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Amazon.com, Inc. Crushed Another Quarter

By Anders Bylund - Feb 1, 2018 at 6:31PM

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The online retailer pocketed a large tax benefit while running roughshod over expectations in the holiday season.

E-commerce veteran and cloud-computing expert Amazon.com (AMZN 3.58%) reported earnings after the closing bell on Thursday. The report, which covered the fourth quarter of fiscal year 2017, exceeded both management's guidance and analyst estimates across the board.

Amazon's fourth-quarter results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Net sales

$60.5 billion

$43.7 billion

38%

Operating income

$2.13 billion

$1.26 billion

69%

Net income

$1.86 billion

$749 million

153%

GAAP earnings per share (diluted)

$3.75

$1.54

143%

Data source: Amazon.

The bottom line included a one-time tax benefit of $789 million reflecting the effects of December's tax reform. Without that non-cash item, net income would have increased 74% year over year, to $1.07 billion. Earnings without the unique tax effect would have gained 42%, landing at $2.19 per diluted share.

As a reminder, the top end of Amazon's guidance ranges for this quarter stood at 38% revenue growth and $1.65 billion in operating profits.

Semi truck pulling a sky-blue trailer, which features the smiling Amazon Prime logo in white.

Image source: Getty Images.

What happened with Amazon this quarter?

  • Operating income more than doubled in the North American retail segment, while net sales in that division rose 40%, to $37.3 billion.
  • International sales climbed 29% higher, to $18.0 billion, but operating losses doubled in that segment.
  • Cloud-computing sales under the Amazon Web Services banner rose 46% higher, stopping at $5.1 billion. Operating income increased 46%, to $1.35 billion, representing 64% of Amazon's total operating profits for the quarter.
  • The Amazon Prime free shipping and streaming video program saw more than 5 billion items shipped in 2017. The company stated that "more new paid members joined Prime in 2017 than any previous year -- both worldwide and in the U.S." Amazon did not report Prime shipping volumes in 2016, and investors have never seen any firm numbers on Prime additions or membership counts.
  • The $13.7 billion Whole Foods Market buyout was only mentioned in passing in this report, adding no color to the integration of this nationwide chain of physical stores.

What management had to say

In a prepared statement, Amazon CEO Jeff Bezos focused on the Alexa digital-assistant's gains in 2017. Bezos said:

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. 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.

Again, we don't really know how many Alexa-powered devices Amazon sold last year or in the fourth quarter, nor how Alexa might impact the company's top or bottom lines. Bezos sure likes to keep proprietary financial details close to the vest.

Looking ahead

Amazon's stated long-term goal is to optimize its free cash flows. That isn't necessarily the same thing as maximizing cash flows, judging by the company's tendency to grow its operating cash profits while accelerating its capital spending even faster.

Chart showing Amazon's strictest measure of free cash flows falling from $4.7 billion to negative $1.5 billion over the last five quarters.

Image source: Amazon.

In the first quarter of 2018, Amazon expects to deliver net sales of approximately $49.3 billion, up from $43.7 billion in the same quarter of 2017. Operating income should stop somewhere between $300 million and $1.0 billion, which would compare to $1.0 billion in the first quarter of 2017. These targets include a 3.3% revenue benefit from helpful foreign-exchange-rate trends.

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