Amazon reported its 2018 fiscal year and fourth quarter financial results on January 31. As expected, the company surpassed last year’s results with a superb performance, especially in North America. Product sales, advertising, and Amazon Web Services all exhibited robust growth. Amazon is cautious in its 2019 guidance, however, because of changes in government regulations in other countries and an anticipated increase in expenses.
Fourth Quarter 2018
Thanks to record-breaking holiday revenue, net sales increased 20 percent to $72.4 billion in the fourth quarter, compared with $60.5 billion in 2017. Earnings were $6.04 a share. Net income increased 58 percent to $3.0 billion in the fourth quarter compared with net income of $1.9 billion, in the fourth quarter of 2017.
AWS, the cloud computing platform, was a major contributor to profits with sales growth of 45 percent over 2017, to $7.4 billion from $5.1 billion, and operating income that increased 61 percent, to $2.2 billion from $1.4 billion.
Amazon’s “Other” revenue category, which is mostly advertising, grew 95 percent over the same period in 2017 — from $1.7 billion to $3.4 billion in the quarter.
Sales in physical stores — mostly Whole Foods — decreased 2.7 percent to $4.4 billion. Amazon does not count in-store pickups of online grocery orders as physical store sales.
Full Year 2018
Company-wide net sales increased 31 percent in 2018 to $232.9 billion, compared with $177.9 billion in 2017. Net income increased to $10.1 billion.
North America contributed $141.4 billion in net sales, and international sales contributed $65.9 billion. Germany was the largest international sales generator with $19.9 billion in revenue, up 17 percent over 2017. The U.K. followed at $14.5 billion, an increase of 28 percent over 2017.
AWS sales grew a healthy 47 percent over 2017, from $17.5 billion to $25.6 billion. While AWS is a much smaller contributor to net sales, it contributed more to total net income than either North American or international product sales, a testament to its high margins and lower costs.
The Other net sales category increased 117 percent, from $4.7 billion to $10.1 billion, thanks to advertising growth. 2018 subscription services net sales — mostly Amazon Prime and digital downloads — grew 46 percent from 2017 to 2018, from $9.7 billion to $14.2 billion.
Third-party Marketplace Sales
Amazon experienced more sales from third-party sellers during 2018. However, Amazon reports only fees (which analysts estimate at 30 percent of gross merchandise value) as revenue from third-party vendor sales.
In its earnings conference call, Amazon’s CFO Brian Olsavsky stated that more than 50 percent of sales on the marketplace platform came from small-and-medium size businesses in the fourth quarter.
Olsavsky suggested that Amazon might consider changing the fees it charges sellers. “More than half of our units sold are from third-party sellers, so it’s very important to us that we have the right business profile both for Amazon and for the sellers. So we will always be evolving that,” Olsavsky said. “Part of that involves changing fee structures, sometimes adding new fees or subtracting old ones, part of it involves raising or lowering fees that sellers pay.”
2019 Forecast
Amazon’s guidance for 2019 was downbeat, resulting in the stock falling following the earnings call.
Some analysts speculate that Amazon is entering a period of slower growth. Challenges this year include reviving Whole Foods, where sales have been sluggish. Amazon will continue to look for new international opportunities because two big markets — India and China —have proved to be problematic.
The recent change in Indian law regarding foreign investment — see “New Indian Investment Rules Limit Amazon, Walmart” — caused Amazon India to temporarily remove about 400,000 products from its website and to shut down Pantry, its grocery-delivery service. Amazon has already invested $5 billion in India and was planning an additional $2 billion.
Pantry is back in business, and most of the products removed from the marketplace are back. Amazon accomplished this by reducing its stake in Cloudtail, the largest vendor on the Amazon site, to 24 percent from 49 percent. In turn, joint venture partner N.R. Narayana Murthy’s Catamaran Ventures increased its stake to 76 percent. The change means Cloudtail is no longer considered to be an Amazon group company under India’s rules, making it once again eligible to sell on the platform.
In its 2018 10K report, Amazon stated:
The People’s Republic of China (“PRC”) and India regulate Amazon’s and its affiliates’ businesses and operations in country through regulations and license requirements that may restrict (i) foreign investment in and operation of the Internet, IT infrastructure, data centers, retail, delivery, and other sectors, (ii) Internet content, and (iii) the sale of media and other products and services. For example, in order to meet local ownership and regulatory licensing requirements, www.amazon.cn is operated by PRC companies that are indirectly owned, either wholly or partially, by PRC nationals.
In India, the government restricts the ownership or control of Indian companies by foreign entities involved in online multi-brand retail trading activities. For www.amazon.in, we provide certain marketing tools and logistics services to third-party sellers to enable them to sell online and deliver to customers, and we hold indirect minority interests in entities that are third-party sellers on the www.amazon.in marketplace. Although we believe these structures and activities comply with existing laws, they involve unique risks, and the PRC and India are actively considering changes in their foreign investment rules that could impact these structures and activities. There are substantial uncertainties regarding the interpretation of PRC and Indian laws and regulations, and it is possible that these governments will ultimately take a view contrary to ours.
The change in Indian regulations also affects Walmart, which invested $16 billion in May 2018 to garner a 77 percent ownership stake in Flipkart, the Indian marketplace. Flipkart has removed 25 percent of the products on its portal to meet the new regulations.
Earlier this month, investment bank Morgan Stanley floated the idea that Walmart may consider selling its stake in Flipkart, which is not profitable. However, finding a buyer would be difficult, and Walmart would likely have to sell at a loss.
Walmart will announce its financial results next week. I will report on the repercussions of the changes to the Indian ecommerce regulations on the company.