- Amazon reported first-quarter profits on Thursday that handily beat Wall Street’s expectations.
- But it warned that its second-quarter bottom line would most likely come in far below analysts’ estimates.
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Wall Street had heady expectations for Amazon’s first-quarter profits. Amazon topped them.
But the company warned that it wouldn’t have such happy news next quarter.
The retail and cloud-computing giant on Thursday reported earnings per share of $7.09. That’s about 50% higher than what analysts were expecting.
But it warned that its revenue and earnings for the second quarter could fall shy of analysts’ estimates. In the case of its bottom line, the shortfall could be dramatic. The midpoint of the range the company provided for its second-quarter operating profit was $1.2 billion below what analysts had previously expected.
For investors, that disappointing forecast seemed to temper their excitement over Amazon’s outstanding first-quarter earnings. In recent after-hours trading, the company’s stock was up a modest $28.01, or about 1%, to $1,930.26 a share.
Here’s what the company reported and how it compared with Wall Street’s expectations and Amazon’s prior-year results:
- Q1 revenue: $59.7 billion. Analysts had forecast $59.68 billion. In the same period a year ago, Amazon recorded $51.04 billion in sales.
- Q1 EPS (GAAP): $7.09. Wall Street had predicted earnings per share of $4.67. The company posted a profit of $3.27 a share in the first quarter last year.
- Q2 revenue (company guidance): $59.5 billion to $63.5 billion. Analysts had previously forecast sales of $62.37 billion for the period. In the second quarter last year, Amazon brought in $52.9 billion in sales.
- Q2 EPS (guidance): The company didn’t offer earnings guidance but said it expected to post an operating profit of $2.6 billion to $3.6 billion. Before the report, analysts were predicting it would post an operating profit of $4.2 billion and earnings per share of $6.34. The e-commerce giant posted operating income of $3 billion and per share earnings of $5.07 in the same period of 2018.
Amazon’s stock closed regular trading up $0.50, or less than 1%, to $1,902.25.
AWS’s revenue growth topped 40% yet again
The company’s results were boosted again by its Amazon Web Services cloud-computing business, which has been helping drive Amazon’s growth over the past several years. Accounting for foreign-exchange fluctuations, AWS’ sales jumped 42% in the period from the first quarter last year to $7.7 billion. AWS has grown at an annual clip of between 40 and 50% since the first quarter of 2017.
The cloud-computing unit posted an operating profit of $2.2 billion in the period, up 59% from the year-ago quarter. AWS accounted for about half of Amazon’s total operating income for the first quarter.
The company’s North American business also posted a solid quarter. The unit posted sales of $35.8 billion, up a relatively modest 17% from the same period last year. But its operating income nearly doubled over the same time frame to $2.3 billion.
Amazon’s big earnings outperformance, though, largely came from holding the line on its biggest expenses. While the company’s overall revenue grew 17% from the first quarter last year, its cost of sales, which includes the wholesale prices it pays for the products it sells to consumers, grew by just 10%. Likewise, its fulfillment and general and administrative costs grew by just 10%.
On a conference call with analysts, Brian Olsavsky, Amazon’s chief financial officer, said that Amazon invested heavily in its fulfillment and data centers in 2016 and 2017. It has since been waiting for its business to catch up with the capacity it created then, he said.
The company expects to ramp up such spending starting in the second quarter, he said. Since Amazon launched its Prime subscription service, one of the offering’s key features has been free two-day shipping on many items in the company’s store. Amazon plans to instead offer free one-day shipping as a default standard on those items, Olsavsky said. In connection with that change the company expects its expenses to increase incrementally by $800 million in the next quarter, he said.
“We’re taking a significant step,” he said, adding, “it will take us time to achieve.”
Amazon’s ad business saw a slowdown
But Amazon’s first-quarter results also included some disappointing nuggets. One big one is that its advertising business, which had been growing exceptionally, saw a marked slowdown in its growth in the quarter.
The company posted $2.7 billion in the first quarter of “other” revenue, a category that largely consists of its advertising sales. That amount was up 36% from the same period a year earlier, excluding foreign exchange changes.
That’s a healthy growth rate, but it’s dramatically lower than what Amazon was recording as recently as the fourth quarter last year. In the holiday period, its “other” revenue grew by 97% on an annual basis. And in the first three quarters of last year, Amazon’s “other” revenue grew by more than 100% annually.
On the call, Olsavsky said the “other” category included items other than just advertising. Amazon’s ad business actually grew “a bit” faster than the 36% rate for the entire “other” area, he said, but he did not specify the rate of growth. Despite questions from analysts, Olsavsky declined to offer an explanation for the slowdown in advertising revenue growth or whether analysts and investors should expect it to continue to grow at this rate going forward.
Part of the explanation for the decline in growth rates has to do with an accounting change Amazon adopted last year. Before the accounting change, the company classified some advertising revenue as a reduction in the cost of its sales. After the accounting change, it recognized the revenue as part of its “other” revenue category. The effect was a one-time boost last year in its reported revenue and growth rates for the “other” category.
Because this year’s “other” revenue numbers directly compare with last year’s, the year-over-year growth rates haven’t been artificially boosted by the accounting change. Without that accounting boost, Amazon’s “other” revenue would have grown by 38% in the fourth quarter last year, or only marginally higher than the rate it posted in the first quarter, an Amazon representative told Business Insider in an email.
Still, even taking the accounting change into account, the company’s ad sales have slowed dramatically over time. As recently as the third quarter last year, Amazon’s “other” revenue grew at a 51% rate without the accounting-change boost, according to the Amazon representative. On the same basis, the “other” category grew by 74% in the first quarter last year, the representative said.
Other areas of Amazon’s business also posted what could be considered disappointing results. Its direct e-commerce business, where it sells goods directly to consumers through its website, grew by 12%, excluding currency fluctuations, to $29.5 billion. Meanwhile, the sales it generates from Whole Foods and its other physical stores grew by just 1% to $4.3 billion.
And its international segment grew by 16%, excluding foreign exchange changes, to $16.2 billion. As recently as the second quarter last year, that business was consistently growing at a rate faster than 20% annually.
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