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Amazon.com (NASDAQ: AMZN) reported earnings for Q4 2023 on Thursday, February 1, 2024. What happened during the release and earnings call, and what are the key questions to focus on?

With total sales coming in at $170.0 billion, slightly above consensus, and operating profit at $13.0 billion, over 20% ahead of consensus, Amazon delivered a strong Q4, sending the shares up 8% following the release. In particular, Amazon delivered an 8% operating profit margin again this quarter, above the 6.4% expected by analysts.

The company released Q1 guidance of $138.0-143.5 billion in revenues and $8.0-12.0 billion in operating profit, inline with expectations of $142.4 billion in sales and $11.0 billion in operating profit. Since January 2023, Visible Alpha consensus for FY 2024 declined slightly from $645.1 billion to $640.7 billion in total sales, but increased from $38.8 billion to $54.4 billion in operating profit.

Driven by improvements in the North America online business and strength in AWS, analysts project Amazon’s total operating profit margin to grow to 8.5% in 2024, more than triple 2022’s 2.4% level, and rise to 10% by the end of 2025 and 12% by the end of 2027.

1. How did AWS perform?

AWS revenues were in line with expectations at $24.2 billion, but operating profit was $2.6 billion above consensus. This resulted in a 29.8% operating profit margin, which was 140 basis points ahead of the 28.4% expected according to Visible Alpha consensus, but driven mainly by headcount reductions. While this result is a notable improvement from Q4 2022’s 24% margin, it is 50 bps lower than Q3 2023’s 30.3% margin.

Since the Q4 earnings release, the consensus margin for AWS climbed to 31.0% starting from the second half of 2024, and is expected to remain at that level through FY 2027. For Q1 2024, however, the range is 25-33% and 28-33% for FY 2024. Longer-term, there is significant debate about both top-line growth and margin levels for the AWS business, which is likely driven by varying views on the pace of cloud migration and the development of GenAI applications.

AWS has picked up the pace on the AI front. CEO Andy Jassy pointed to Bedrock helping to fuel early traction in GenAI. Jassy explained that GenAI is and will continue to be an area of pervasive focus and investment across the company and believes it will “ultimately drive tens of billions of dollars of revenue for Amazon over the next several years.” (Visible Alpha’s AI Monitor tracks the pace of AI-exposed revenue growth, including Amazon’s AWS business.)

New Question: Will AWS margin remain at 30-31% levels in 2024-2025?

2. Is the advertising business continuing to show growth?

The Ads business continued its strength by growing 26% in Q4 to $14.5 billion and 24% in 2023 to $46.9 billion, in line with expectations, driven by sponsored products. Jassy reiterated that they are still in the early days for Ads and noted in the quarter that “streaming TV advertising continues to grow quickly.” CFO Brian Olsavsky further explained that the company is looking for ways to increase advertising in its streaming properties, including Fire TV, Prime Video, Free V and Twitch. Jassy also noted that Amazon is focused on improving its measurement and transparency, enabling brands to see the payback of their advertising spend.

Consensus expectations for ad revenue in 2024 are at $57.0 billion, with the most aggressive estimates at $60.0 billion, down from $70 billion expected in Q1 last year. Longer term, there is also debate about the magnitude of revenue growth for this business. By the end of 2026, analysts expect this business to generate $78.2 billion in revenues, but the range is from $67.1-91.0 billion.

New Question: Will Amazon be able to maintain more than a 20% CAGR for the Ads business going forward?

3. What’s supporting Amazon’s online margin improvement?

Both the North America and International online businesses saw sales and operating profit come in ahead of expectations again, delivering margin improvement. In 2023, Amazon delivered 500 bps of margin improvement in North America, going from 1.2% in Q1 2023 to 6.2% in Q4, and the company noted that there’s still more to go. According to Visible Alpha consensus, analysts project Amazon’s North America operating profit margin to remain at 6% for 2024. However, margin assumptions range from 4-8%, while top-line growth is estimated to remain consistent at 10%. This range continues to widen through 2027, with estimates from 6% to 14%.

Combined with the ongoing strength and success of advertising, the company has also made significant improvements to its regional fulfillment centers. The benefits of regionalization and advertising are projected to continue to enhance margins.

New Question: Will Amazon’s North America online business be able to generate a 10% operating profit margin by the end of 2025?

