Breakneck spending on warehouses, logistics, data centers and content wasn't enough to stop Amazon.com (AMZN) from beating first-quarter earnings estimates. Not when its high-margin services revenue streams continued defying the law of large numbers.
Amazon reported Q1 revenue of $51.04 billion (up 43% Y/Y, and perhaps a low-30s percentage after accounting for the Whole Foods acquisition) and GAAP EPS of $3.27, handily beating consensus estimates of $49.92 billion and $1.24. Jeff Bezos's company also guided for Q2 revenue of $51 billion to $54 billion, slightly above a $52.21 billion consensus at the midpoint and (given Amazon's recent revenue beats) possibly conservative. Q2 operating income guidance is at $1.1 billion to $1.9 billion, which compares favorably with both year-ago operating income of $628 million and a $1.12 billion consensus.
And on the earnings call, CFO Brian Olsavsky made one of my 2018 Amazon predictions come true: He disclosed Amazon, which is three months removed from hiking Prime's U.S. monthly fee to $12.99, will be raising Prime's annual U.S. fee by $20 to $119. The hike is the first of its kind since 2014; it goes into effect for new members on May 11, and for renewals on June 16.
Shares rose 6.7% in after-hours trading to $1,620.00, making new highs in the process. Here are some key takeaways from Amazon's report and call:
1. Impressively, all 3 of Amazon's reporting segments not only beat consensus estimates, but saw revenue growth accelerate from Q4 to Q1. North American revenue rose 46% annually -- growth was likely a little below 30% after accounting for Whole Foods -- to $30.73 billion, as Prime and marketplace growth keeps driving e-commerce share gains. International revenue rose 34% (21% excluding currency swings) to $14.88 billion; European and Indian growth have been the main drivers for this segment. AWS revenue rose 49% to $5.44 billion, with Amazon stating the public cloud giant is seeing an "increased pace of enterprise migrations."
2. Also impressive: Amazon posted a 39.8% gross margin (GM), up from 37.2% a year ago and above a 38.2% consensus. The shift in the company's revenue mix from direct e-commerce sales to services streams (AWS, third-party seller services, Prime fees, ads) continues driving GM growth. And as indicated on the call, greater e-commerce and data center economies of scale are giving profit margins a lift. AWS's operating profit, it should be noted, grew 57% to $1.4 billion.
3. In addition to the margin growth, Q1 EPS got a boost from a relatively low 15% tax rate, and from $239 million in "other income" that stemmed largely from investment gains on stock warrants. Absent these factors, EPS would've still beaten consensus, but not to the same degree.
4. Once it fully goes into effect, the U.S. Prime annual fee hike could add another $1 billion or more in gross profit to Amazon's income statement, provided there aren't major cancellations (they seem unlikely, given Prime's value proposition). Amazon, which recently proclaimed it has over 100 million Prime members globally, was estimated by Cowen in January to have 60 million U.S. Prime members. After backing out those on discounted plans (e.g., students, consumers on government-assistant programs) or monthly plans, and accounting for continued member growth, Amazon might get 50 million or so annual Prime payments between June 2018 and 2019.
5. Spending growth remains torrid. Fulfillment spend rose 66% annually to $7.8 billion, marketing spend by 41% to $2.7 billion, tech/content spend by 40% to $6.8 billion and G&A spend by 34% to $1.1 billion. Direct capital spending (driven by warehouse/logistics investments) rose 44% to $3.1 billion. Capex involving capital leases (driven by AWS) rose a relatively modest 20% to $2.3 billion -- Facebook (FB) and Alphabet/Google (GOOGL) grew their data center capex at much faster rates in Q1 -- but this stems from the fact that such spending more than doubled in the year-ago period.
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6. Two core elements of Amazon's e-commerce flywheel -- Prime adoption and seller marketplace growth -- appeared to be spinning just fine in Q1 ahead of the Prime price hike. With the qualifier that each set of figures benefited some from accounting changes, Amazon's subscription services revenue grew 60% (56% exc. forex) to $3.1 billion, and its seller services revenue grew 44% (39% exc. forex) to $9.3 billion. In addition to Prime fees, subscription growth is benefiting from growing uptake for Amazon's Music Unlimited service, recently disclosed to have "tens of millions" of paid customers.7. Amazon's e-commerce ad business had a phenomenal quarter. After backing out an accounting change (certain ad services are now counted as revenue rather than a cost reduction) that had a $560 million impact, Amazon's "Other" revenue (dominated by ads) grew 72% to $1.47 billion, topping a $1.35 billion consensus. This fits with a report from ad firm Merkle indicating Amazon ad spend, buoyed by its site/app traffic growth and the tons of shopping data the company can leverage, soared in Q1 with the help of major ad price increases. For now, Amazon's ad growth doesn't seem to be doing too much damage to Google, whose clients of course include many firms that compete against Amazon or operate in other industries. But the effects of this rivalry certainly bear watching.
TheStreet's Eric Jhonsa previously covered Amazon's earnings report and call through a live blog.