Amazon Q2: Why Is Net Unearned Revenue Negative?
Summary
Amazon's net unearned revenue was negative for the first time since Q4 2013.
What caused the negative net unearned revenue was the drastic slowdown in additions to unearned revenue growth.
Because unearned revenue is a forward indicator, the growth decline suggests that either Prime or AWS will be slowing down in the near future.
What's really surprising after Amazon's (AMZN) Q2 earnings is that no one, not one Wall Street analyst, not one financial commentator, not one Seeking Alpha contributor (except for us), commented on the negative net unearned revenue in this quarter.
What is unearned revenue and why is it important? Here are some brief explanation from our previous Editor's Pick article:
...Due to accrual accounting, revenue can only be recognized during the period in which it is earned. That means any Prime membership fee or AWS booking fee cannot be fully booked as revenue in the period in which the sale is made..."Unearned revenue is recorded when payments are received in advance of performing our service obligations and is recognized over the service period. Unearned revenue primarily relates to prepayments of Amazon Prime memberships and AWS services." - Amazon 2016 10-K...Additions to unearned revenue include cash received for services not yet performed, while amortization of previously unearned revenue represents the revenues actually booked in the period in which the service is rendered......Much like how backlog is a forward indicator of an industrial company's revenue, unearned revenue represents future revenues for the company and should be emphasized when analyzing the company's actual growth. Furthermore, unearned revenue represents cash inflows to the company, therefore it is critical for valuing the company using DCF......As Prime membership and AWS users increase, the portion of unearned revenue, as a percentage of Amazon's overall revenue, has increased, making it a more important measure of Amazon's true revenue as time goes on...
For the first time since Q4 of 2013, net unearned revenue was negative:
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