Last quarter, when Amazon reported otherwise respectable earnings, the market hammered the stock after AWS growth slowed again and Amazon guided to the lowest revenue growth since 2001, despite broadly higher margins. And, as the company reported moments ago, while its guidance may have been slightly downbeat, it wasn't too far off as Amazon reported Q1 net sales of $63.4BN, above the $62.46BN consensus estimate, while generating $5.22 in Q2 EPS, missing the $5.56 expected.
Here are the summary Q2 highlights:
- Earnings per share of 5.22$, missing expectations of 5.56, but up from $5.07 in 2Q 2018
- Sales of $63.4 billion, above expectations of $62.4 billion, and also up 20% YoY from $52.8 billion
- Operating income of $3.08 billion, missing expectations of $3.7 billion, and just up from $2.9 billion
- AWS sales of $8.381 billion, also missing the $8.5 billion expected, but up from $6.1 billion
While AMZN missed on most of Q2 metrics, the good news here is that Q2 revenue did come in higher than sellside expectations, rising 20% in Q1, and looking ahead, the recent top line slowdown is expected to moderate, as the company now expects Q3 net sales between of $66BN and $70N, with the midpoint of $68BN ,coming in just above the Wall Street consensus estimate of $67.22BN. If revenue comes in right on the midpoint, it would represent another modest rebound from recent lows, rising 20.2% in Q3.
But if the company's top line guidance was the good news, its profit outlook was not, as Amazon’s guidance for Q3 profit came in well below analyst expectations with the company expecting to make just $2.1 billion to $3.1 billion in operating income, well below the Wall Street analyst estimate of $4.3 billion.
More bad news: after the company's profit margin nearly doubled to an impressive 7.4% in Q1 2019, largely thanks to the increasing contribution from AWS, in Q2 profit slumped again, and the profit margin of 4.9% was the lowest going back to Q1 2018.
Another negative: after the company's international loss shrank to just $90MM in Q1 2019, it once again swelled, rising to $601 million in Q2.
It is also worth noting that Amazon's North American retail business, which for years was reaping the rewards of massive investment in logistics facilities, appears to have topped: in Q2, Amazon’s Amazon’s North American retail segment posted $1.5BN in operating income, down from $1.8BN Y/Y. That was the first year-on-year decline since Q3 2017.
Meanwhile, the all important Amazon Web Services was once again responsible for more than half of Amazon's entire profit, with the division generating $8.381BN in revenue (below the $8.5BN expected), and up from $7.7BN in Q1, generating $2.12 BN in operating income, a 25.3% operating margin, down from $2.22BN in operating income in Q1, and sharply lower from the 28.9% margin reported last quarter. Even so it was responsible for 69% of the company's total operating income of $3.08BN.
But even more concerning was the slowdown in AWS revenue, which rose just 37%, down from 49% a year ago and down from 42% last quarter. As Bloomberg puts it, AWS’s growth rate of 37% continues to slow as the business grows, "but it’s still a cash machine."
To summarize, AWS revenue growth:
- Q1 2018: 48%
- Q2 2018: 49%
- Q3 2018: 46%
- Q4 2018: 46%
- Q1 2019: 42%
- Q2 2019: 37%
And AWS operating margin:
- Q1 2018: 25.7%
- Q2 2018: 26.9%
- Q3 2018: 31.1%
- Q4 2018: 29.3%
- Q1 2019: 28.9%
- Q2 2019: 25.3%
Putting all of Amazon's sales in context, the one thing that sticks out is the continued slowdown in AWS, which just saw its slowest quarterly growth on record, and while US retail sales growth posted a rebound, the associated profit margin was depressed, resulting in the first North American profit drop in two years.
Commenting on the decline in margins, Moody's Amazon analyst Charlie O'Shea said that investments in next day Prime Delivery compressed North American margins, but he said this is an example of "short-term pain for long-term gain, and is a necessary strategy to compete with brick-and-mortar’s speed advantage to the customer.”
"North America performance ex these investments held up very well in an acutely competitive and promotional environment, with the $200 million drop in margin much less than these strategic investments in delivery."
Meanwhile, “liquidity remained very robust at $40 billion in cash plus marketables, providing Amazon with significant financial flexibility to execute virtually any type of increased investment activity with little overall credit impact.”
As for Amazon's fledgling advertising business, CFO Olsavsky said that there's "a big slowdown in advertising" from the previous year due to some accounting changes that will persist through the year, but he assured investors that the business is performing well.
Looking at the rest of Amazon's business, Q2 marked two years since Amazon announced it was buying Whole Foods Market. Alas, as Bloomberg notes, the read on how the grocer is performing under Amazon remains murky. Whole Foods accounts for almost all of the sales in Amazon’s “physical stores” segment. That was $4.33 billion, barely changed from $4.31 billion a year ago, with razor thin margins. "Complicating matters, that total does not include online orders from the dozens of markets where Whole Foods stores serve as grocery delivery depots."
And while Amazon reported strong revenue and an impressive sales outlook, the reason why the stock is sharply lower is due to the disappointing profit outlook, suggesting continued big spending on delivery which pressures margins, and the ongoing slowdown in AWS, which in turn according to BBG, is worrying investors that "it is returning to a big spending cycle to fuel faster deliveries in the face of greater competition."
Perhaps realizing that it needs to focus much more carefully on costs, Amazon announced labor initiatives, pledging to upskill 100,000 of its employees across the U.S. by 2025, dedicating over $700 million to provide employees across its corporate offices, tech hubs, fulfillment centers, retail stores, and transportation network with access to training programs that will help them move into more highly-skilled roles within or outside of the company.
But before Amazon's army of underemployed workers hears you complain about the company's less than stellar numbers, for those still concerned about AMZN's cash burn, here is an update on the company's reported LTM Free Cash Flow in Q2 of $25.02 billion, a new all time high.
Meanwhile, as noted above, after surging for several quarters, Amazon's operating margin suddenly hit a brick wall, as a result of slowing AWS growth and greater spending on US retail, and in Q2 slumped from 7.4% to just 4.9%, a one year low.
The stock, for those who don't have a screen in front of them, tumbled as much as $100 to $1,900 after hours, before recovering some losses.