Sunday, November 11, 2012

Amazon Earnings Review: Coming Apart at the Seams

Amazon reported QE September 2012 financial results on October 25

Last quarter I said that Amazon's financial results were "depressing", even though CEO Jeff Bezos says the spending is for long-term upside and glory. This quarter was even worse as the downtrend accelerated. The prior quarter was a meager net income of $7 million (on almost $13 billion of sales and an earnings per share of a mere +0.01) and that has evaporated. Now there is a current quarter net loss of -$274 million (on almost $14 billion of sales and a resulting loss per share of -$0.60).

Some of this financial performance destruction was, "The third quarter 2012 includes a loss of $169 million, or $0.37 per diluted share, related to our equity-method share of the losses reported by LivingSocial, primarily attributable to its impairment charge of certain assets, including goodwill". That would result in an Amazon core business loss per share of -$0.23 which is still dismal.

The next quarter, the Holiday QE December 2012, would normally be the annual financial performance peak, first for revenues and then, in theory, for net income and earnings per share. Not so. Management's outlook is $20+ billion in sales for the QE December 2012, but the operating loss is projected to be deeper, dropping to a worst-case scenario operating loss of -$490 million. Hence net income will sink accordingly, yet again.

Sales continue trending upwards and year over year growth has been consistent. Not so with earnings per share. For 7 consecutive quarters, year over year EPS performance has been negative, meaning the prior year's earnings per share was not matched or exceeded. So far, no benefit for the shareholders on the outside. Ouch.

Outlook QE December 2012:
* Net sales are expected to be between $20.25 billion and $22.75 billion, or to grow between 16% and 31% compared with fourth quarter 2011.
* Operating income (loss) is expected to be between $(490) million and $310 million, compared with $260 million in the prior year period.
* This guidance includes approximately $290 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions, investments or legal settlements are concluded and that there are no further revisions to stock-based compensation estimates.

"Our approach is to work hard to charge less. Sell devices near breakeven and you can pack a lot of sophisticated hardware into a very low price point,” said Jeff Bezos, founder and CEO of “And our approach is working – the $199 Kindle Fire HD is the #1 bestselling product across Amazon worldwide. Incredibly, this is true even as measured by unit sales. The next two bestselling products worldwide are our Kindle Paperwhite and our $69 Kindle. We’re selling more of each of these devices than the #4 bestselling product, book three of the Fifty Shades of Grey series. And we haven’t even started shipping our best tablet – the $299 Kindle Fire HD 8.9” ships November 20.”


VMware Earnings Review: Performance Sputters Again

VMware reported QE September 2012 financial results on October 23

As noted last quarter, new CEO Pat Gelsinger has a financial performance downtrend to contend with. Gross margin is stable. The performance slowdown is the result of increasing operating expenses and therefore a decreasing operating margin (now 17% down from a peak of just over 20%). Some of this increase in operating expenses is most likely the result of acquisitions. Whether this is a short-term trend or a change in the long-term business model remains to be seen.

QE December 2012 guidance for total revenues is an improved +19% to +22% QoQ and +21% to +22% YoY. However, the 12-quarter YoY average has been +32%. Full 2012 guidance for total revenues is +21% to +22% YoY.

VMware also announced a new CFO, "Jonathan Chadwick, 46, brings deep industry and business leadership experience to VMware. Most recently, he served as corporate vice president of Microsoft and CFO of Skype, following roles as EVP and CFO of McAfee and in a variety of finance leadership positions in over a decade at Cisco Systems. Chadwick will be responsible for leading VMware’s global finance organization and will report to Gelsinger".

Total revenues continue growing solidly year over year and is now +20.7%. However, the trend is downwards and the growth rate has decreased 5 consecutive quarters and is the lowest since the QE 12-31-09 (+18.2%).

This financial performance downtrend has trickled down to net margin and therefore GAAP earnings per share, which has decreased year over year for 2 consecutive quarters, and is now -12.2%. These are the only 2 GAAP EPS YoY decreases since the QE 12-31-09.

“Third quarter results reinforce VMware’s leadership and momentum as cloud emerges as the de facto IT infrastructure standard,” said Pat Gelsinger, chief executive officer, VMware. “Our Software Defined Data Center platform gives customers a clear path to the cloud, and the recently announced VMware vCloud® Suite of virtualized compute, storage, networking and management capabilities demonstrates our unique ability to deliver proven solutions that speed this journey.”

“We delivered a solid quarter despite tough macroeconomic conditions,” said Carl Eschenbach, chief operating officer and co-president, VMware. “The quarter went as expected and we achieved record quarterly results for total revenue and non-GAAP operating income. Fourth quarter revenues are expected to be in the range of $1.26 and $1.29 billion. Annual 2012 revenues are expected to be in the range of $4.572 and $4.602 billion, an increase of 21.4% to 22.2% from 2011. Annual license revenues are expected to grow between 12.8% and 13.8%.”


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