CFO Defends Amazon From...

Investors seem pretty disappointed with Amazon’s fourth quarter results  (as of 3pm Pacific, the company’s stock is down 8.6 percent in after-hours training), yet for most of this afternoon’s analyst conference call, that disappointment was largely hidden in the normal stream of numbers and financial terminology. Finally, a few minutes before the call ended, one analyst asked CFO Tom Szkutak to directly address the concern that earlier questions had hinted at — namely, that the company seems to be seeing “diminishing return” on its spending. Szutak’s initial response? “I’m not sure how to answer that.” Yes, he said Amazon is investing heavily (for example, he said Amazon had opened 17 fulfillment centers during the quarter, bringing the total to 69), but that’s because the company is seeing so much growth — in its own retail business, in fulfillment for third-party retailers, in Amazon Web Services, and so on. As evidence, he pointed to Amazon’s 46 percent growth in overall unit sales. (He talked in more detail about media sales earlier in the call.) At the same time, he acknowledged that there have been some challenges this quarter, including the economic crisis in Europe and supply issues caused by flooding in Thailand. “We’re incredibly excited about the opportunity that we have and that’s why we have invested as we have and why we’re continuing to invest,” Szutak said. Asked if Amazon will be changing its strategy at all, he said, “We’re continuing to look as we always do. We learn every week and every month and every quarter.”

Apple’s Off-The-Charts ...

Sometimes you have to see things to truly appreciate their magnitude. Apple’s latest quarter was so massive that MG had to write two posts about it: $46 billion in revenues, 37 million iPhones sold, 15 million iPads. The chart above, which comes from Asymco (see a fully interactive version here ), shows how unusual this quarter was for Apple. The quarter was driven by iPhone and iPad sales. And you can see that by looking at the blue and red lines, which show unit sales of each. iPhone sales went from 17 million the quarter before to 37 million. They more than doubled in a single quarter. But look closely at the iPad line. What I just noticed for the first time is that Apple sold almost as many iPads last quarter as it sold iPhones in the previous quarter. And now it is selling as many iPads as iPods. That red line is going to keep on going up. Will it ever catch up to iPhone sales?

The Day Apple Left The ...

