 700,000 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Amazon Employees

Employees Y/Y Growth

Source: Company reports, Edgewater estimates

1,079 965 1,186 1,215 1,029 978 805 293 701 296 (166) (400) (200) 200 400 600 800 1,000 1,200 1,400 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

WW Shipping Costs (+bps y/y)

(Excludes WFM Revenue)

Source: Company reports, Edgewater Research 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?

2013

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

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

53% 30% 40% 50% 60% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Amazon 3P Penetration

Source: Company reports

32.6% 34.8% 36.6% 40.0% 25.0% 35.0% 45.0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Amazon Rolling 4Q Gross Margin

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

• Apparel
• Home goods
• Within office products, things like tech

accessories/cables is a good example Amazon likely takes ~15-20% in higher- margin categories

• Consumer electronics
• Commodity office products (lower price hurts as well)

Take rate is more in the ~6-8% range for lower-margin categories

AMAZON’S SOLUTION Amazon 1P items will likely only consist of:

Higher-margin goods Important brands/PL Important items/categories for the customer experience

Expectation is more product will shift to 3P/FBA Amazon dictates whether a product is sold on 1P or 3P

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
• ESTIMATE 70-75% OF AD REVENUE IS FROM

NORTH AMERICA

• ON TRACK FOR ~$9.5B IN 2018
• WE ESTIMATE A 60% OPERATING PROFIT

$3,463 $5,581 $9,460 $15,346 $21,485

FY16A FY17A FY18E FY19E FY20E

Amazon Ad Revenue

Source: Company Reports, EW Estimates

AD REVENUE SIGNIFICANCE – OUR ESTIMATES

WHAT AMAZON REPORTS (2017): NA OP INCOME $2.84B INT’L OP INCOME ($3.06B) AWS OP INCOME $4.33B TOTAL OP INCOME $4.11B ANOTHER WAY TO LOOK AT IT: NA OP INCOME $493MM INT’L OP INCOME ($4.07B) AWS OP INCOME $4.33B TOTAL OP INCOME $758MM **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

REVENUE

• AWS ~$25.6B (2018), ~17.5B (2017)
• ADVERTISING ~$9.6B (2018), ~$5.8B (2017)

OPERATING PROFIT

• AWS ~$7.2B (2018), $4.3B (2017)
• ADVERTISING ~$5.8B (2018), ~$3.5B (2017)

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 FY16A FY17A FY18E FY19E FY20E FY21E

AWS vs Advertising Op Income

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

KEY TAKEAWAYS KEY ADVANTAGES WILL NEED TO BE AROUND:

• 3P MARKETPLACE STRATEGY AND SUPPLY CHAIN SAVVY
• SOPHISTICATED MARKETING/ADVERTISING CAPABILITIES
• HAVING A PRIVATE LABEL PLAN

THANKS!!

Eamon Kelly Eamon@EdgewaterRC.com