01—Abstract
Summary
Summary of the 10-K filed February 10, 2017. Cited figures are marked; the original filing is the authoritative source.
Amazon's FY2016 10-K shows a business in rapid expansion.
Net sales rose 27% to $136.0 billiona (from $107.0 billion), with North America up 25%, International up 24% (26% excluding FX), and AWS up 55% to $12.2 billion. Operating income more than tripled to $4.2 billion from $2.2 billion, but the gain was driven almost entirely by North America ($2.4 billion) and AWS ($3.1 billion), while International still posted a $1.3 billion operating loss. Net income reached $2.4 billion, or $4.90 diluted EPS, compared with $596 million in 2015.
Cash generation strengthened materially. Operating cash flow was $16.4 billionb, and free cash flow reached $9.7 billion, up from $7.3 billion. Investors should note, however, that free cash flow less capital lease principal repayments was only $5.7 billion, and that $5.7 billion of property and equipment was acquired under capital leases in 2016.
Much of the infrastructure buildout, mainly for AWS, is financed through leases, which add substantial obligations: total capital and finance lease commitments are large, and lease-related liabilities are rising. Total debt was $8.8 billionc at year-end, and cash plus marketable securities was $26.0 billion. Key risks flagged by the filing include intensifying competition, the IRS transfer-pricing dispute (about $1.5 billion of additional federal tax sought), a European Commission state-aid probe of Luxembourg tax rulings, a French tax assessment of about €196 million, and an ongoing OFAC/BIS review of orders shipped to Iran-linked parties.
Amazon has never paid a cash dividend and made no share repurchases in 2016. Management also expects the ASC 606 revenue standard and the ASU 2016-09 stock-compensation change to affect reported results, and the latter will add roughly $750 milliond of tax volatility sensitivity.
02—Key points
Key Highlights
- Net sales grew 27% to $136.0 billion in 2016, led by North America (+25% to $79.8 billion) and AWS (+55% to $12.2 billion).
- Operating income rose to $4.2 billion from $2.2 billion, but North America ($2.4B) and AWS ($3.1B) generated all of it while International lost $1.3 billion.
- AWS is the profit engine: its 25% operating margin ($3.1B on $12.2B) far exceeds the retail segments' margins.
- Net income reached $2.4 billion ($4.90 diluted EPS) versus $596 million in 2015; the 2016 effective tax rate was about 37%.
- Operating cash flow of $16.4 billion and free cash flow of $9.7 billion were both up sharply, though $5.7 billion of capital-lease-funded infrastructure spending sits outside that measure.
- Total debt was $8.8 billion, with $26.0 billion in cash and marketable securities; $1.0 billion of notes mature in 2017 and the company has $3.0 billion in unsecured revolving credit capacity.
- Material legal and tax exposures include the IRS transfer-pricing case (~$1.5B), the EU state-aid investigation of Luxembourg tax rulings, a French assessment (€196M), and an OFAC/BIS sanctions review.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Amazon.com Inc kept $0.02.
- Revenue$135.99B100.0%
- Cost of revenue−$88.27B64.9%
- Gross profit$47.72B35.1%
- Operating costs−$43.54B32.0%
- Operating income$4.19B3.1%
- Interest, other & tax−$1.81B1.3%
- Net income$2.37B1.7%
Where FY2016 revenue went
$135.99B- Cost of revenue: $88.27B, 65% of revenue
- Operating costs: $43.54B, 32% of revenue
- Net income: $2.37B, 1.7% of revenue
- Interest, other & tax: $1.81B, 1.3% of revenue
Kept 1.7% as net incomeNet income $2.37B · 1.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 10, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $135.99B$107.01B | +27.1% |
| Cost of Revenue | $88.27B$71.65B | +23.2% |
| Gross Profit | $47.72B$35.35B | +35.0% |
| Operating Expenses | $131.80B$104.77B | +25.8% |
| Operating Income | $4.19B$2.23B | +87.5% |
| Interest Expense | $484.00M$459.00M | +5.4% |
| Net Income | $2.37B$596.00M | +297.8% |
| EPS (Basic) | $0.25$0.06 | +291.4% |
| EPS (Diluted) | $0.24$0.06 | +292.0% |
| Shares Outstanding (Basic) | 9.48B9.34B | +1.5% |
| Shares Outstanding (Diluted) | 9.68B9.54B | +1.5% |
05—Questions
Frequently Asked Questions
How profitable is Amazon's core retail business compared with AWS?
Retail is far less profitable on a margin basis. North America earned $2.4 billion on $79.8 billion of sales, a margin of about 3%, while International lost $1.3 billion on $44.0 billion of sales. AWS earned $3.1 billion on $12.2 billion, a margin of about 25%. AWS therefore accounts for most of Amazon's operating profit.
Is Amazon's free cash flow as strong as it looks?
Reported free cash flow of $9.7 billion excludes equipment acquired under capital leases, which was $5.7 billion in 2016. After subtracting capital lease principal repayments, free cash flow falls to $5.7 billion, and after also deducting finance lease repayments and capital-lease asset additions it is $3.9 billion. Investors should look at lease-adjusted figures when judging cash generation.
Does Amazon pay dividends or buy back stock?
No. Amazon has never declared or paid cash dividends on its common stock. It made no share repurchases in 2014, 2015, or 2016, although the Board authorized a $5.0 billion repurchase program in February 2016. Equity compensation, mainly restricted stock units, is the main source of share dilution.
What are the biggest tax risks facing Amazon?
The IRS is seeking to increase Amazon's U.S. taxable income for 2005 and 2006 transfer pricing with foreign subsidiaries, which would add roughly $1.5 billion of federal tax plus interest; the case is being contested in U.S. Tax Court. The European Commission is also investigating Luxembourg rulings, and France has assessed about €196 million. Gross tax contingencies reached $1.7 billion at year-end 2016.
What accounting changes could affect Amazon's reported results going forward?
Several standards matter. ASU 2014-09 (revenue recognition, effective 2018) will change the timing of device revenue and gift card recognition and the presentation of some advertising revenue. ASU 2016-09 (effective 2017) will recognize excess tax benefits in the income tax provision, adding volatility tied to the stock price; management estimated a cumulative retained-earnings increase of about $700 million. The lease standard (ASU 2016) is expected to significantly increase reported assets and liabilities.
06—Continue