It’s All About the Long Term – Amazon Shareholder Letter(s)

I’m re-posting a deeper analysis of Jeff Bezos’s recently published annual shareholder letter along with an additional history and perspective.

Amazon’s story has special meaning for me and this long-term view is a big part of the story.  Watching Amazon’s success unfold over the years has been an important business and life lesson for me.   I’ve always been a big fan of Jeff B having known him since the early days of Amazon.  In 1996, in the very early days of e-commerce, I was at the Internet Shopping Network (ISN) and part of “the big 3” of early e-commerce (Amazon = Book sales;  CDNow = Music sales;  ISN = Computer Sales.  We all used the same “middle man model”;   Amazon = Ingram Books;   CDNow = Ingram Music;  ISN = Ingram Micro.  Suffice it to say, I’ve had very real and very deep and detailed operating experience in the e-commerce arena.

History

First, a bit of a history lesson on e-commerce to complement and add perspective to this long-term view blog post.    In the early days of e-commerce (1995-1998;  Amazon’s first book sale was July, 2005), the model was to simply get a dump of the big 3 distributors databases/catalogs and to repackage the information into nice looking web pages with pictures, prices, text narrative, and of course a Buy button (with a bunch of other back-end code, operations, EDI Technology.).

That’s was the entirety of e-commerce in those days.  It all started with that.  Nobody owned their own warehouses.  We were simply resellers without any brick and mortar.  We bought at wholesale, sold at “retail”, and everything was shipped from the Ingram’s warehouses to the customers of Amazon, CDNow, and ISN.  In fact, Amazon didn’t open their first real owned and operated warehouse/distribution center until 1998.  It was 100% manual pick/pack – but they owned it.  Amazon proceeded to open six more key distribution centers in 1999, the year they really leaned into doing whatever it takes for customer satisfaction and away from having some other firm (Ingram) control your back-end customer experience.

We crossed path’s again in 1997/1998 with Netflix and their brief acquisition offer.   And, I got to know Jeff best of all in the 1999-2000 era with WineShopper.com when we were a huge Amazon investment and briefly a tab on Amazon’s home page (Wine). http://cookflix.me/117CFeQ

“It’s All About the Long Term”:  the Scott Cook influence

The title of this post is from Jeff’s 1997 original letter but he buried it a bit as “The Headline”.   Jeff’s always had a long view mentality, but I believe this was drilled into him and he embraced it fully around the 1996 time frame when Scott Cook began mentoring Jeff.   Scott officially became a key board member in Jan, 1997.    The long-term view was one of Scott’s key mantra’s and he drilled it into all of us at Intuit in the late 80’s/early 90’s. Scott’s other big mantra from 1993 was to “Wow! the Customer” (inspired by Tom Peters 1994 book he had read and proceeded to hand out to all of us).    Scott clearly impressed  and/or reinforced the concept of “Wow!” with Jeff and now Jeff is impressing it upon all of us by proving it to us over the last +15 years.     Here was Jeff B’s quote on appointing Scott to his board in Jan, 1997 after six months of great mentoring:

“We are delighted and honored to have Scott Cook join the Amazon.com board of directors. No one is better at using technology to serve customers than Scott Cook,” said Jeff Bezos, founder and CEO of Amazon.com. “His experience building the preeminent financial software company in the face of fierce competition will be of great benefit to Amazon.com. ”

More Amazon history, Jeff’s eternal optimism, and his  long-term view:  

1997-1999

Amazon went public on May 15, 1997 (I have the original S-1 if anyone wants to see it!).  This IPO document clearly and highly unusually stated it did not intend to make a profit for the next four to five years.  Unusual?  Absolutely!  For perspective, the bankers wouldn’t take Intuit public in 1993 until we had 9 quarters of consecutive profitability.  By 1997, that was down to 4 quarters of profitability.  Today’s times have changed, but in that day to go public and to say explicitly you weren’t focused on profits for four to five years was so far “out there” and “long view” that many investors shunned the stock and actively shorted it.   After all, it was still 1997, the heady days of 1999 were just barely beginning and certainly investors hadn’t lost their heads yet.  There were many good reasons to short Amazon.  The analysts weren’t wrong “short term”  but Jeff/team simply out executed them and eventually proved them wrong in the “long term”.  Read on and you’ll see it took four more years to actually turn their first very small but consecutive profit.