$46.33 billion in revenue. It’s a number the biggest and best tech companies in the world can only dream to hit in a year. Apple hit it in one quarter. $13.06 billion in profit. It’s a number no tech company would ever aspire to in one quarter because it’s ridiculous. The only companies that have ever thought about such numbers are oil companies. And even then, only 3 of them have actually hit it . Ever. Until yesterday. I’ve already tried to give some context to the stunning Q1 2012 results that Apple posted. But the truth is that they’re still unbelievable. Perhaps the next step should be to figure out how they could post such numbers. The simple answer is that Apple’s iPhone sales were off the charts. 37 million units sold is mind-boggling when the previous record was 20 million, set in Q3 2011 . A year ago, in the same holiday quarter , Apple sold “just” 16 million iPhones. That was also a record at the time and lead to record revenue and profit at the time. This year, Apple quite simply took things to the next level — and then went a level beyond that. Because the iPhone is over 50 percent of Apple’s revenues, amazing iPhone sales equates to amazing revenues. Again, the simple answer. But to figure out why this quarter was so far ahead of any other quarter, you have to go deeper. It was really a confluence of events. First of all, this past quarter was set up by the preceding quarter, which saw Apple fall short of Wall Street expectations for the first time in years. But as we noted at the time, this was misleading . Apple surpassed their own expectations (which isn’t surprising given that they’re always low), but failed to meet Wall Street’s simply because Wall Street’s numbers were lazy . Analysts didn’t take into account the fact that the new version of the iPhone did not launch in the summertime, as it had in years past. Because it did not — and again, the iPhone is about half of Apple’s revenue — there was no burst in iPhone sales that Apple usually sees in Q4. Instead, that burst came in Q1 — last quarter. And unlike previous years, this burst was compounded because Q1 is also Apple’s holiday quarter. A new iPhone plus holiday shopping season is apparently like gasoline on a fire. Now we know. But it would be foolish to think that Apple’s big numbers were only about the iPhone. Remember, Apple set new records in Mac and iPad sales as well. The iPad in particular is interesting because while it’s Apple’s newest business, it’s already the second-largest in terms of revenue. This past quarter, 20 percent of revenue came from iPad sales. The third-biggest source of revenue is Mac sales — they accounted for 14 percent of Apple’s revenue last quater. In other words, 87 percent of Apple’s revenue last quarter was from products that all saw record sales. The lone dim spot in Apple’s numbers were iPod sales, which continue to decline year-over-year. But because the other businesses have grown so massive, so quickly, the iPod only accounts for 5 percent of Apple’s revenues now. Pretty soon — maybe even next quater — the iTunes Store itself will be a bigger money-maker for the company. When you consider that iTunes (including the App Store) was initially set up to be run as a break-even business, this is impressive. Something else to consider: the iPhone, iPad, and Mac have the highest margins amongst Apple major products. The iPhone 4S, because it is largely based off of the design of the iPhone 4, probably has one of the best margins that Apple has ever seen. That rings especially true when you hear that Apple’s overall gross margin for the quarter was 44.7 percent. It’s a number so big that Apple CFO Peter Oppenheimer said he couldn’t recall ever seeing a number so high in his 15 years of service. And he was skeptical that Apple would ever hit it again. That huge margin meant huge profit. In fact, it meant profit the likes of which had never been seen before by a technology company. Something else: Q1 2012 for Apple happened to span 14 weeks. This was unusual, and Apple was quick to note as much in both their press release and on the earnings call. Normally, quarters span 13 weeks (do the math: 13 x 4 = 52). You simply cannot discount an extra week of sales. And you especially cannot discount it during the holiday quarter. And one more thing: the passing of Apple co-founder Steve Jobs in October drove people all around the world to Apple Stores to pay their respects . When people visit Apple Stores, they don’t often walk away empty handed. And what better way to pay respect to Jobs than to buy a product from the company he cared so much about? It’s a delicate subject, but worth mentioning. Again, this monster quarter was all about a confluence of events. It was about a new iPhone launch during Apple’s typically busiest quarter merged with a newer product, iPad, coming into its own, and the Mac continuing its methodical growth. Add to that amazing margins plus one more week of sales — and the fact that Apple as a whole has been killing it for several years now across the board — and you get a jaw-dropping quarter. It all came together. Next question: will Apple be able to replicate the magic next quarter? Well, no. The quarter after the holiday one is typically weaker as consumer spending cools. And when you consider that it will span the regular 13 weeks instead of 14, you have two things working against it. Add to that the fact that the iPhone 4S will no longer be a new product, and you have another dip. There could be a new iPad in the quarter — but it may only go on sale at the tail-end. Or it may not be on sale until the following quater — we’ll see. Either way, that probably dings iPad sales a bit next quarter too. But even with all those things working “against” Apple next quater, Oppenheimer still gave guidance of $32.5 billion in revenue. That would be Apple’s second-best quarter ever. And again, Apple always low-balls such numbers, so perhaps $35 billion in a more reasonable guess. In other words, Apple may only have the second-best quarter of any tech company ever in terms of revenue next quarter. And profits may only be near the bottom of the all-time top 20 amidst the oil empires. Boo hoo. [photo: flickr/ ConvenienceStoreGourmet ]

Yahoo Earnings Meet Exp...

