• Amazon disclosed in its quarterly filing that its allowance for doubtful accounts jumped $400 million last quarter.
  • The balance is an estimate of contracts that Amazon believes its customers won’t be able to pay for.
  • The increased balance in allowance for doubtful accounts is primarily related to Amazon Web Services, the filing said.
  • It’s another sign that companies are feeling pressure in their cash balances as the coronavirus recession continues.
  • Visit Business Insider’s homepage for more stories.

Amazon estimates its customers won’t be able to pay for $400 million worth of contracts from last quarter as the coronavirus outbreak portends a deep recession and slow economic recovery.

In its quarterly report filed Friday, Amazon wrote that its allowance for doubtful accounts, or the portion of contracts its customers may be unable or unwilling to pay for, jumped about $400 million last quarter. It added in a section discussing COVID-19’s effects on its business that the increased balance is largely related to Amazon Web Services customers.

“In addition, the allowance for doubtful accounts receivable increased, primarily in the AWS segment,” Amazon wrote in its filing.

The change is another sign that Amazon’s cloud customers are feeling the pinch as the coronavirus outbreak puts a deeper strain on the economy. While some cloud customers pay cash up front for their contracts, many companies still prefer to pay at the end of the month or year based on the amount they used.

But when business slows, companies may decide to defer cash payments — or simply not pay them entirely.

Dan Ives, an analyst at Wedbush Securities, said the trend may not be a big concern yet but could become more common in the recessionary environment. The impact could be more pronounced for AWS because Amazon’s cloud service is considered more popular among cash-sensitive small businesses compared with other cloud providers.

“It’s not a red flag in itself, but speaks to a growing worry of investors around the health of enterprises, especially SMBs in this dark, COVID economic storm,” Ives told Business Insider.

An Amazon representative declined to comment for this story.

Deep economic downturn

Allowance for doubtful accounts, or bad-debt expenses, are a part of the balance sheet that records the amount of revenue the company doesn’t expect to collect in cash. In other words, it’s the company’s best estimate of deals that won’t be paid by customers. Companies typically create this reserve balance based on past payment history and the market environment and write off from it when cash is officially determined uncollectible. 

The increase in balance is recorded as an operating cost during the quarter. Amazon Chief Financial Officer Brian Olsavsky said during Thursday’s earnings call that about $400 million of Amazon’s cost was related to “increased reserves for doubtful accounts.”

For AWS, a few hundred million dollars in lost cash is a drop in the bucket. In the first quarter, AWS had $10.2 billion in revenue, meaning Amazon’s total amount of doubtful accounts is less than 4% of its cloud sales. It may be one reason that AWS is less flexible on payment terms than other cloud providers, The Information and Bloomberg previously reported.

During Thursday’s call, Olsavsky highlighted AWS’s $41 billion revenue run rate and 33% growth from last year. He added that AWS continued to see strong growth in the videoconferencing, gaming, and entertainment industries, but slower demand in areas like hospitality and travel. “I think there’s going to be a mixed bag on industries,” he said.

Still, Rob Sanderson at Loop Capital wrote in a note Thursday that Amazon’s higher doubtful account reserve could be the “tip of the iceberg” as the US economy faces a deeper economic downturn amid the pandemic.

In fact, other companies, like Alphabet and Facebook, are starting to sound the alarm on future cash collections as well. Alphabet, whose doubtful-allowance balance grew over $400 million last quarter, wrote in its filing that the continued market volatility caused by COVID-19 may have a “material impact on our allowance for credit losses in future periods.” Facebook also said in its filing that it faced “increasing uncertainties around our estimates of revenue collectibility and accounts receivable credit losses.”

“Economic recession comes with some amount of business failure, naturally,” Sanderson told Business Insider.

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