Figure 1: Key financials for Amazon

Amazon Key Financials

Source: Visible Alpha consensus (February 5, 2024)

Amazon.com, Inc. (NASDAQ: AMZN) will report Q4 2023 results on Thursday, February 1, 2024. Here are the key numbers that we’re watching.

Figure 1: Amazon – consensus expectations for Q4, past earnings surprises, revisions, and CAGR

Amazon com Earnings Preview

Source: Visible Alpha consensus (January 26, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

Amazon Q4 2023 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q4 have come up slightly from the beginning of last year, from $163 billion to $166 billion, driven by strength in Amazon’s online retail and advertising businesses, while AWS expectations have come down. The focus will likely be on the Q4 performance and 2024 outlook for the online retail and AWS margins and their impact on EPS.

The North America retail operating margin has increased significantly from a meager 1.1% at the beginning of last year to 4.3% now, ahead of Q4 earnings. Operating margin expectations for North America have remained at current levels since October. For 2024, the estimated margin ranges from 3.6% to 6.3%, with consensus at 5.1%. What will the company say about the outlook for the online business?

AWS margin came in at 30% last quarter, and has steadily increased back to the expected 28% level forecast at the beginning of last year for Q4 and 2024. There is, however, a significant range of estimates for the Q4 AWS margin into this week’s release, with analysts expecting from 24% to 31%.

The stock has traded up over 30% since last quarter’s October release, outperforming the S&P 500. Could the Q4 release provide the next positive catalyst for the stock?

Figure 2: Amazon consensus estimates

Amazon com Consensus Estimates

Source: Visible Alpha consensus (January 26, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on January 25, 2024.

Netflix Inc. (NASDAQ: NFLX) reported Q4 2023 results on Tuesday, January 23, 2024.  What happened in Q4 and what may be next?

In a pivot from the usual recorded interview, Netflix live streamed their earnings call on YouTube. Spencer Wang, vice president of finance, hosted the call and asked the co-CEOs questions. The discussion and debate from the earnings interview were around the growth of engagement and monetization and the potential for advertising to drive revenues while maintaining margin.

1. How is the landscape shifting for Netflix?

In previous quarters, Netflix shared a Nielsen chart showing a breakdown of major players’ share of TV screen time in the U.S., where YouTube has been leading. This quarter, however, in addition to the U.S. data they included Nielsen data from other key markets, including Brazil and Mexico, where YouTube leads by a substantial margin.

Given the recent WWE announcement and the newly livestreamed earnings call, is Netflix looking to provide more live events? While the company noted on their call that they prefer to build and not buy, could more partnerships be in the works?

Figure 1: Share of TV screen time

Nielsen Share of Viewing Data

Source: Netflix Q4 Shareholder Letter (January 23, 2023)

New question: Going forward, how will live events play a role in Netflix’s content offering?

2. What happened in Q4 and how has the outlook changed?

Revenue

Q4 performance: Q4 year-over-year revenue growth of 12% was $115 million ahead of consensus estimates, driven by strong net adds. The company reported 13 million new subscribers, driven by both the U.S. and overseas regions. The UCan market added 2.81 million new subscribers, which demonstrated that its new paid-sharing program has worked. There is concern that password-sharing customers have been pulled forward, and could show a slowdown going forward.

Q1 2024 expectations: The company guided Q1 to 13% year-over-year revenue growth with revenue of $9.3 billion, in line with consensus estimates, and supported by the continued positive expected revenue impact of paid-sharing, growth of the ads business, and further monetization. Regarding pricing, the company will be providing a range of prices and plans.

FY 2024 expectations: The company expects to grow revenues by increasing engagement trends and reducing churn with a more diverse entertainment offering. Gaming and the growth of ads could be key drivers in 2024. According to Visible Alpha consensus, analysts expect the company to generate revenue of $38.6 billion in FY 2024, up from expectations of $38 billion in January 2023.

Operating profit

Q4 performance: Netflix delivered Q4 operating profit of $1.9 billion and a 17% operating profit margin, almost $300 million ahead of consensus estimates coming into the quarter.

FY 2024 expectations: Looking ahead, the operating profit margin outlook for FY 2024 is now expected to be 24%, up from 22-23%, driven by the strength in Q4 continuing into 2024 and an assumption around a weaker dollar.

Longer-term: The company did not give a long-term margin target. Based on Visible Alpha consensus, operating profit margin is expected to grow from 24.1% in FY 2024 to 30% in FY 2027. Currently, consensus estimates project an improvement from FY 2024 in the operating margin, and for this to grow to 30% by the end of FY 2027, which may be aggressive given the investment likely required to scale the ads business. There is significant debate among analysts with respect to FY 2027 margin estimates, which range from 26% to 33%.

