AMZN Amazon.com Inc

By Yoree Koh 

Amazon.com Inc. notched a best-ever $3.56 billion quarterly profit as it continued to lean on higher margin businesses and put a lid on costs.

Expenses, however, are expected to jump in the second quarter in part because Amazon said it would invest $800 million to make one-day free shipping the standard for Prime members, instead of two days.

The e-commerce company's bottom line got a big boost in the first quarter from its cloud-computing unit and burgeoning advertising business, helping to offset sluggish growth from the core online retail business. The profit more than doubled to well above what analysts were expecting.

Still, sluggish retail sales overseas and flat performance from Amazon's Whole Foods grocery chain dragged down revenue growth for a fourth straight quarter. Revenue rose 17% to $59.7 billion. Growth was 43% in 2018's first quarter, though it was boosted by the acquisition of Whole Foods.

Amazon's stock rose 0.8% in after-hours trading on Thursday to $1918.12. The shares are up about 24% this year, helping propel the company's market value closer to $1 trillion -- a level Amazon flirted with last year.

After years of plowing nearly every dollar made back into its business, Amazon has entered a new era of more modest revenue growth and consistent profits. The company had spent heavily in prior years to build out its warehouses to meet surging retail demand and branch into new industries such as cloud computing, filmmaking and groceries.

Amazon started delivering record profit last year as it eased spending while newer businesses like advertising and cloud computing took off, helping to offset the lower margins of its traditional retail business. Its online retail marketplace now relies more heavily on third-party vendors -- 58% of sales on the platform come from taking a cut from these outside businesses, as opposed to selling goods directly itself.

The result for the latest quarter: Expenses grew 12.6%, the lowest percentage rise in at least a decade, while Amazon's operating margin climbed to 7.4%, its best over that time.

On a call with analysts, Chief Financial Officer Brian Olsavsky said Amazon didn't invest as heavily in new fulfillment centers or logistics infrastructure as in years past, adding that hiring was also moderate. Amazon's head count fell by nearly 17,000 employees during the quarter to a total of 630,600. That represents only the second sequential decline and steepest drop for the company since at least 2010.

Mr. Olsavsky, however, stuck to his comments in January when he warned that spending would pick up again. "My point from the last call still holds and that we do expect those growth rates to be higher for all of 2019. So most of that will happen in the next three quarters."

One of the coming costs is the $800 million the company has earmarked in the second quarter to shift its Prime free two-day shipping program into a free one-day delivery as it faces competition from big-box retailers. Mr. Olsavsky said Amazon would build out most of the logistical and fulfillment capacity through the year, but didn't specify when the company plans to roll out the faster shipping.

Amazon offers one-day and two-hour shipping to Prime members for some products for a fee. The move would extend one-day shipping to far more products and ZIP Codes world-wide. Amazon has more than 100 million Prime members.

As for other higher costs, the finance chief added that the second quarter is also when stock-related expenses tend to tick upward.

As Amazon has become a behemoth with more than $200 billion in annual sales, its revenue growth has naturally shrunk. But it is also because of some trouble spots.

For one, Amazon has run into problems overseas, particularly in India, where new e-commerce rules favor domestic companies over foreign giants like Amazon. The company also recently pulled the plug on its third-party online marketplace in China after struggling to battle the incumbents there.

Its international sales rose 9% in the first quarter, compared with 19% growth in the fourth quarter.

Mr. Olsavsky said Amazon has made adjustments to comply with India's latest e-commerce regulations and that there were "few days of downtime" in the first quarter. "We're very happy with the progress of the business in India," he said.

Meanwhile, Amazon's booming advertising business didn't fare as strongly as in recent periods. Revenue for its "other" category -- which is primarily derived from advertising -- rose 34% to $2.72 billion in the first quarter after nearly doubling year-over-year in the prior quarter.

And as Amazon pushes further into physical retail with cashier-less Amazon Go stores and bookstores, it has yet to show much revenue growth. Its Whole Foods grocery chain, which it acquired in 2017, makes up the bulk of that category, where revenue rose 1% in the latest period. In April, Amazon implemented a third round of price cuts on grocery items, primarily on produce and meats, and said it would introduce more discounts to Amazon Prime members.

Its biggest and brightest cash cow -- the cloud-computing arm called Amazon Web Services -- continues to churn out profits. Sales rose 41% to $7.7 billion, while operating income jumped 59% to $2.22 billion.

In his annual shareholder letter earlier this month, Chief Executive Jeff Bezos pronounced his own bullish stance on the cloud-computing business.

Still, after an early head start that has made it the dominant player in renting computing power to businesses and government agencies, Amazon is confronting stiffer competition from Microsoft Corp. and Alphabet Inc. On Wednesday, Microsoft said quarterly revenue at its Azure cloud-computing business rose 73% from a year earlier.

For the current quarter, Amazon projected revenue of between $59.5 billion and $63.5 billion -- or 13%-to-20% growth from a year earlier; analysts project on average $62.4 billion in revenue.

The company expects between $2.6 billion and $3.6 billion in operating income for the second quarter, compared with a year-earlier $3 billion and analysts' consensus estimate of $3.11 billion.

Write to Yoree Koh at yoree.koh@wsj.com

(END) Dow Jones Newswires

April 25, 2019 20:54 ET (00:54 GMT)

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