1999-2002

In two quick debt financings in Q4 1999 and in Q1 2000, Amazon borrowed a total of nearly $2 billion in convertible long term debt (10 yr notes at~5-7% interest rate).   As a backdrop, Amazon’s total cash & marketable securities as of March 31, 2000 (after this cash/debt raised) was $1.0 Billion and it was burning $300 million of cash in operating activities a quarter..   They had just reported 1999 annual revenues of $1.6 billion and gross profit (after cost of sales) of $300 Million for 1999 and had just borrowed nearly $2 billion by March 31, 2000.

Amazon turned it’s very first quarterly profit in Q4 of 2001 (where it typically still received 40% of annual revenues in classic retailer seasonality) and proceeded to go negative again until its second every quarterly profit in Q4 of 2002.

Amazon was 7 years in and had been a public company for 5 years when in July 2002, a Business Week article wrote, “after seven years and more than $1 billion in losses, Amazon is still a work in process.”  In fact, in 2002, Amazon ended up laying off 1,300 employees (15% of its workforce) and closing one of its distribution warehouse centers and bet the house even further with a very risky strategy of lowering prices across the board and offering free shipping (causing analysts to cry “desperate times call for desperate measures” and many proceeded to short the stock even harder convinced of the company’s eventual demise)

By 2003 – the headline in Amazon’s Q4 2003 Financial Statement Release led with the headline:

“AMAZON.COM ANNOUNCES RECORD FREE CASH FLOW FUELED BY LOWER PRICES AND YEAR-ROUND FREE SHIPPING” with a classic Jeff B quote of:

“Our commitment to year-round free shipping and lower prices continues to be a win-win for our customers and Amazon.com,”
said Jeff Bezos, founder and CEO of Amazon.com. “In addition to purchasing thousands of $29 DVD players this holiday season,
customers also bought Tibetan yak cheese, pomegranate molasses and zero carb cheese straws.”

2003 Revenue had just surpassed $5 Billion and Amazon was finally turning an operating income profit of under $300 Million (~5% of sales) and its first ever positive annual net income of a whopping $35 million (< 1 % of sales).   Amazon was now 9 years in and 7 years since going public.  It also announced it would begin repurchasing up to $500 million of it’s still current $2 billion of long term debt.

2005-2008

• Feb, 2005 – launches Amazon Prime
• by Dec 31, 2006 – 220,000 developers are using AWS (Amazon Web Services;  launched in 2002/2003)
• In 2006, launches Amazon Simple Storage Service (S3) and Elastic Cloud Computing (EC2)

Back to Jeff B’s 2013 and Historical Annual Shareholder Letters

I realize many of you may have already seen last week’s news story that prompted this post.   Others of you may have skimmed the actual letter itself.  In today’s fast paced world, I’m betting many of you may have missed the key points I’ve attempted summarized below.  The keys to business success are relatively straightforward and simple;  (1)  Vision and Passion (2) Customer Obsession and (3)  Long Term View.  That’s it.   Pretty simple and powerful.

Some quick summaries and my personal key take-away’s from the published shareholder letters.   I’ve added a few other letter’s along the way and some key metrics as bonus material.