Yahoo just released its earnings report for the fourth quarter of 2011, with results that were basically in line with the expectations of Wall Street analysts . The company earned 24 cents per share, which is what analysts estimated, and what the company delivered during the same quarter last year. But meeting those low expectations is no great triumph. For one thing,  Yahoo’s revenues have been in declining for a while now, and the trend continued. Fourth quarter revenue, minus traffic acquisition costs, came in at $1.17 billion, a 3 percent decrease from the same period last year. That’s also less than the analyst estimate of $1.19 billion. Display ad revenue was down 4 percent, to $546 million. Search ad revenue was down 3 percent to $388 million. But hey, some numbers went up — operating income increased 10 percent to $242 million, a fact that new CEO Scott Thompson highlighted in the earnings release. “Yahoo! continued to make progress in the quarter with operating income increasing ten percent year over year,” Thompson said. “In 2012 we will be aligning resources behind key areas of focus to enable us to move aggressively in market and grow our business, bringing innovative new products and experiences to both our users and advertisers.” The numbers cover a quarter when Yahoo was mostly without permanent leadership — Carol Bartz was fired in September , and the company was run by interim CEO Tim Morse (normally Yahoo’s CFO) until Thompson’s hiring  in early January. More interesting than the numbers will be Thompson’s first earnings call as Yahoo CEO, which starts at 2pm Pacific. We’ll be liveblogging the call in this post. Earnings call liveblog 2:03pm:  After the boilerplate, Scott Thompson starts the call. It has been three weeks since he joined, two weeks since his official start date. He’s been “rapidly coming up to speed.” Talks about Yahoo’s “exceptional foundation,” user base, brand, etc. “We will focus on generating real, sustainable growth and value creation.” Acknowledges that there’s a lot of work to do, but says it’s too early for a detailed plan. His guiding principle is to “insist that we be balanced,” especially in “the way we allocate capital.” 2:06pm: Thompson goes over the basic numbers. “A lot of people worked very hard” to get these results, but there’s “no question” that they need to improve. Tim Morse takes over to go into more detail. “This quarter was challenging in many respects, but I’m proud of what the company accomplished.” Talks about new products, salesforth growth, Interclick acquisition, and more. 2:09pm: Morse starts talking about finances for the whole year, noting that revenues are down in large part because of the beginning of the search partnership with Microsoft. Morse notes declining costs, but argues that Yahoo isn’t cutting everything — the company spent $250 million on new products. 2:16pm:  Morse discusses audience and engagement growth, thanks to content and product launches. “One in six Americans online watched a Yahoo original video in November.”  Despite these wins, “Revenue isn’t growing. … We expected better.” 2:19pm:  Morse says, “a low- to mid-teens operating margin is not what you should expect from us in the future.” The margin should improve thanks to revenue growth and improved “cost structure.” 2:21pm: Thompson thanks Morse for leading the company through the transition. Then Thompson talks more about his goal of balance. First, he will balance Yahoo’s approach to its customers — which includes users and advertisers. “We will focus equally on both.” Second, he will balance “who we are.” “Yahoo is fundamentally both a media company and a technology company. We need to be great at both.” “So we end the debate about which is more important — we are both a media company and a tech company. We must do both.” 2:23pm: Third, balance between speed and thoughtfulness: “We will get speed back into the equation.” Fourth, balance in how Yahoo’s invests its capital. Majority of resources should be dedicated to current core business. But Thompson also believes in significantly investing in new products, and spending a small but non-trivial amount on technologies that won’t be relevant for at least 12 months. “This isn’t starting from scratch on a new investment cycle.” 2:27pm: Two fundamental building blocks of future plans. One is a focus on customer experiences. “We need to improve the quality of our relationship with these customers and their experiences with Yahoo.” Those improvements can include new interfaces, better content, and faster services. Yahoo will also give advertisers “better tools to increase the effectiveness and ROI of their spend with us.” The second building block, data, is one way Yahoo can improve that experience. “Yahoo has made some real progress in this area but there’s a long way to go to get to that uniquely relevant experience that will really differentiate it.” “Our data may be Yahoo’s single most underrated, under-appreciated and under-used asset.” Data will be “the cornerstone of the next generation of Yahoo products.” 2:30pm: The board has worked systematically to make decisions about Yahoo’s future, whether that’s an acquisition, raising more capital, or selling off part of the company. “It’s important for you to know that the company remains open to anything that would be good for our shareholders.” However, Thompson says he feels strongly that Yahoo’s Asian assets are important — implying that he will oppose a sale. “I’m here because I believe this company can do much more to innovate and disrupt, to build great products, and to leverage great data and technology in ways that the world hasn’t yet conceived.” 2:33pm: Question and answer portion starts. How much will Interclick contribute to Q1 numbers? And can you say anything about search RPS improvements? Morse: There’s about $25 million of cost and $10 million of revenue. On RPS, Microsoft is “starting to get into the swing of things. … We’re definitely closing the gap.” 2:36pm: How significant of a role do you see M&A in terms of the strategy? Does Yahoo need “transformative acquisitions”? And what about the larger economic environment? Thompson: “If we want to push this agenda forward quickly, we’ll have to be fairly aggressive in the market” — so yes, Yahoo will probably be making some acquisitions. Morse on the macroeconomy: “We’re not expecting much of a pickup in the first quarter anywhere, really.” 2:38pm: What about paying out a dividend? And how can Yahoo turn around its display ad business? Thompson: Too early to talk about dividends. On turning around display business, “a lot of my time and attention has gone into understanding what that business is.” Display advertising is “the very highest priority I have in the core business today.” 2:40pm: Can we assume there are no sacred cows going forward? And how are those premium video programs actually doing? Thompson: It’s hard to interpret the first question. “We are understanding and evaluating all options for the business going forward. … I don’t know whether what I just said fits into no sacred cows, but we’re being aggressive.” Morse: In the last month we had nine out of the top 10 shows in terms of original programming on the Web. Yahoo doesn’t disclose revenue or streaming numbers. “I think it’s safe to assume healthy growth there, but we need to do more.” 2:42pm: What are the economics of Electric City, the web video series in partnership with Tom Hanks? Is it just an experiment? Thompson was at CES where Electric City was announced, says he was “fascinated” by the buzz. No details about how that’s going to affect the larger business. 2:45pm: What are some of the broad themes on new areas that Yahoo could pursue? And what can you say about search share and revenue? Thompson: Too early to talk about those themes. “I hesitate to say what picks at this point in time, what strategy we’re going to invest in.” Morse: It’s definitely Yahoo’s goal to grow search share. Thompson: “No winner has shown themselves … as it relates to mobile and search and display and local.” 2:48pm: How would you define Yahoo? Thompson: “This debate is apparently a long-standing debate inside the company. I would reiterate my comments, which is we better be darn good at both.” “We are going to stop this debate.” 2:53pm: What kind of growth rate do you expect to see on “Class 2″ display advertising inventory?  Morse: You’re right, we didn’t have enough focus on that segment. That’s what the Interclick acquisition is for, but no numbers. We are investing in this area “in order to meaningfully improve the growth rates and especially the CPMs in that area.”

