Three months after outperforming Q1 earnings expectations with a record $3.6 billion net income, Amazon saw net income drop to $2.6 billion, putting an end to a record profit streak of four straight quarters. While the company’s stock has reacted negatively to the news, dropping more than 2%, it is very clear that the profit hit is directly related to the more than $800 million spent on expanding Amazon’s one-day delivery capabilities in Q2.
“The story on everyone’s mind is the below-expectations earnings on the quarter,” said Chris Perry, Insights Manager from Edge by Ascential in commentary provided to Retail TouchPoints. “This appears to very much be a short-term trade-off for Amazon, which indicated on its earnings call that the investments in one-day delivery during the quarter did weigh on profit but also contributed to above expected sales growth in its retail business. While it is too early to say what exact differences occur in shopper behavior with widely available free one day delivery, it is clear that a new consideration set of items is created when a shopper can receive them at this enhanced speed.”
The massive infrastructure investment will leak over into Q3’s expected profit totals. Amazon now forecasts Q3 operating income in the range of $2.1 billion to $3.1 billion, far lower than FactSet’s initial estimates of $4.4 billion.
Despite Profit Hit, Revenue Growth Continues
Although Prime Day revenue totals won’t be included until Q3 earnings are announced in three months, Amazon is still having no trouble bringing in the sales. Total revenue for Amazon jumped 20% from the year-ago period to $63.4 billion, surpassing Refinitiv estimates and rebounding from 16.8% growth in Q1.
Revenue from Amazon Web Services (AWS), the cloud service that has been a massive growth driver (and chief profit driver) for the e-Commerce giant, gained 37% to $8.38 billion, below the $8.5 billion anticipated by FactSet.
In the “Other” category, which includes Amazon’s increasingly important online advertising business, revenue climbed 37% to $3 billion. Advertising and marketing are clearly becoming larger focal points of the Amazon brand going forward — marketing expenses grew 48% year-over-year to $4.3 billion in Q2, more than 20% higher than the next highest expense area for the company.
“With Prime Day investments nearing the presentation levels of Alibaba’s Singles Day 11.11 Global Shopping Festival, with concerts and experiences above and beyond the promotions themselves and the increasing number of products/services within their ecosystem to support, it’s not surprising to see their marketing spend increase vs. their 2018 investment levels,” Perry said. “It is not illogical to see the correlation between greater marketing investment and overall general performance in revenue/net sales growth.”
Beyond its earnings report, Amazon now must deal with regulatory scrutiny, particularly as U.S. and EU antitrust officials launch investigations into the company’s business practices. Amazon CFO Brian Olsavsky would not comment on the antitrust concerns during the earnings call.