New question: Is the longer-term pace of margin expansion too aggressive?

3. What additional visibility into the Ads business was provided in the Q4 release?

According to the company, in Q4, ads membership increased 70% quarter-on-quarter and accounts for 40% of new sign-ups, up from 30% last quarter. In the Q4 shareholder letter and earnings call, management highlighted that they aim to drive engagement to attract advertisers, which they expect to help the ads business continue to scale.

Netflix remains upbeat about the long-term opportunity, given the size of their user base. The company continues to have work to do on advertising business features, both to scale and to build out the technical capabilities, in order to create formats that brands will value. In particular, the company called out the need to continue improving the targeting and measurement they offer to their customers.

Long-term ad-supported revenue expectations: Currently, consensus estimates project total ad-supported revenue to expand to nearly $10 billion by the end of FY 2027, up over 15x from FY 2023 levels. There is a significant range of views on the magnitude of this growth. For FY 2027, analyst estimates range from $3.9 billion to $18.6 billion, which narrowed from $2.9 billion to $19.6 billion last quarter.

New question: How big can the ads business become?

Figure 2: Key financials for Netflix

Netflix Consensus Expectations

Source: Visible Alpha consensus (January 25, 2023)

Amazon.com (NASDAQ: AMZN) reported earnings for Q3 2023 after the market close on Thursday, October 26, 2023. What happened during the release and earnings call, and what are the key questions to focus on?

With total sales coming in at $143.1 billion, slightly above the top end of guidance, and operating profit at $11.2 billion, over 40% ahead of consensus and 32% ahead of the top end of guidance, AMZN delivered a strong Q3, sending the shares up 5% in the after-market following the release. In particular, the operating income was $3.5 billion ahead of consensus estimates, delivering an 8% operating profit margin, significantly above the 5.5% expected by analysts.

The company released Q4 guidance of $160-167 billion in revenues and $7-11 billion in operating profit, in line with current expectations of $165.8 billion in sales and $10.1 billion in operating profit. For 2023, Visible Alpha consensus for AMZN moved up (from Q2 to now) from $562 billion to $571 billion in total sales and from $22 billion to $34 billion in operating profit.

Driven by improvements in the North America online business and stability in AWS, analysts project AMZN’s total operating profit margin to return to 6% in 2023, more than double 2022’s 2.4% level, and rise to 7% by the end of 2024 and 10% by the end of 2026.

1. How did AWS perform?

AWS revenues were in line with expectations at $23.1 billion in sales, but the operating profit was $7 billion, significantly outperforming. This resulted in a 30.3% operating profit margin, which was 580 basis points ahead of the 24.5% expected according to Visible Alpha consensus. Analysts had been projecting AWS revenues of $23.1 billion and operating profit of $5.6 billion in Q3. For Q4, analysts had been projecting AWS operating profit margin of 24.8%. However, this estimate has been revised up to 27.9%.

Since Q2, the consensus margin for AWS has remained at 24.4% for 2023, and there is now less debate about the future performance of AWS margin for 2023. For 2024, however, the range is from 22-30%. Based on comments from CEO Andy Jassy, most of the optimization will happen in 2023. However, Jassy explained that this is now getting offset by a shift to new workloads, suggesting a more upbeat outlook for the AWS business into 2024. He also reiterated this quarter that 90% of IT is still on-premises and more is likely to move to the cloud with their Generative AI (GAI) initiatives.

AWS has picked up the pace on the AI front. CEO Andy Jassy pointed to Bedrock helping to fuel early traction in GAI. Jassy explained that companies will want to leverage LLMs, but will need to customize the models and applications. Applications built on top of the LLMs will likely be key. Plugins available in ChatGPT4 provide a sneak peek into how companies and their customers may see GAI integrated into existing applications.

New Question: Will AWS margin remain at 30% next year?

2. Is the advertising business continuing to show growth?

Analysts had been expecting the Ads business to grow 22% in Q3 to $11.6 billion, and 22% in 2023 to $45.9 billion. Amazon delivered a nice beat in Q3 with $12.1 billion, up 26% year over year. Expectations for ad revenue by 2024 are at $55 billion, with the most aggressive estimates at close to $59 billion, down from $70 billion in Q1. The company reiterated that they are still in the early days for Ads.

New Question: How significantly will AI help grow ad revenues at AMZN going forward?

