Marketplace Sellers Drive Amazon’s Q2 Profit Train

Another quarterly earnings reports, another rush of pleased Amazon investors hurrying to boost the stock in after-hours trading  Amazon stock jumped 4.1 percent in after-hours trading, despite notching the rare miss on revenue expectations. Profit expectation doubled analysts’ forecasts, which helped instill confidence, as did continued strength in the Amazon Web Services business and emerging strength of its advertising business.

Moreover, R.J. Hottovy, a consumer equity strategist at Morningstar Inc., noted that market watchers were also pleased to see the amount of commerce action that Amazon’s independent merchants are generating on the Amazon Marketplace.

“We’re seeing a lot more third-party transactions, which is why the revenue missed, but the profits are so good,” he said. “The big number is operating income in the second quarter coming in so far ahead.”

Amazon CFO Brian Olsavsky confirmed that take in his call with analysts, noting that third-party sales were changing the profit equation for Amazon, too. Half of all units sold through Amazon are from these sellers, and these sales keep growing. Third-party sales are more lucrative for Amazon, as they receive a commission on those sales, and an even larger commission when merchants elect to turn fulfillment and advertising over to Amazon.

Though analysts were focused on the how’s and why’s of that big number, it bears noting that there were all kinds of “big numbers” to look at from this earnings report.

By The Numbers

Amazon literally doubled earnings expectations: Analysts were looking for earnings per share (EPS) of $2.50 and got $5.07 as the price per share instead. All in, Amazon’s net income grew twelvefold year on year and hit a new record $2.5 billion. That makes Q2 2018 Amazon’s third consecutive quarter of surpassing $1 billion in profits.

Revenue was a slight miss — analysts had been looking for $53.41 billion, but the results came in at $52.9 billion instead. The revenue, which includes all sales from Whole Foods Market, was up 39 percent since the same time in 2017. North American sales were up 44 percent to $32.1 billion, while international sales climbed 27 percent to $14.6 billion. Sales from Whole Foods, which was acquired by Amazon a year ago, was roughly $4.3 billion during the quarter.

Amazon’s profit was largely driven by two areas — one established, one emerging. Amazon Cloud services saw its sales growth pick up the pace for the third consecutive quarter, with revenue up 49 percent to $6.1 billion. “Other” revenue — a category which, for Amazon, is mostly taken up with advertising sales — grew 132 percent year on year to $2.2 billion.

Olsavsky noted that 2017 investments in warehouse and data-center efficiency had a positive effect on profit this year, as did changes in human resources (HR) that have seen Amazon focus on growing teams through internal transfers instead of new hires. That said, Amazon’s headcount continues to grow, having reached a record high of 575,700 employees in the quarter. That’s up 51 percent from last year, and a 2 percent increase from Q1.

“A big contributor to the quarter, and the last few quarters obviously, has been strong growth in our highest profitability businesses and also advertising,” said Olsavsky, according to reports. “We’ve seen a greater-than-expected efficiency in a lot of our spend in things like warehouses, data centers, marketing.”

Amazon’s official Q3 guidance was somewhat short of analyst expectations, with revenue in the range of $54 billion to $57.5 billion. Wall Street estimates have come between $55.6 billion to $62.2 billion.

Sales from Prime Day, which took place earlier in July, will be included in Amazon’s third-quarter results.

When asked by analysts if the recent Prime membership price change had any effect on memberships or renewal, Olsavsky did not offer any specific figures, but he did note that Prime memberships seem to have been mostly unaffected by price increases.

“Prime membership remains strong and we think Prime members really value their memberships,” he told investors.