July 26, 2018 / 8:11 PM / 18 days ago

Amazon earnings skyrocket on cloud computing, advertising

(Reuters) - Amazon.com Inc (AMZN.O) forecast strong fall sales and posted a profit that was double Wall Street targets on Thursday thanks to the retailer’s younger, higher-earning businesses, including cloud computing and advertising.

Shares rose more than 3 percent in after-hours trade. The report may come as a relief to investors in the U.S. technology sector, still reeling from a profit warning by Facebook Inc (FB.O) Wednesday that plunged its stock 19 percent.

Amazon’s report shows how the world’s largest online retailer has increasingly learned to compensate for the high costs of fast package delivery and video streaming, which it has marketed around the globe to huge success. It was the first mover in the business of selling data storage and computing power in the cloud, a bet that continues to pay dividends and give it the leeway to invest in grand projects.

For instance, the company is working to ship food from Whole Foods Market stores across the United States, in an ambitious attempt to bring groceries into the age of online retail.

Amazon’s spending typically climbs in the summer quarter, pressuring profits as the company prepares for Christmas and the winter holidays, its peak sales period each year.

Yet the company said it expects an operating profit between $1.4 billion and $2.4 billion, up from $347 million a year earlier. Amazon does not forecast net income, but analysts were expecting an $843 million profit in the third quarter, according to Thomson Reuters I/B/E/S.

The company also reported a second-quarter profit of $2.5 billion, its largest ever.

“A big contributor to the quarter and the last few quarters obviously has been strong growth in our highest profitability businesses and also advertising,” Brian Olsavsky, Amazon’s chief financial officer, said on a call with media. “We’ve seen a greater-than-expected efficiency in a lot of our spend in things like warehouses, data centres, marketing.”

The Seattle-based company cut hundreds of consumer jobs in its headquarters earlier this year, in a move that may have lowered costs and freed up resources for fast-growing areas like Amazon’s voice aide Alexa.

“How can we move people to some of our new investments areas?” Olsavsky said as an example of Amazon’s focus on efficiency.

Wedbush Securities analyst Michael Pachter called the expansion in the company’s gross profit margin “remarkable,” citing impressive results from cloud sales and services to third-party merchants on Amazon.

FILE PHOTO:The logo of Amazon is seen on a building in San Jose, Costa Rica March 21, 2018. REUTERS/Juan Carlos Ulate

“That drove the bulk of the earnings beat,” he said.

CFO Olsavsky noted that third-party sales were changing the profit equation for Amazon, too. The company for years was notorious for roller-coaster results.

More lucrative than sales of goods that Amazon owns, third-party transactions offer the company a commission that increases significantly when merchants choose to hand over fulfilment and advertising to Amazon, as many do. Half of all units sold through Amazon are from these sellers, and these sales keep growing.

SHOPPING BLITZ

Highly profitable ad sales were a bright spot last quarter. The company said revenue from the category and some other items grew 132 percent to $2.2 billion. Analysts were expecting $2.1 billion, according to Thomson Reuters I/B/E/S.

Amazon Web Services (AWS), the company’s profit centre, posted a 49 percent rise in sales to $6.1 billion, also beating the average estimate of $6 billion.

These key businesses, along with a July event that the company created to drum up sales during the summer shopping lulls, are helping Amazon overcome high costs in the third quarter.

During the event, called Prime Day, popular brands now agree to put their inventory on sale for members of Amazon’s loyalty club Prime, while rival retailers scramble to drive traffic back to their websites.

This year, Amazon said the July event saw Prime members purchase more than 100 million products. The company said it now expects third-quarter sales of between $54 billion and $57.5 billion, up from $43.7 billion a year earlier.

Even more crucially, more people joined Prime on July 16 than on any previous day in the company’s history, Amazon said.

Prime includes fast shipping and video streaming for $119 per year in the United States and is the cornerstone of Amazon’s strategy. Its more than 100 million members globally spend above average amounts on Amazon, to get the most out of their subscriptions.

Hiking the annual U.S. price of Prime 20 percent during the second quarter showed few signs of discouraging sign-ups: the company said subscription revenue increased 57 percent to $3.4 billion.

Total net sales for the second quarter rose 39 percent to $52.89 billion, missing the average analyst estimate of $53.40 billion.

Reporting by Jeffrey Dastin in San Francisco and Arjun Panchadar in Bengaluru; Editing by Patrick Graham and Lisa Shumaker

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