3. What’s supporting Amazon’s online margin improvement?

Both the North America and International online businesses saw sales and operating profit come in ahead of expectations, delivering margin improvement. The company has continued to show margin improvement, going from 1% in Q1 to 4% in Q2 and now 5% in Q3, in the North America online business, and the company noted that they still have more to go. Analysts project AMZN’s North America operating profit margin to be 4.2% for Q4, leading to an expected 4% for 2023. By the end of 2024, analysts expect a further 100-basis-point margin expansion in North America to 5%.

In addition, analysts had expected a -3% operating loss margin for the international business, but instead, it almost broke even. Analysts are currently not expecting this business to break even until the end of 2025, which may be too conservative given this quarter’s improvement.

The company has made significant improvements to its regional fulfillment centers and these are projected to continue to enhance margins. In addition, the company is also finding more efficiencies to support margin growth.

New Question: Will Amazon’s North America online business be able to generate a 10% operating profit margin by the end of 2026?

Figure 1: Amazon’s key financial items

Amazon

Source: Visible Alpha consensus (October 31, 2023)

Amazon.com, Inc. (NASDAQ: AMZN) will report Q3 2023 results on Thursday, October 26, 2023. Here are the key numbers that we’re watching.

Figure 1: Amazon – consensus expectations for Q3, past earnings surprises, revisions, and CAGR

Amazon Earnings Preview

Source: Visible Alpha consensus (October 24, 2023). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

Amazon Q3 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q3 have come up slightly from the beginning of the year, from $139.6 billion to $141.6 billion, driven by increased optimism about the resilience of Amazon’s revenue for retail and AWS. There is some debate about the top line performance of the profitable advertising business, with analysts expecting between $11.0 billion to $13.7 billion.

The focus will likely be on the Q3 expectations for the retail and AWS margins. The North America retail operating margin has increased significantly from a meager 1.1% at the beginning of the year to 3.8% now, ahead of Q3 earnings. While margin expectations jumped substantially from April to July, operating margin expectations for North America have continued to grind higher since July, rising from 3.1% to 3.8%. AWS margin came down to 24% in August from 28% at the beginning of the year, and has since remained at 24%. There is, however, a significant range of analyst estimates for AWS margin into Q3 earnings, with analysts expecting from 22% to 29%.

The stock has traded down slightly since last quarter’s July release but is up over 50% year to date. Could the Q3 release provide the next positive catalyst for the stock?

Figure 2: Amazon consensus estimates

Amazon Consensus Estimates

Source: Visible Alpha consensus (October 24, 2023). Stock price data courtesy of FactSet. Amazon’s current stock price is as of the market close on October 23, 2023.

 

Netflix Inc. (NASDAQ: NFLX) reported Q3 2023 results on Wednesday, October 18, 2023.  What happened in Q3 and what may be next?

According to Visible Alpha consensus, total revenues expected prior to the Q3 release were $8.5 billion, down from $8.78 billion at the Q2 earnings release.

The stock was trading down around -25% from the Q2 release in July to the Q3 release, but reacted positively immediately after the Q3 release, rising 12% after hours and up strongly to open the following trading day. In our preview note, we asked, “Could the Q3 release provide a positive catalyst for the stock?” Indeed, it looks like the Q3 results were solid and the outlook better than expected.

The discussion and debate from the earnings interview were around the paid-sharing program and the potential for advertising to drive revenues while maintaining margin. In addition, the company noted that the SAG-AFTRA strike is continuing.

1. The SAG-AFTRA strike continues. What are the industry dynamics at work?

According to management, a conclusion is needed for the strike, but the issues are still getting worked through. A final request for a per-subscriber levy from the guild broke down the negotiations, resulting in the SAG-AFTRA strike continuing. In the earnings call, company management noted that talent metrics will become more transparent and about engagement.

It is worth reiterating the role of AI in the strike. Actors have been concerned about where and how their images are shown, especially AI-generated images used in advertising and endorsing products and services, which may explain why the Writers Guild of America (WGA) may have reached an agreement more quickly. According to the Center for Democracy and Technology, “AI can’t write or rewrite literary material, and AI-generated material will not be considered source material under the [agreement], meaning that AI-generated material can’t be used to undermine a writer’s credit or separated rights.”