Verizon Posts A Net Los...

Ever since the AT&T/T-Mobile saga came to a grinding halt , you’d think that Verizon would be enjoying its reign in peace. But it would seem that the company has posted a net loss of $2.02 billion in the fourth quarter of 2011. At the same time a year earlier, Verizon was seeing a profit of $2.64 billion. According to Bloomberg , the loss can be attributed to a pension charge and higher subsidy costs for rising iPhone sales. But there have been gains, as well. Verizon lured in 1.2 million new subscribers — probably thanks in large part to the iPhone — and hopes that the high subsidy costs will eventually be paid off by consumers as they spend on calling and data. Bloomberg enlisted the help of James Ratcliffe, an analyst at Barclays Capital in New York, who said that “the average smartphone customer will spend about $2,000 over the two-year contract. If the subsidy is $400, you’re still getting $1,600, and that’s very cash-flow positive.” It would appear that smartphones are, indeed, where it’s at for Verizon, as the company reported that 44 percent of its customer base is now using a smartphone. The carrier announced a total revenue of $18.3 billion for the quarter, representing a 13 percent year-over-year increase. Not surprisingly, data played a major role in bringing in the big bucks for ol’ Big Red. In fact, 42 percent of all revenue for the quarter was made up of the $6.3 billion in data revenue, up 19.2 percent from the same time last year.