Earnings

Amazon earnings: Strong sales, but costs are going up

Amazon earnings: Strong sales, but costs are going up
  • Q1 revenue: $75.5 billion (26% YoY, -14% QoQ, vs. $73.6 billion expected)
  • Q1 earnings: $2.5 billion (30% YoY, -24% QoQ, below expectations)
  • Q2 revenue guidance: $75.0 billion and $81.0 billion, in line with expectations

The big number: Amazon will spend the entire amount of operating profit it expects to record during the second quarter — at least $4 billion — "on COVID-related expenses getting products to customers and keeping employees safe," it said in a press release.

People are talking: "I think we've learned that it's easier to get ready for a Prime Day than it is to get ready for something like this, when it all hits at once," CFO Brian Olsavsky said on the earnings call.

Opportunities: Amazon has always been a company less concerned with profit than most of its peers, and the decision to invest all of its expected second-quarter operating profit into personal protective equipment, cleaner facilities, and higher wages for its retail army could buy it some goodwill. Demand for online retail should continue to be quite strong in the second quarter even if stay-at-home orders start to lift around the country.

And Amazon should be able to fulfil that demand: It hired 175,000 employees just in March and April. The company now employs 840,000 people, up 33% from last year.

On the cloud side, AWS continues to post impressive growth on a large number, recording $10.2 billion in revenue during the quarter, up 33%. Rivals Microsoft Azure and Google Cloud are growing faster, but estimates suggest their combined revenue tallies for the first quarter are well below AWS.

Threats: The second quarter might be the biggest test of Amazon's vaunted operational skills in its history.

"It's an odd quarter, because generally the biggest uncertainty we have is customer demand and what they'll order how much of it they'll order," Olsavsky said. "Demand has been strong, and the biggest questions we have in Q2 are more about our ability to service that demand with the products that people are ordering, in a full way."

On other fronts, advertising has been a greater focus for Amazon over the last few years, and it's going to be a rough few months for the advertising market. Amazon is less exposed to that problem than companies like Google or Facebook, but Olsavsky said the company did see a slowdown in advertising demand over the last few weeks of March, as well as "downward pricing pressure."

The power struggle: It will take a lot to displace Amazon from its perch atop the online retail market, but Amazon's ability to control the spread of the pandemic across its massive workforce — larger than the population of four U.S. states — will play as important a role in keeping its operations running as fancy AI algorithms or robotic distribution centers.

Amazon plans to spend $300 million procuring and administering COVID-19 tests for that workforce as part of the aforementioned $4 billion investment. Depending on how the pandemic fares over the course of the year, that effort could wind up costing the company $1 billion, according to reports. That means the company will continue to rely on AWS to generate the lion's share of its operating profit for the foreseeable future, which could give rivals an opportunity to reignite the cloud pricing wars of a few years back.

 Tom Krazit

Tom Krazit ( @tomkrazit) is Protocol's enterprise editor, covering cloud computing and enterprise technology out of the Pacific Northwest. He has written and edited stories about the technology industry for almost two decades for publications such as IDG, CNET, paidContent, and GeekWire, and served as executive editor of Gigaom and Structure.

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