Amazon Smashes Earnings Projections

After the bell on Thursday, Amazon (AMZN) reported a top- and bottom-line beat with its first-quarter earnings results. Revenues of $59.7 billion (up 17% year over year) edged past the consensus of $59.65 billion, and earnings per share of $7.09 (up 116% year over year) smashed expectations of $4.72. In addition to the headline results, operating income of $4.4 billion (up 131% year over year) came in well ahead of the $3.1 billion analysts were looking for

Before we get into the results, let's take a look at financial guidance for the second quarter. Net sales are expected to be between $59.5 billion and $63.5 billion, representing growth of between 13% and 20% year over year. This guidance includes an unfavorable impact of approximately 150 basis points from foreign exchange, which is a slight improvement from the 210-basis point headwind management expected for the first quarter. At a midpoint of $61.5 billion, management's guidance is once again light compared to the $62.3 billion consensus view. The company also expects second-quarter operating income to be between $2.6 billion and $3.6 billion. At a midpoint of $3.1 billion, management's guidance is short compared to the $4.1 billion analysts were looking for.

To help understand why management's operating income is light, let's refer back to previous guidance because it helps tell a more complete Amazon story. On the last call, management guided for operating income between $2.3 billion and $3.3 billion -- a "miss" vs. expectations -- broadly citing increased spending and investments throughout 2019. Well, the step up in investment did not happen in the first quarter as it was previously thought, allowing the company to enjoy a continuation of the same efficiencies it had in 2018 and deliver massive outperformance in operating income. As management explained on the call, the increased spend they planned to do will still happen this year, however it will be over the next three quarter. This is included in second-quarter guidance. In our best effort to deliver an apples-to-apples comparison because Amazon does not provide full year guidance, when we take the operating income figure from the first quarter (+$4.4 billion) and add this to the second quarter midpoint guidance figure of $3.1 billion, the $7.5 billion first half operating income result/guidance is still a beat against a $7.3 billion analyst forecast. That's why we believe investors should feel comfortable with the light second quarter guide.

Now, in the second quarter, management has factored in approximately $800 million of incremental spend related to the company's latest innovation. Get ready, because Amazon is evolving its already popular Prime Free 2-day shipping program into a Free 1-day shipping program. This news is another example of Amazon's commitment to offering the best possible experience for its customers. They are literally planning to cut the time it takes to ship the vast majority of their products in half, reshaping the industry gold standard they previously set. It's like Amazon is outbidding themselves with this project, and they can do this thanks to the 20-year head start they have made in Logistics, Fulfilment capacity, and partner networks. That's the type of customer obsession CEO Jeff Bezos talked about in his 2018 shareholder letter. Once implemented, it is reasonable to expect an uptick in deliveries as customers leverage the convenience of Amazon. Naturally, more deliveries will also mean more returns, an outcome that could lead to additional foot traffic in Kohl's stores thanks to the nationwide expansion of the return program that was announced earlier this week

Shares of AMZN were trading slightly higher to about $1,911 in after-hours trading after rising by 2.18% week to date.

The Amazon press release also highlights many of the company's recent achievements. For a full list, please see the company's press release here.

Before getting into each segment's results, let's look at how Amazon did by geography. Total North America sales were $35.812 billion, increasing 17% year over year when excluding FX. That's a small beat against the $35.112 billion consensus. Operating Income in the segment came in at $2.287 billion, also beating expectations which were $1.517 billion.

Total International net sales in the quarter were $16.192 billion, a slight miss against the $16.46 billion consensus. While e-commerce changes in India were a headwind, the company only needed a few days of downtime and was able to make the necessary changes to keep the impact minimal. The operating losses held up well in the quarter too, as the company achieved 90 million in loss against a -605 million consensus. 

While unit growth of 10% was the slowest rate the company has seen, keep in mind that this figure excludes the company's fastest growing businesses -- AWS, advertising, and subscription services, which management pointed out will cannibalize the unit calculations. Management still believes this metric is meaningful, but CFO Brian Olsavsky said "it needs to be understood and caveated."

Online Stores and Physical Stores (Retail)

At Online stores, the heart of Amazon's e-commerce business, revenues in the quarter were $29.498 billion, topping the $29.289 billion consensus. In the quarter, sales increased 12% year over year when excluding FX, a slight deceleration from the prior quarter's 14% pace.

At Physical Stores, which is Amazon's business that includes items that customers physically select in stores (principally Whole Foods, but excludes online and delivery Whole Foods sales so a bit skewed), revenue was $4.307 billion in the quarter, short of the $4.394 billion consensus. However, this result represented a 1% increase year over year excluding FX, an improvement from the 3% decline in the prior quarter.

Amazon Web Services

At Amazon Web Services, revenue of $7.696 billion edged the expectation of $7.691 billion. Sales grew 42% year over year excluding FX, a deceleration from the 46% rate of the previous two quarters. While the pace of sales can be lumpy at times due to differences in sales cycles (which could explain the slowdown), its hard not to have an appreciation for this fast growth rate and the $30 billion run-rate size of the company. AWS Operating Income came in at $2.223 billion, increasing 59% year over year and beating the consensus of $2.166 billion. The operating margin of AWS dipped slightly quarter to quarter to 28.9% from 29.3%, however, this rate is still a huge 320 basis point improvement from the 25.7% the business did in the same quarter one year ago. Now you know why Amazon has had terrific earnings power over the past year and change, and AWS still has plenty more runway for growth.

Subscription Services

In subscription services, which includes annual and monthly fees associated with Prime, audiobook, e-book, digital video, digital music, and more, revenues increased 42% year over year when excluding FX (an acceleration from the prior quarter's 26% rate) to $4.342 billion. This result was solid beat compared to the $4.027 billion consensus. During the call, management reminded investors that it had more people sign up for Prime in 2018 than any other year before. Furthermore, they commented that all of the Prime Benefits (Free Two-Day Shipping soon to be One-Day, Video, Music, etc) are trending in a positive direction and are becoming more "sticky." This comment sent shares higher after hours.

Third-party Seller Services

In this segment, which includes commissions and any related fulfilment and shipping fees, and other third-party seller services, sales were $11.141 billion. This slightly missed the expectation of $11.335 billion and represented year over year growth of 42% when excluding FX.

Other (Primarily Advertising Services and Other Service offerings)

Sales in "Other" was $2.716 billion and came in short of the $2.863 billion consensus. This segment's year over year growth rate slowed to 36% when excluding FX, representing a sharp deceleration on a reported basis from prior quarters. However, it appears that it's only a slowdown of two percentage points when you factor in the impact of an accounting change. Management also reminded investors on the conference call that Advertising isn't the only business within this division, and Advertising actually grew at a higher rate compared to the reported number.

Overall, this was a solid result for the company given some of the e-commerce concerns (such as in India) explained one quarter ago. There will always be puts and takes with a company of this size and guidance appears light once again, however, we believe it is more beneficial to take a more holistic view at the moment. The reason for this is that the company pushed out its investment spend by one quarter, allowing them to enjoy the benefit of their steep efficiencies and "earnings spicket" for one quarter longer at the detriment of second quarter results. But remember, when we compare first half guidance with first half estimates, Amazon is still outperforming expectations. Then when we extend our time frame even longer, we struggle to find a more attractive story in the business world as we are reminded of the explosive, secular growing, high-margin business of AWS, the continued success from Advertising and Subscription Services, and the most dominant e-commerce platform on the planet that is once again out-innovating itself with its plan for Free 1-Day Shipping.