Netflix highlighted the competitive environment and presented a market share chart (Figure 1 below), which shows how both Netflix and YouTube have remained at the top. However, YouTube has pulled ahead with a share that’s now 120 basis points higher than Netflix, up 60 bps from Q2. In this new era of AI, will YouTube have an advantage over Netflix and others, given Google’s substantial AI investments? Will the SAG-AFTRA strike and issues related to AI impact Netflix’s longer-term competitiveness?

Figure 1: Share of US TV Screen Time

Share of US TV Screen Time

Source: Netflix Q3 Shareholder Letter, October 18, 2023

New question: When and how will the strike conclude, and what concessions may Netflix make, especially related to AI?

2. What happened in Q3 and how has the outlook changed?

Revenue

Q3 performance: Q3 year-over-year revenue growth of 7.8% was in line with consensus estimates. There were no upside revenue surprises in Q3. However, the company reported 8.8 million new subscribers, driven mainly by overseas regions. The U.S. market added 1.75 million new subscribers, which demonstrated that its new paid-sharing program is working. While monetization for this program is happening, it has been at a slower pace than some of the more optimistic analysts originally expected. Paid sharing has been rolled out as planned in every region. According to Netflix’s Q3 shareholder letter, “The cancel reaction continues to be low, exceeding our expectations, and borrower households converting into full paying memberships are demonstrating healthy retention.”

Q4 expectations: The company guided Q4 to 11% year-over-year revenue growth with revenue of $8.7 billion, in line with consensus estimates, and supported by the continued positive expected revenue impact of the paid-sharing program. In addition, the company will be adjusting prices in the U.S., UK, and France. Total revenue expectations for FY2023 have remained around the current level of $33.7 billion since last quarter’s release on July 18, 2023.

FY2024 expectations: FY2024 expectations have decreased by $4.4 billion to $38.3 billion from $42.7 billion, indicating analysts remain more cautious on the FY2024 outlook for Netflix. The company noted that they expect a more balanced mix of member and ARM growth in FY2024, which should support the operating margin growth projected.

Operating profit

Q3 performance: NFLX delivered Q3 operating profit of $1.9 billion and a 22.4% operating profit margin, in line with consensus estimates coming into the quarter.

Q4 and FY2024 expectations: The company guided Q4 to a 14% operating profit margin, based on the company hitting the top-end of the FY2023 operating profit margin outlook of 18-20%. Looking ahead, the operating profit margin outlook for FY2024 is now expected to be 22-23%, above the 22% expected by analysts.

Longer-term: The company did not give a long-term margin target when asked on its call. Currently, consensus estimates project more than 800 bps improvement from FY2023 in the operating margin, and for this to grow to 28.2% by the end of FY2027, which may be aggressive given the investment likely required to scale the ads business. There is a significant 300-500 bps range in the margin assumptions beyond FY2024, which are also worth watching.

New question: What will be the longer-term pace of margin expansion?

3. What additional visibility into the Ads business was provided in the Q3 release?

According to the company, in Q3, ads membership increased 70% quarter-on-quarter and accounts for 30% of new sign-ups. In the Q3 shareholder letter and earnings call, management highlighted that they are confident in the Q4 outlook and expect monetization from continuing to scale the ads business.

There was a management change in the ads business and the company is optimistic about driving it to the next level, as scale is very important. Netflix remains upbeat about the long-term opportunity, given the size of their user base, and expects the ads business to be a multi-billion dollar opportunity. The company has a lot of work to do on advertising business features, both to scale and to build out the technical capabilities, in order to create formats the brands will value. It will be worth watching both operating expenses and CapEx related to the expansion of the ads business going forward.

Long-term ad-supported revenue expectations: Currently, consensus estimates project total ad-supported revenue to expand to over $7 billion by the end FY2027, up 10x from expected FY2023 levels. However, there is a large range of views on the magnitude and the trajectory of this growth. For example, in FY2025, analyst estimates range from $2 billion to $8.5 billion, with consensus at $5.3 billion. However, this range only increases in FY2027 from $2.9 billion to $19.6 billion.

Figure 2: Key Financials for Netflix

NFLX Key FinancialsSource: Visible Alpha consensus (October 19, 2023).

Netflix Inc. (NASDAQ: NFLX) will report Q3 2023 results on Wednesday, October 18, 2023. Here are the key numbers that we’re watching.

Figure 1: Netflix – consensus expectations for Q3, past earnings surprises, revisions, and CAGR

Netflix Table

Source: Visible Alpha consensus (October 16, 2023). “Surprise” indicates the direction that specific line items beat or missed. “Revisions” show the trajectory of line items from a given date.

