Since 2000, another couple of great resources have been added to the arsenal of business researchers – earnings calls and investor presentations. Earnings calls are the conference calls company management give every quarter to provide investment analysts at the big banks and mutual funds with context on their quarterly performance. Investor presentations are made at the events where companies showcase themselves for big investors.
So what changed in 2000? That’s when the SEC issued Regulation FD, which required that all investors in a public company receive material information at the same time. Before that, the earnings calls and investor conferences were all closed-door affairs, and only the big financial institutions, more or less, had access. Now all of this information is freely available online and through other avenues.
While the 10-K filing often has a ton of regulatory boilerplate, earnings calls and presentations are where public companies really try to communicate with their investors. In particular, you can find much more digestible information on revenue and profitability performance and how it compares with previous periods. You also get greater depth on corporate strategy and initiatives.
Just to make this a little more concrete, let’s compare what you find in Amazon’s last 10-K with their earnings and investor presentations.
Overall, I’m surprised at how little Amazon discloses in the 10-K. There is a spectrum for how much companies include in these filings, from the bare regulatory minimum to a good deal of information to help investors understand the business. I would say Amazon is a bit closer to the former end of the scale.
- The description of the business is straightforward, with only minimal mention of Amazon Web Services and the Kindle e-book reader. These products, although important for long-term growth, still don’t contribute enough revenue to be considered “material” for the purposes of regulatory filings. Until the accountants say otherwise, Amazon can keep their results a little more under wraps, unlike the core e-commerce business.
- They have 24,300 employees, although the number fluctuates due to retail seasonality.
- The risks section, which I have to admit I only skimmed, looks like mostly boilerplate – loss of key executives, technology, intellectual property, etc., etc. Nothing to see here, folks.
- The properties section is short but more interesting. Amazon has 11 million square feet of warehouse space and half a million square feet of data center space in North America. Pretty amazing. If I were going to do a geographical analysis of Amazon’s operations, this would be my starting point. They don’t break it down across individual locations, which is disappointing. My next stop would be news reports on their warehouses, followed by the job postings (great way to back into locations and organizational structure).
- Interestingly, the management discussion section is almost entirely restricted to discussion of the financials. Not a lot of strategy context here.
- There is one interesting data point – technology and content spending was about $1.2 billion for 2009, which coincidentally is on the same order of magnitude as Yahoo’s technology spending. The numbers aren’t necessarily directly comparable, but it’s a good reminder of what a formidable technology operation Amazon has. It would be interesting to benchmark this spend across e-commerce and content companies more generally. I have no data at hand to back this up, but I bet that Amazon leads the pack among e-commerce operations.
The earnings call transcript
This document provides some great context on points that were glossed over in the 10-K. Note that many companies, including Amazon, provide audio recordings on their IR sites. Personally, I find having to listen to the whole thing a pain compared to reading it, and some companies take down previous recordings pretty quickly. I prefer the conference call transcripts available at sources like Seeking Alpha.
- Strong margins in North America were driven primarily by 3-P (third-party, meaning the other merchants with stores hosted on Amazon) sales and good cost execution in inventory and purchasing.
- In addition, book sales grew, offsetting a drop in video games from a very strong quarter the prior year.
- Amazon Prime (their annual subscription for free per-order shipping) is performing well and helping to drive international revenue growth.
- Fulfillment by Amazon (FBA, where Amazon holds, packs, ships, and services fulfillment for independent vendors) is another program that I was not aware of.
- There is some discussion of the EGM business. I’m not sure what that is, but it would be a good term to follow up on.
- Similar to the 10-K, the conference call also fails to shed any light on either Web Services or the Kindle.
The investor presentation
The presentations tend to be tied to investment conferences that the big banks and mutual funds hold periodically. Let’s take a look at the Credit Suisse presentation from June 2009.
- The first few slides are focused on free cash flow, which is the profitability metric Amazon focuses on, rather than the net income and whatnot mandated by Generally Accepted Accounting Principles (GAAP), which govern regulatory financial reporting like the preparation of SEC filings.
- The discussion of Amazon’s negative working capital is much clearer, showing that they basically get 23 days of “float.”
- This is where the EGM label becomes clear – Electronics and Other General Merchandise. The other sales categories are Media and Other. Other is still only 3% of sales, so it’s no surprise they’re keeping the details under wraps.
- There is a great illustration of how they are working to maximize gross margin dollars, not margin percentage. From a competitive strategy perspective, this suggests Amazon is willing to grow in categories at or below their average 22% gross margin if they think they can do it in a way that satisfies ROI and free cash flow goals.
- There’s also a better discussion of how Amazon looks at customer experience and what they do to drive it, including some context on pricing, shipping, and other practices.
The picture will be different from company to company, but in this case, it’s clear that the investor presentation is the most valuable research source. If I only had an hour to understand Amazon’s business, I would read that and be done with it. The earnings call and the 10-K are helpful supplements, but they also involve progressively more slogging through stuff that’s not very useful.
Do you use these sources now? How do they fit into your overall research strategy?