Last Thursday, Amazon.com (NASDAQ:AMZN) reported that it returned to profitability in Q4, buoyed by holiday season demand. Revenue rose 15% year-over-year to $29.33 billion and EPS totaled $0.45, down slightly from $0.51 in Q4 2013.
Following the earnings announcement, Amazon CFO Tom Szkutak and designated successor Brian Olsavsky talked to Wall Street analysts about the company's results and the outlook for 2015. Here are five key points investors should know from their discussion.
The strong dollar is hurting
For Q1 2015, we expect net sales of between $20.9 billion and $22.9 billion or growth of between 6% and 16%. This guidance anticipates approximately 460 basis points of unfavorable impact from foreign exchange rates. -- Amazon.com CFO Tom Szkutak
Amazon.com gets the majority of its sales from the U.S., and domestic revenue has been growing faster than international revenue lately. However, Amazon's international business is still a significant portion of the company total: 36% as of last quarter.
As a result, the strengthening dollar will have a noticeable impact on Amazon's revenue growth. As the dollar appreciates, the dollar value of international sales will fall. This headwind is on pace to reach 460 basis points in Q1. That reduces the midpoint of the company's guidance range for revenue growth by about 30% (from 15.6% to 11%).
But Prime is driving growth
... Prime worldwide is up 53% year-over-year. So it's growing very fast globally. It's 50% growth in the U.S. and even higher in international. -- Tom Szkutak
On the other hand, Amazon.com is benefiting from growing customer interest in the Prime membership program. While Prime benefits differ by country, in the U.S. the program includes free 2-day shipping on a wide variety of items, access to video and music streaming content, and free e-book rentals for Kindle owners.
Amazon announced that Prime membership increased 53% last year on a base of tens of millions of customers. Even in the U.S., where Prime has been around for almost 10 years, the member base grew 50% year-over-year.
This was particularly impressive because Amazon raised the membership price in early 2014. The growing base of Prime members is helping Amazon to produce solid revenue growth -- especially in the U.S. -- even as the company runs up against the law of large numbers.
Video games holding back media revenue growth
... [K]eep in mind that we have video game consoles that are part of the ... media absolute numbers, and last year it was a very strong year for new console launches ... So for example, if you look at North American media growth rate in Q4 of this past year, you're seeing that impact. -- Tom Szkutak
Amazon's 15% revenue growth last quarter represented its slowest growth rate since the depths of the Great Recession in 2009. The media category experienced the most dramatic reduction in growth. In fact, media sales declined year-over-year, even after adjusting for currency fluctuations.
However, Amazon.com CFO Tom Szkutak pointed out that Amazon classifies video game consoles in the media segment. Game console sales soared in late 2013 due to the launch of new models. The new console introductions also boosted sales of video games. This created tough revenue comparisons for Q4 2014 in the media segment.
Mix is shifting to third-party sales
Seller units represented 43% of paid units, Fulfillment by Amazon, or FBA, units represented more than 40% of seller units. -- Amazon.com Vice President of Finance, Global Consumer Business Brian Olsavsky
In recent years, Amazon has ramped up its efforts to attract third party-sellers to its platform. This has a number of benefits. Amazon earns a higher profit margin on third-party sales than on its direct sales. Bringing in third-party sellers also allows Amazon to increase its selection without adding inventory.
Last quarter, 43% of the items sold on Amazon.com came from third-party sellers, up from 39% a year earlier. This is another reason why revenue growth is slowing -- for third-party sales, Amazon only counts the commission it earns in its revenue (not the full sale price).
Still investing heavily in growth
You should expect that we will be spending more in terms of CapEx to support our Web Services business which is growing very fast. You should expect us to add fulfillment capacity. -- Tom Szkutak
Amazon.com's profitability has plummeted in the past few years as the company has invested billions of dollars in growth initiatives. In fact, the company posted a full-year loss for 2014.
While Amazon's management has talked about being selective about these growth investments, it will still pour plenty of money into growth projects. Amazon's cloud computing business, Amazon Web Services, will continue to require significant CapEx for the foreseeable future. Amazon also plans to keep adding distribution centers to keep up with rising sales while reducing shipping times and costs.
The bottom line from Amazon.com's earnings call was that the company is continuing to focus on growth more than margin expansion in the near term. If Amazon stock's 14% surge on Friday is any indication, that's just fine with investors.