By Jeremy C. Owens, MarketWatch
Amazon.com Inc. doubled its profit in the first three months of 2019, but will shave into its growing earnings in order to chop the delivery time for Prime customers in half.
Amazon /zigman2/quotes/210331248/composite AMZN +0.91% on Thursday reported record earnings for the fourth consecutive quarter, but projected a sharp reduction in operating profit for the current period. When analysts asked about the guidance on a conference call Thursday afternoon, Chief Financial Officer Brian Olsavsky revealed that Amazon expects to spend about $800 million to change Prime free delivery times from two days to one.
“We’re currently working on evolving our Prime free two-day shipping program to be a free one-day shipping program,” Olsavsky said.
Amazon offers one-day delivery on some products now, and even same-day delivery for some purchases. But Olsavsky said Amazon now expects that the standard free two-day shipping that is the biggest selling point for the Prime subscription plan will be improved to a one-day schedule.
“We have been offering obviously faster than two-day shipping for Prime members for years — one day, same day, even down to two-hour delivery for Prime Now —so we’re going to continue to offer same day and Prime Now, morphing into or evolving into a free one-day offer,” he said in response to an analyst question.
Amazon stock initially gained about 1% in after-hours trading after earnings were released Thursday afternoon, but fell to a decline as the profit guidance was digested. after Olsavsky explained the reason for the forecast, shares moved back to gains of about 1%.
Amazon reported first-quarter profit of $3.6 billion, or $7.09 a share, on sales of $59.7 billion, up from earnings of $3.27 a share a year ago on revenue of $51 billion. That is record quarterly net income for the internet giant, which recorded revenue just slightly higher than $3 billion in the 2018 holiday-shopping period, the previous record. Amazon now produced record revenue totals in four consecutive quarters, bringing in about $12 billion in earnings in that time.
Analysts on average projected Amazon would report earnings of $4.70 a share on sales of $59.68 billion, according to FactSet. Amazon had forecast revenue of $56 billion to $60 billion for the quarter, which disappointed investors at the time.
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On Thursday, Amazon forecast revenue of $59.5 billion to $63.5 billion for the second quarter, after producing revenue of $52.89 billion in that period a year ago, but said second-quarter operating income of $2.6 billion to $3.6 billion. That would be a large sequential drop from operating income of $4.4 billion in the first quarter, and analysts on average were projecting operating income of $4.19 billion on revenue of $62.39 billion, according to FactSet.
Amazon’s core e-commerce business produced most of the first-quarter revenue, reporting North American revenue of $35.81 billion and $16.19 billion internationally, with domestic operating income of $2.29 billion and an international operating loss of $90 million. Amazon Web Services, the company’s cloud-computing arm, reported operating income of $2.22 billion on revenue of $7.7 billion, up from income of $1.4 billion on sales of $5.44 billion a year ago. Analysts on average expected operating income of $2.17 billion on revenue of $7.7 billion.
Operating profit of about $2.2 billion from the e-commerce business is what produced the big earnings beat, as analysts’ estimates called for domestic operating profit of $1.52 billion and an international loss of $605 million. The $90 million loss on international operations is the closest Amazon has come to producing a profit in that segment since doing so in the second quarter of 2016; Amazon had an operating loss of more than $2.1 billion in the international e-commerce business in 2018.
“At first glance, a good report given some concerns over online spending headwinds,” wrote Baird Equity Research analyst Colin Sebastian, who has an outperform rating and $2,100 price target on Amazon stock. “Positives include significant margin upside for both North America and Int’l segment (Int’l almost achieved break-even results), reaccelerating subscription services growth, and continued fulfillment expense leverage.”
Amazon showed a deceleration in one of its biggest growth segments from 2018, advertising. The company’s “other” revenue, which bundles advertising with some other services, grew 36% to $2.72 billion year-over-year and declined sequentially. Sales in that segment had grown sequentially for at least 15 consecutive quarters, and revenue increased more than 117% in 2018.
For more: Amazon is becoming an advertising giant
“A larger-than-expected slowdown in other revenues after a record year of growth showcases the moderating sales for third-party sellers as the platform seeks to maximize profitability, at some cost to these sellers,” eMarketer Senior Forecasting Director Monica Peart said in an email.
Amazon’s physical stores, mostly made up of Whole Foods Markets stores, continued to struggle for growth. Amazon reported revenue of $4.31 billion from its physical store sales, up slightly from $4.26 billion a year ago and lower than the average analyst forecast of $4.39 billion.
Amazon shares closed with an increase of less than 0.1% at $1.902.25. The stock has gained 27% so far this year, as the S&P 500 index /zigman2/quotes/210599714/realtime SPX +2.62% has gained 16.8%.