Netflix Q3 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q3 have come down slightly from the beginning of the year, from $8.6 billion to $8.5 billion, driven by a decline in expectations for U.S. streaming. However, Q3 expectations for operating income have increased from $1.7 billion at the beginning of the year to $1.9 billion ahead of Q3 earnings.

The stock has traded down -25% since last quarter’s July release and has remained lower (currently around $355-360) from a high of $483 ahead of the July release, driven by concerns around the actors’ and writers’ strikes and the paid-sharing program in the U.S. Could the Q3 release provide a positive catalyst for the stock?

Figure 2: Netflix – consensus revenues, operating income, EPS, and stock performance

Netflix

Source: Visible Alpha consensus (October 16, 2023). Stock price data courtesy of FactSet. Netflix stock price is as of the market close on October 13, 2023. “Ad-supported revenue – Advertising – UCAN Streaming” is a new line item that recently started to be modeled by analysts.

In our weekly round-up of the top charts and market-moving analyst insights: Novartis’ Entresto (NYSE: NVS) faces generic competition & Medicare price cuts in the U.S.; Salesforce (NYSE: CRM) mitigates its revenue slowdown with margin expansion; and Sleep Country Canada (TSX: ZZZ) expands its portfolio amid a growth slowdown.

Novartis’ Entresto Facing Generic Competition & Medicare Price Cuts in the U.S.

Novartis’ (NYSE: NVS) Entresto is one of 10 prescription drugs that initially fall under the Inflation Reduction Act (IRA) of 2022, which allows Medicare to negotiate lower prices directly with drug companies. Entresto is prescribed for patients with heart failure to help reduce the risk of death and hospitalization. The expected reduction in U.S. prices will take effect from 2026.

In the case of Entresto, however, generic competition is expected to be a greater threat than lowered pricing for U.S. revenue from 2025 onward. Analysts expect generic competition to begin taking effect between 2025 and 2027.

Novartis has thwarted attempts by generic makers of Entresto since 2019, utilizing patent infringement lawsuits. Notably, the company has settled with several generic companies regarding a U.S. launch date for Entresto generics. Novartis has guided investors to model 2025 as a reasonable timeline to assume generic competition. Even though one Entresto patent will expire in 2025 based on a recent court decision, other key Entresto patents could survive through 2027.

Novartis' Entresto Facing Generic Competition & Medicare Price Cuts in the U.S.

Salesforce to Mitigate Revenue Slowdown with Margin Expansion

Salesforce (NYSE: CRM) has seen its revenue growth slow down significantly over the last year as economic challenges prompted many companies to tighten their spending. Analysts expect the company’s total revenue to increase by 11% in 2024, a notable slowdown from its 18.3% growth in fiscal 2023 and the 24.7% surge in fiscal 2022.

According to Visible Alpha consensus, however, Salesforce’s margins are expected to continue to expand. Analysts expect the company to generate an operating margin (GAAP) of 13.5% in 2024, up from 3.3% in fiscal 2023, and 2.1% in fiscal 2022.

The growth in profitability is on the back of several measures the company has implemented over the past year. Salesforce laid off about 10% of its workforce in early 2023, halted all major acquisitions, and has also reined in its operating expenses. The company’s selling and marketing expenses, a major expense line for the company, are projected to decline by -5.2% in 2024, while total operating expenses are projected to fall by -2.8%.

Salesforce to Mitigate Revenue Slowdown with Margin Expansion

Sleep Country Canada Expands Portfolio Amid Growth Slowdown

Analysts expect Canadian specialty sleep retailer Sleep Country Canada (TSX: ZZZ) to see total growth improve starting in 2023, following a sharp decline in 2022, according to Visible Alpha consensus. The company has seen total growth slow down since last year due to reduced consumer spending on big-ticket discretionary items. Total growth combines the percentage increases in same-store sales and sales from new stores.

In an effort to enhance its portfolio, the omnichannel specialty sleep retailer has been on an acquisition spree since 2021. Earlier this year, the company acquired the Canadian operations of mattress retailer Casper Sleep, and late last year, it acquired the direct-to-consumer sleep brand Silk & Snow. Additionally, in 2021, Sleep Country Canada made investments in Hush Blankets and Sleepout, a start-up curtain company.

Novartis Drug to Face Generics and Price Cuts; Salesforce Expands Margins; Sleep Country Wakes Up With Acquisitions

Amazon.com (NASDAQ: AMZN) reported earnings for Q2 2023 after the market close on Thursday, August 3, 2023. What happened during the release and earnings call, and what are the new questions to focus on?

