Evercore ISI’s Ken Sena performs his analysis of Amazon’s Alexa business and computes its overall cost for 2016
Published By: Eunice Gettys on January 9, 2017 01:38 pm EST
Last week, Amazon.com, Inc.’s (NASDAQ:AMZN) voice assistant division Amazon Alexa demonstrated at the Consumer Electronics Show (CES) 2017 that it has a command in the space, overpowering rivals Alphabet, Apple, and Microsoft. However, the segment craves a lot of investment and costs; therefore, Evercore ISI analysed how much the Alexa spending would hurt the company’s bottom line.
After performing a deep drive on Amazon Alexa, Evercore ISI analyst Ken Sena found that the division’s cost might end up at as much as $330 million for fiscal year 2016. He expects a significant chunk of the cost to decline in the fourth quarter. Amazon is scheduled to report its fourth quarter and full-year financial numbers on January 26.
The equity research firm conducted a bottom-up analysis of personal costs associated to engineers and data scientists, Echo hardware sales subsidies, secondary services/storage cost, as well as compute/training hardware (GPUs) costs. It broke the overall cost down to $140 million in personal costs, $140 million in net hardware, $40 million in compute/training, and $10 million in Others.
Mr. Sena estimated a hardware expense of $140 million after taking into account the eight million device sales last year. He also incorporated gross margin on sales between -10% and -20%, which resulted in $140 million in consolidated segment operating income (CSOI) and total operating expenses contribution of $790 million.
For personal costs, he assumed a technical workforce of 300-400 employees with a ratio of developers/engineers to data scientis of about 3:1 or 4:1. Thus, this computes 75-80 data scientists at an annual salary of $1 million or above. This is how the analyst reached the $140 million amount. Interestingly, Alexa business’ human resource website shows 500 jobs openings.
Amazon uses its Alexa business to drive its core retail business and bolster functionality of its products, such as Amazon Echo and Amazon Fire TV. The company has reportedly sold five million Echo speakers up till now, as it works to connect it to other devices in houses to develop a stronger ecosystem.
