01—Abstract
Summary
Summary of the 10-K filed January 30, 2015. Cited figures are marked; the original filing is the authoritative source.
Amazon.com's FY2014 10-K shows a company growing revenue rapidly while earnings went backward.
Net sales rose 20% to $88.99 billiona (North America +25%, International +12%, or +14% excluding currency), but income from operations fell 76% to $178 million and the company posted a net loss of $241 million, or $(0.52) per share, versus net income of $274 million in 2013. The decline was driven by heavy investment in technology and content (up 41%, including AWS infrastructure), fulfillment expansion, a $170 million charge tied to the Fire phone, and higher stock-based compensation. Gross margin improved to 29.5% from 27.2%, largely because service sales (third-party seller fees, AWS, advertising, subscriptions) grew faster than retail product sales.
Cash generation was stronger than the income statement suggests. Operating cash flow rose to $6.8 billionb, but free cash flow (operating cash flow less purchases of property and equipment) was only $1.9 billion, down from $2.0 billion, because cash capex reached $4.9 billion. Capital leases added another $4.0 billion of property and equipment, and total long-term debt rose to about $8.3 billion after a $6.0 billion bond issuance in December 2014.
Cash and marketable securities ended the year at $17.4 billionc. Investors should note that the company is increasingly financing infrastructure through leases and debt rather than purely from operating cash, and that management guided Q1 2015 operating income to a loss of $450 million to income of $50 million.
The filing also highlights material risks: an IRS transfer-pricing dispute seeking about $1.5 billiond in additional federal tax, a European Commission state-aid investigation into Luxembourg tax rulings, a French tax assessment of about $250 million, and numerous patent and copyright suits. The company will also change its reportable segments to North America, International, and AWS beginning in 2015, which should make AWS economics more visible.
02—Key points
Key Highlights
- Net sales grew 20% to $88.99B in 2014 (North America +25%, International +12%), though international growth was reduced by roughly $636M in unfavorable foreign exchange effects.
- Income from operations fell 76% to $178M and net loss was $(241)M, or $(0.52) per share, versus net income of $274M in 2013.
- Gross margin expanded to 29.5% from 27.2%, driven by growth in higher-margin service sales such as third-party seller fees, AWS, and advertising.
- Operating cash flow rose to $6.8B, but free cash flow fell to $1.9B from $2.0B as cash capex increased to $4.9B; capital leases added another $4.0B of infrastructure.
- Long-term debt increased to about $8.3B after a $6.0B senior notes issuance in December 2014; no borrowings were outstanding under the $2.0B revolving credit facility.
- Q1 2015 guidance calls for operating income between $(450)M and $50M, versus $146M in Q1 2014, reflecting continued investment spending.
- Material tax and legal exposures include an IRS transfer-pricing claim of roughly $1.5B, a European Commission state-aid probe of Luxembourg tax rulings, a ~$250M French tax assessment, and numerous patent suits.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2014, Amazon.com Inc lost $0.00.
- Revenue$88.99B100.0%
- Cost of revenue−$62.75B70.5%
- Gross profit$26.24B29.5%
- Operating costs−$26.06B29.3%
- Operating income$178.0M0.2%
- Interest, other & tax−$419.0M0.5%
- Net income−$241.0M0.3%
Where FY2014 revenue went
$88.99B- Cost of revenue: $62.75B, 71% of revenue
- Operating costs: $26.06B, 29% of revenue
- Operating income: $178.0M, 0.2% of revenue
Kept 0.2% as operating incomeOperating income $178.0M · 0.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed January 30, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $88.99B$74.45B | +19.5% |
| Cost of Revenue | $62.75B$54.18B | +15.8% |
| Gross Profit | $26.24B$20.27B | +29.4% |
| Operating Expenses | $88.81B$73.71B | +20.5% |
| Operating Income | $178.00M$745.00M | −76.1% |
| Interest Expense | $210.00M$141.00M | +48.9% |
| Net Income | -$241.00M$274.00M | −188.0% |
| EPS (Basic) | $-0.03$0.03 | −186.7% |
| EPS (Diluted) | $-0.03$0.03 | −188.1% |
| Shares Outstanding (Basic) | 9.24B9.14B | +1.1% |
| Shares Outstanding (Diluted) | 9.24B9.30B | −0.6% |
05—Questions
Frequently Asked Questions
Why did Amazon's operating income fall so sharply in 2014 even though sales grew 20%?
Operating costs grew faster than sales. Technology and content expense rose 41% to $9.3B, driven by AWS infrastructure and payroll, and fulfillment costs rose 25%. Stock-based compensation increased to $1.5B from $1.1B, and the company recorded $170M in Fire phone inventory and supplier commitment charges, mostly in Q3 2014. Management frames these as long-term investments.
Is Amazon generating enough cash to fund its growth?
Operating cash flow of $6.8B covers cash capital expenditures of $4.9B, leaving free cash flow of $1.9B. However, the company also acquired substantial infrastructure through capital and finance leases (about $4.0B in 2014) and relied on $6.0B of new bonds, so growth is increasingly financed by debt and lease obligations. Total principal payments on capital leases were $1.3B in 2014.
What are the biggest legal and tax risks disclosed in the filing?
The most significant items are an IRS effort to increase U.S. taxable income from 2005–2006 transfer-pricing arrangements, which the company is contesting in U.S. Tax Court and which could imply about $1.5B in additional federal tax plus interest. Other risks include a European Commission state-aid investigation into Luxembourg tax rulings, a French tax assessment of about $250M, and many patent infringement suits. Management says it disputes all allegations and intends to defend itself vigorously.
Will Amazon begin reporting AWS separately, and why does it matter?
Yes. Beginning in Q1 2015, Amazon expects to report three segments: North America, International, and AWS. AWS is currently embedded in North America, so the change will give investors visibility into the profitability and growth of the cloud business separately from retail, which is important for evaluating the sources of the company's operating losses and margins.
How much of Amazon's revenue is subject to seasonality and holiday concentration?
A disproportionate share of revenue comes in the fourth quarter: 33% of 2014 annual revenue, versus 34% in 2013 and 35% in 2012. Cash balances peak at December 31 because payables to suppliers are timed after holiday sales are collected, and inventory and fulfillment costs rise during the peak period, which increases the risk of markdowns and shipping costs.
06—Continue