There is no reason to bury the tribe. Amazon (Nasdaq stock code: AMZN) Having just passed the best quarter ever, as the company became critical during the pandemic, it achieved record revenue and profits from blowout growth. As we enter the second quarter report, there are many signs that the tech giant’s quarterly performance is impressive, and Amazon provides-and some.
Driven by strong global e-commerce demand, revenues this quarter increased by 40% to $88.9 billion. This result easily exceeded the company’s own expectations, that is, revenue increased by 18%-28%, and analysts expected an increase of 28.6% to $81.5 billion. Amazon̵
In the earnings conference call, management explained that the second quarter was the slowest period of retail sales in history, so the company was able to improve its over-fulfillment capacity, which was to support demand during the holiday season. Thereby increasing the operating leverage.
However, the results of the blowout profit are particularly impressive, even though the company spent $4 billion on COVID-19-related expenses, including personal protective equipment, additional cleaning work, higher wages for warehouse employees, and its own Investment testing laboratory. In a more normal period, assuming constant demand, operating income for the quarter would be close to $10 billion without these costs.
The management emphasized the unique conditions that led to huge profits because fixed costs were fully utilized and the company saved expenses in areas such as business travel, marketing and even healthcare. However, it is worth studying how Amazon doubled its operating profit to a record level within a quarter of only one quarter when it intends to achieve break-even.
International e-commerce stands out
For the first time in many years, Amazon has made a profit in its international e-commerce business. The company has been at a loss while developing infrastructure and building its Prime membership base in India and other regions. Profit at the end of the quarter was $345 million, compared with a loss of $601 million a year ago.
After most of the world was responding to the impact of the global pandemic, the international market’s sales to North America increased by 38% to US$22.7 billion, while its domestic market increased by 43%.
This growth has helped increase operating leverage. Management pointed out that the UK is one of the largest markets outside the US and its performance is particularly strong
AWS gains leverage
Although the revenue growth of Amazon Web Services in Amazon’s cloud computing division has actually slowed, profits have skyrocketed. AWS’s revenue increased by 29% to 10.8 billion US dollars, while the division’s operating income increased by 58% to 3.4 billion US dollars. AWS is still the company’s largest source of profit, and high-profit businesses will continue to improve the company’s overall profit margin over time.
The management said on the conference call that the AWS backlog as measured by revenue commitments increased by 65% from the same period last year and 21% from the previous quarter, indicating strong demand for its AWS cloud infrastructure services during the pandemic. Technology and content are the main components of AWS costs, which only increased by 15% to $10.4 billion. This is an example of the company’s use of fixed costs this quarter.
Economic mo is getting bigger and bigger
In the past few years, Amazon has transitioned from a low-margin company to a profitable machine. The emergence of AWS has always been one of the elements of success, but the company’s ability to use its competitive advantage as a leading e-commerce company may be a bigger reason. For example, because Amazon collects sales commissions and performance fees while using the infrastructure already established for first-party sales, third-party sales that exceed direct sales in this quarter tend to earn higher profits. Advertising has also become an important business, and its working principle is similar.
Revenue from third-party seller services increased by 53% during the quarter to reach $18.2 billion. This is because market sellers also benefited from the epidemic, and their “other” category (mainly composed of advertising) revenue increased by 41%. Reached $4.2 billion. Taking into account the challenges faced by other advertising-driven platforms in the second quarter, the strength of its advertising business is also obvious.
The management tried to lower expectations of maintaining this high level of profit, calling the quarter “very abnormal”, while the third-quarter guidance predicted that operating profit would be more moderately between US$2 billion and US$5 billion. COVID-19 expenditures exceed US$2 billion. Most importantly, it expects revenue to grow by 24%-33%. However, after the latest performance, investors should probably not accept these forecasts too much.
The results of the second quarter show the profits that Amazon can achieve. Although peak demand is key, its ability to control fixed costs and take advantage of its competitive advantages in areas such as AWS and its third-party markets is also crucial. When the pandemic ends and demand returns to normal, Amazon will be in a stronger position, larger in scale, and less competition.
This extra strength can’t help showing up on the bottom line.