With total sales coming in at $134.4 billion and operating profit at $7.7 billion, AMZN beat their Q2 guidance for revenues of $127-133 billion and operating profit of $2.0-5.5 billion.

The company released Q3 guidance of $138-143 billion in revenues and $5.5-8.5 billion in operating profit, ahead of pre-Q expectations of $138 billion in sales and $5.5 billion in operating profit. For 2023, Visible Alpha pre-Q consensus for AMZN ticked up from $557 billion to $562 billion in total sales and operating profit from $20 billion to $22 billion. After the Q2 earnings release, analysts now expect total 2023 revenues of $570 billion and operating profit of $29 billion.

1. Is AWS bottoming?

AWS performance stabilized coming into Q2. The results came in slightly better than expected at $22.1 billion in sales and $5.4 billion in operating profit, resulting in a 24.4% operating profit margin, which was 60 basis points ahead of Q1 levels of 23.8% and 170 basis points ahead of the 22.7% expected according to Visible Alpha consensus. Analysts had been projecting AWS revenues of $22 billion and operating profit of $5 billion in Q2. For H2, analysts had been projecting AWS operating profit margin of 24%.

The consensus margin has increased 40 basis points to 24.4% for 2023, and there is now less debate about the future performance of AWS margin. For 2023 and 2024, the range has narrowed from 21-29% to 23-26.6%. Based on comments from CEO Andy Jassy, the company continues to see that customers want to optimize costs in the cloud. However, Jassy explained that this is beginning to be offset by a shift to new workloads, suggesting a more upbeat outlook for the AWS business.

While AMZN has lagged other big tech players on the AI front, CEO Andy Jassy pointed to adding more CapEx to support Large Language Models (LLM) and Generative AI (GAI). He noted that 90% of IT is still on-premises and more is likely to move to the Cloud with GAI initiatives. Jassy explained that companies will want to leverage LLM, but will need to customize the models and applications for privacy and security. Applications built on top of the LLMs will be key. Plugins available in ChatGPT4 provide a sneak peek into how companies and their customers may see GAI integrated into workflows. It is worth noting that net sales to retail third-party seller services beat by over $1 billion, delivering $32.3 billion. This business line may be one area that will benefit from GAI.

New Question: When will customer optimization wind down and shift fully to new workloads over the next few quarters?

2. Is the advertising business continuing to show growth?

Analysts had been expecting the Ads business to grow 16% in Q2 to $10 billion, and 17% in 2023 to $44 billion. Amazon delivered a nice beat with $10.7 billion, up 22% year-over-year. Expectations for ad revenue by 2024 have been at $50 billion and have now increased to $54 billion, with the most aggressive estimates at close to $60 billion, down from $70 billion in Q1. The company reiterated that they are still in the early days for Ads.

New Question: How significantly will brand/product search continue to help grow ad revenues at AMZN going forward?

3. What’s supporting Amazon’s margin improvement?

Both the North America and International online businesses saw sales and operating profit come in ahead of expectations, delivering margin improvement. The company generated significant margin improvement, going from 1% in Q1 to 4% in Q2, in the North America online business, and noted that the operating profit margin has returned to 4-6% pre-pandemic levels, but they still have more to go. Analysts project AMZN’s North America operating profit margin to be 3.7-3.8% for H2, leading to an expected 3.2% in 2023. By the end of 2024, analysts expect a further 100-basis-point margin expansion in North America to 4.2%

The company has made significant improvements in optimizing its regional fulfillment centers and these are projected to continue to enhance margins. In addition, the company is also finding more efficiencies to support margin growth. Driven by improvements in the North America online business and stability in AWS, analysts project AMZN’s total operating profit margin to return to 5% in 2023, more than double 2022’s 2.4% level, and to rise to 6.4% by the end of 2024.

New Question: Will Amazon be able to generate a 10% operating profit margin in 2026?

Netflix Inc. (NASDAQ: NFLX) reported Q2 2023 results on Wednesday, July 19, 2023. What happened in Q2, what is the outlook for Q3, and what are the new questions to focus on?

Overall, Q2 came in light and Q3 guidance came in below consensus, similar to what happened in Q1. According to Visible Alpha consensus, total revenues expected for Q3 have come down by $250 million, from $8.78 billion to $8.53 billion.

