After the bell on Thursday, Amazon reported Q2 revenue of $63.4 billion (up 20% annually) and GAAP EPS of $5.22. Revenue beat a consensus analyst estimate of $62.52 billion, while EPS missed a consensus of $5.56.
And following a pretty strong July Prime Day event, Jeff Bezos' firm guided for Q3 revenue of $66 billion to $70 billion (up 17% to 24%), which compares favorably to a consensus of $67.28 billion at its midpoint. On the other hand, operating income guidance of $2.1 billion to $3.1 billion is below a consensus of $4.39 billion.
Amazon's shares finished after-hours trading down 1.7% to $1,941.15. Here are some notable takeaways from the company's earnings report and call.
1. Amazon's 1-Day Shipping Efforts Boosted E-Commerce Growth
Three months after Amazon disclosed it aims to make 1-day shipping the norm for Prime orders, the company reported its North American segment revenue rose 20% annually to $38.65 billion; that's above a consensus estimate of $37.28 billion, with growth accelerating from Q1's 17%. On the call, CFO Brian Olsavsky indicated the sales boost provided by the 1-day initiative was the biggest factor behind the North American acceleration.
International segment revenue, which remained pressured by the dollar's strength, grew 12% to $16.37 billion, slightly missing a consensus of $16.41 billion. On a constant currency (CC) basis, International growth improved slightly to 17% from Q1's 16%. Olsavsky noted International sales saw a limited impact from the 1-day effort in Q2, and will see a bigger impact in Q3.
Amazon also reported that its total "online stores" (direct e-commerce) revenue rose 14% to $31.05 billion, beating a consensus of $30.04 billion. Third-party seller services revenue, which carries higher margins, rose 23% to $11.96 billion, nearly matching consensus estimates.
One-day shipping might especially be driving stronger order growth for lower-cost items. Amazon's average selling price (ASP) per unit sale fell in Q2, while its paid unit accelerated to 18% from a Q1 level of 10%.
2. AWS Grew Strongly, But Missed Estimates
Following a Q1 in which it saw 41% growth, Amazon Web Services (AWS) segment revenue grew 37% in Q2 to $8.38 billion, missing an $8.49 billion consensus. The segment's operating profit rose 29% to $2.12 billion; that spells an operating margin of 25.3%, down a bit from a year-ago level of 26.9%.
When asked about AWS' performance, Olsavsky insisted all remains well for the public cloud giant, and noted tough comps (AWS revenue was up 49% in Q2 2018) impacted its growth. He also suggested AWS' operating margin pressure stemmed from a pickup in sales/marketing hiring and (to a lesser extent) stock compensation expenses, rather than price pressure.
Last week, Microsoft (MSFT) - Get Report reported its Azure cloud unit (AWS' biggest rival) saw revenue grow 64% annually during its June quarter, with stronger growth seen for the cloud infrastructure (IaaS) and developer platform (PaaS) services that compete directly against AWS. However, AWS, Azure and Alphabet's (GOOGL) - Get Report Google Cloud Platform (GCP) all still appear to be taking public cloud services share from rivals with less scale and small feature sets.
3. Shipping Expenses Grew Rapidly
1-day has a price: Amazon's global shipping costs rose 36% annually in Q2 to $8.13 billion, a much higher growth rate than Q1's 21%. This in turn was a key reason why Amazon's gross margin (GM), which has steadily risen in recent years thanks to the strong growth seen by high-margin services revenue streams, came in at 42.7%, below a consensus of 43.3%. GM still rose by 0.6 percentage points annually, but this was a much smaller rate of growth than Q1's 3.4-point increase.
Olsavsky disclosed the additional transportation costs needed to support the 1-day effort in Q2 were "a little bit higher" than prior guidance of about $800 million, and that Amazon also saw other cost/margin pressures such as "some additional transition costs in our warehouses." He added that costs related to the 1-day effort are expected to keep growing in Q3, and are baked into Amazon's guidance.
"[It] does create a shock to the system," he said about the 1-day effort. "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."
4. Spending in Other Areas Also Picked Up
Amazon's fulfillment spend rose 17% to $9.27 billion, after having grown 10% in Q1. Marketing spend -- boosted by AWS hiring as well as ad spending to promote hardware and international Prime Video content -- grew 48% to $4.29 billion, up from a Q1 clip of 36%. Tech/content spend rose 25% to $9.07 billion, slightly up from a Q1 clip of 23%. And general & administrative (G&A) spend grew 14% to $1.27 billion, up from a Q1 rate of 10%.
Direct purchases of property and equipment, which is driven in large part by warehouse capital spending, grew just 10% to $3.56 billion. However, purchases of property and equipment via capital leases, which is driven by AWS capex, grew 42% to $3.31 billion, after having grown just 16% in Q1.
Amazon's headcount rose 13% annually to 653,300, with Olsavsky stating headcount for technical workers grew twice as fast.
5. Amazon's Revenue Mix Shift Towards Services Continues
Amazon's total product revenue rose 13% annually to $35.86 billion, while its total services revenue rose 31% to $27.55 billion.
In addition to seeing 37% AWS growth and 23% seller services growth, Amazon saw its subscription services revenue -- driven in large part by Prime membership fees, but also getting contributions from businesses such as Music Unlimited and Prime Video Channels -- rise 37% to $4.68 billion. And its "Other" revenue, which is now dominated by ads, grew 37% to $3 billion.
TheStreet's Eric Jhonsa previously covered Amazon's earnings report and call through a live blog.