1997 Letter

• We will focus relentlessly on our customers.  We will “Obsess Over Customers”
• We will continue to make bold (not timid) long term investment decisions vs. short term profitable one’s or short-term Wall St reactions.
• We will measure and learn from both our successes and our failures.
• We are prioritizing growth over profitability in order to achieve scale which is key to our business model
• Our success is dependent on attracting and motivating employees each of whom must think like, and act like, an owner

1997 key metrics:   Market cap =  $    Revenue = $150 Million     Net Income -$28 Million;    Debt = $75 Million;  Cash Equiv. Balance = $125 Million;  # Customers = 1.5 million;  # of Items Shipped = < 7 million;   # of Employees = 614

1999 Letter:

• served over 17 million customers in  150 countries
• sales of $1.6 Billion (up from 600M in 1998)
• Book sales fall slightly below 50% by end of 1999.   In 1997, they were 100% of sales
• Int’l Sales = 22% or $350 Million
• Worldwide Distribution Capacity (warehouses) grew from 300,000 sq. feet (1 large size Safeway warehouse) to 5 million square feet.
• Year 2000 Goals:  1) Grow and Strengthen Customer Relationships  2) Product and Service Expansion  3) Operational Excellence 4) Int’l Expansion

2000 Letter:

• Share price down 80% (Ouch!)
• 20 million customers; Sales of $2.6 Billion; Cash Equiv = $1.1 Billion;   Debt = $2.1 Billion;
• Avg. Spend per customer = $134
• Big “bold bets” in many investment areas including Living.com and Pets.com both of which shut down in 2000.

2004 Letter

• a 2 page diatribe education on free cash flow per share using a hypothetical company and spreadsheets embedded in the letter!
• More on Free Cash Flow Per Share as Amazon’s Key Metric
• $477 Million of Total Free Cash Flow in 2004
• Paid off $600 Million of previous $2.1B in long term debt

2004 key metrics:   Market cap =  $19 Billion;  Revenue = $6.9 Billion (44% Int’l);  Net Income = $588 Million (8-9% of revenue); Debt = $1.9 Billion; Cash Equiv. Balance = $1.8 Billion;  # of Employees = 9,000

2011 Letter

• The Power of Invention;  the most powerful and radical invention are those that empower others to unleash their creativity
• Examples = AWS, Fulfillment by Amazon, Kindle Direct Publishing;  powerful self-service platforms
• One of first inventions in AWS (the S3 simple storage service) now holds nearly 1 Trillion data objects;  1 billion objects added daily
• S3 avg’s 500,000 transactions per second with peaks of 1 million transactions per second
• KDP (Kindle Direct Publishers) allow authors to keep 70% of the revenue (vs. 17% avg with traditional books)

2013 Letter

• Customer-centric view = defining element of our culture
• Internally driven to “wow” customers and invent before we have to
• We don’t react to competition.  We react to our customers needs.
• We “Wow Customers” and “Put Customer First”
• We Surprise, Delight, and Earn Customer Trust

“Amazon, as far as I can tell, is a charitable organization being run by elements of the investment
community for the benefit of consumers,” writes one outside observer

Jeff’s response:  “…long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business
from those customers, even in new business arenas. Take a long-term view, and the interests of
customers and shareholders align”

“As proud as I am of our progress and our inventions, I know that we will make mistakes along the way – some will be self-inflicted, some will be served up by smart and hard-working competitors. Our passion for pioneering will drive us to explore narrow passages, and, unavoidably, many will turn out to be blind alleys. But – with a bit of good fortune – there will also be a few that open up into broad avenues. I am incredibly lucky to be a part of this large team of outstanding missionaries who value our customers as much as I do and who demonstrate that every day with their hard work.”

2013 key metrics:   Market cap = $124 Billion   Proj. 2013 Revenue = $75 Billion; Proj. 2013 Net Income = $675 M  (~1% of sales);    Debt = $4.5 Billion;  # of Employees = +88,000

In conclusion, it’s been nearly 18 years since Amazon sold their very first book.   Amidst all the early and loud negativity (huge losses, huge debt, layoffs and faltering market value), Jeff was eternally optimistic and the poster boy for the “long term view”.   Most importantly, he’s executed “long term” and taught us all valuable lessons along the way.  And “It’s Still Day 1!”

Jeff’s original 2013 letter > Amazon2012-1997-Shareholder Letter

amazonshareholderletters1997-2011  < Complete History of Jeff’s Annual Shareholder Letters