The stock has traded down more than -11% since last week’s release. Last quarter, the stock traded down -10% after hours, but then came back on optimism around revenue and subscriber growth. However, this quarter we have not yet seen any significant rebound. The stock has remained lower around $430 from a high of $483 on Wednesday ahead of the release.

The discussion and debate from the earnings interview are around the paid-sharing program and the potential for advertising to drive revenues while maintaining margin and cash levels. In addition, the company noted that the recent strike is not an outcome they wanted.

1. Generative AI images and video are at the heart of the SAG-AFTRA strike. What are the industry dynamics at work?

According to management, a conclusion is needed for the strike, but the issues are still getting worked through. It is worth highlighting the role of AI in the strike. Actors are concerned about where and how their images are shown, especially AI-generated images in advertising and endorsing products and services.

Multimodal AI and text-to-image generative AI are quickly becoming better, making it easier for companies to train models and generate images/videos from text descriptions. The improvement of text-to-image generated AI is potentially threatening the value that a celebrity brings to an endorsement. If potential advertisers leverage the new generative AI image generators, instead of images and videos directly from a celebrity, then there are big questions about how this will impact the cost to the advertisers and the potential income to the entertainers.

In tandem with this capability to generate images/video, celebrities are also concerned about their personal brands and the potential risks of having their images appear in places they do not want them. As it relates to Netflix, it could have an impact on a show’s image and the perception of the content if actors show up in ad campaigns via generative AI that the actor and/or Netflix do not approve of.

New question: When and how will the strike conclude, and what concessions may Netflix make?

2. What happened in Q2 and how has the outlook changed?

Revenue: Q2 year-over-year revenue growth of 3% was in line with guidance, but a bit below consensus estimates. There were no upside revenue surprises in Q2 around the new paid-sharing program, as some analysts were suggesting into the quarter. While monetization for this program is happening, it is at a slower pace than some of the more optimistic analysts expected. In addition, Netflix Q2 revenue guidance of $8.2B came in a bit below consensus of $8.5B. Consensus expectations for Q4 are increasing, as analysts see the revenue impact of the paid-sharing program move further out.

Total revenue expectations of $34.3 billion for FY2023 have come down $600 million to $33.7 billion since July 18, 2023 (before the release), with several of the most bullish analysts revising down their revenue expectations. FY2024 expectations have increased $100 million to $42.7 billion from $42.6 billion, indicating analysts remain upbeat on the 2024 outlook for Netflix.

Operating profit: Coming into Q2, consensus was expecting a 20% operating profit margin, ahead of the 19% guidance. NFLX’s operating profit margin came in better at 22%. The company guided Q3 to a 22% operating profit margin, which was a bit better than the 21.5% consensus estimate. The FY2023 operating profit margin outlook of 18-20% remains in line with guidance, but analyst estimates have moved upward from 19.2% after the Q1 release to 19.7% after the Q2 release.

New question: How will the strike and the focus on growing advertising revenues impact margins going forward?

3. Did the new paid-sharing program updates in the Q2 release reveal anything new?

NFLX pushed out the broader rollout of the paid-sharing program in Q1 to Q2, which will push revenue and membership growth to the second half. In the Q1 earnings interview, NFLX highlighted that they are significantly optimistic about advertising and that margins for this business look promising.

In the Q2 shareholder letter, management highlighted that they are confident in the outlook and expect monetization to increase from the paid-sharing launch and for this acceleration to be weighted to Q4. In the Q2 interview, management explained that when Netflix drops the basic tier, consumers tend to either take the ads plan or move into the standard plan. 

Netflix is seeing good demand off a small base for ads, but the company has a lot of work to do on advertising business features both to scale and to build out the technical capabilities. It will be worth watching both operating expenses and capex related to the expansion of the ad business going forward.

Netflix highlighted the competitive environment and presented a market share chart (Figure 1 below), which shows how both Netflix and YouTube have remained at the top and taken share from competitors. However, YouTube has pulled ahead with a share that’s 60 basis points higher than Netflix. In this new era of AI, will YouTube have an advantage over Netflix and others, given Google’s substantial AI investments?  Will Netflix look at making an acquisition to remain competitive?

Figure 1: Share of U.S. TV Screen Time
Share of U.S. TV Screen Time

Source: Netflix Shareholder Letter (July 19, 2023)

New question: How will analysts model this new business and what will be the range of estimates over the next few quarters?


References: https://ir.netflix.net/financials/quarterly-earnings/default.aspx