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- Amazon released a disappointing earnings report Thursday.
- Its second-quarter profit was below Wall Street’s expectations, and it announced that it expected its operating income in the third quarter will likewise fall short of analysts’ projections.
- Amazon Web Services, the company’s cloud business, posted its slowest growth rate in more than five years in the period.
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Amazon’s bottom line soared last year in part because it deferred some spending.
The company’s second quarter report Thursday showed that its costs – particularly for its new one-day shipping service – are now catching up with it.
Thanks to a jump in expenses, the e-commerce giant posted a profit for the second period that was well shy of Wall Street’s expectations and warned that its bottom line for the third quarter will also be significantly below forecasts. To add insult to injury, the company’s cloud computing unit posted its slowest revenue growth in at least five years and also fell shy of analysts’ projections.
“We had some lessening of expenses in some key areas last year,” Brian Olsavsky, Amazon’s chief financial officer, said on a conference call with analysts.
He continued: “We expected a step up in 2019. We didn’t see as much of it in Q1 … We’re seeing more of it in Q2, and well see it through the remainder of year.”
Investors sold the shares on the news. In recent after-hours trading, the company’s stock price was down $30.90 a share, or 1.6%, to $1,942.92.
Here’s what the company reported and how it compared with analysts’ projections and the company’s year-earlier results:
- Q2 revenue: $63.4 billion. Analysts were looking for $62.5 billion. In the same period last year, Amazon posted $52.9 billion in sales.
- Q2 AWS revenue: $8.4 billion. Analysts had forecast $8.5 billion. In the same period last year, the cloud-computing unit recorded revenue of $6.1 billion.
- Q2 EPS: $5.22. Wall Street had predicted $5.56. The company earned $5.07 in the second quarter of 2018.
- Q3 revenue (guidance): $66 billion to $70 billion. Wall Street had previously forecast $67.2 billion. Amazon recorded $56.6 billion in third-quarter sales last year.
- Q3 operating income (guidance): $2.1 billion to $3.1 billion. Analysts had projected an operating profit of $4.3 billion for the period. In the same period a year ago, the company posted operating income of $3.7 billion.
- Q3 EPS (guidance): Amazon didn’t offer specific earnings guidance. But its forecast for operating income implies a earnings per share range of $4.11 to $6.28 for the quarter, assuming its tax rate, share count, interest income and expenses, and other, non-operating expenses remain the same. Analysts, by contrast, had projected $6.61. The company posted a profit of $5.75 a share in the same period a year ago.
Amazon’s shares closed regular trading down $26.99, or 1.4%, to $1,973.82. At the end of the session, though, the stock was still up more than 4% since its last earnings report in April.
Amazon Web Services is slowing down
The company has benefited greatly in recent years from the growth of Amazon Web Services, its cloud-computing business. In the second quarter, AWS again accounted for a disproportionate share of Amazon’s operating profit. The business posted operating income of $2.1 billion in the period, or more than two-thirds of the company’s total operating profit.
But for the second period in a row, AWS’s sales growth slowed, this time to below Wall Street’s estimates. In the second quarter, the business’ revenue grew by 37% from the same period a year earlier. That was down from a 42% annual rate in the first quarter, a 46% rate in the fourth quarter last year, and a 49% rate in the second quarter last year.
The just-completed quarter also was the first quarterly period since at least 2013 that Amazon’s cloud-computing unit had grown at an annual rate of less than 40%.
The slowdown was due in part to the comparison with the strong growth rates AWS posted in the first half of last year, Olsavsky said on the call with analysts. Some of the unit’s customers saw a big jump in their user of the service during the year-ago period, which helped increase AWS’s revenue then. But Amazon isn’t worried about the drop in the segment’s sales growth, because it continues to see increasing adoption of its services by its customers, he said.
“We’re very happy with the growth,” Olsavsky said.
Other parts of Amazon’s business showed signs of a pick-up. Sales through its online stores grew by 16% in the second quarter, excluding the effects of foreign exchange fluctuations. That was the fastest rate by which its e-commerce business had grown since the fourth quarter of 2017.
And both Amazon’s North American and international businesses grew at a faster pace than they did in the first quarter. The North American unit grew by 20% from the same period a year ago to $38.7 billion. That was up from a growth rate of 17% in the first quarter. Its international business grew by 17%, excluding foreign currency changes, to $16.4 billion. In the first quarter, that segment at a 16% annual clip, excluding such fluctuations.
Amazon’s costs are rising
But the company’s bottom line was weighed down by increased expenses. As part of Amazon’s first-quarter earnings call, Olsavsky had warned that the company would see some $800 million in increased expenses related to its move to offer free one-day shipping on many items for members of its Prime subscription service. The incremental increase in costs ended up being even greater than that, he said Thursday. The cost of buying inventory for the one-day shipping program and moving it around to distribution centers so that it was relatively close to customers was more than Amazon expected, Olsavsky said.
The company will incur a similar increase in costs in the third quarter as it increases the number of items it has available for one-day shipping and expands the program outside of the US, he said. He declined to give a specific incremental expense number, but said it will be “near” the $800 million figure the company expected in the second quarter.
Making such a significant move in its shipping offering “does create a shock to system,” Olsavsky said. “We’re working through that now. We expect we’ll be working through that for a number of quarters, but when the dust settles, we will regain our cost efficiency over time.”
But it’s wasn’t just the one-day shipping program that weighed on Amazon’s results. The company significantly ramped up its marketing, with those expenses jumping 48% to $4.3 billion. A big part of that was devoted to promoting its AWS business, Olsavsky said.
Meanwhile, the company is boosting its headcount and spending on infrastructure for AWS after holding the line on such costs last year, he said. The company’s headcount grew by 13% in the second quarter.
Meanwhile, the amount it spend acquiring property and equipment under finance leases – a kind of proxy for its infrastructure spending – jumped 41% in the quarter from the same period last year to $3.3 billion. In the first quarter, that figure grew by just 16%. All last year, the comparable figure grew by only 10%.
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