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Amazon today reported earnings for its first fiscal quarter of 2020, including revenue of $75.5 billion, net income of $2.5 billion, and earnings per share of $5.01 (compared to revenue of $59.7 billion, net income of $3.6 billion, and earnings per share of $7.09 in Q1 2019). North American sales were up 29% to $46.1 billion, while international sales grew 18% to $19.1 billion. Amazon’s leadership position in online retail and the cloud makes it a bellwether during the coronavirus pandemic. In short, revenue was up but profit was down.

Analysts had expected Amazon to earn $73.61 billion in revenue and report earnings per share of $6.25. The retail giant beat on revenue but missed on earnings per share. The company’s stock was up 4% in regular trading and down 4% in after-hours trading. Amazon gave second-quarter revenue guidance in the range of $75.0 billion and $81.0 billion, compared to a consensus of $78 billion from analysts. All of that looked good to investors, except for this line: “This guidance assumes approximately $4.0 billion of costs related to COVID-19.”

COVID-19 concerns

Amazon CEO Jeff Bezos provided a longer-than-usual statement, given the company’s role during the pandemic and the coronavirus’ impact on its bottom line. Bezos name-checked AWS, Prime Video, and Fire TV; said essential workers were an inspiration; and noted that the company’s business has “never been more critical.” Then he addressed investors directly about that $4 billion:

If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities. There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less.

Of the $4 billion figure, some $300 million will be dedicated to developing the company’s own COVID-19 testing capabilities. “We put some of our best people on it — I think everyone is trying to get testing,” CFO Brian Olsavsky said on the earnings call.

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In short, Amazon is going to spend money, not just make money, in response to the pandemic. Investors don’t like to hear that, and so the stock is down.

Further related to COVID-19, Amazon says it has procured 100 million face masks and is “requiring that they be worn by all associates, drivers, and support staff.” The company also purchased more than 1,000 thermal cameras and 31,000 thermometers. Those will be used “to conduct mandatory daily temperature checks for employees and support staff throughout our operations sites and Whole Foods Market stores.” In fact, Whole Foods Market stores will offer masks to customers.

AWS is now a $10 billion business

Amazon Web Services (AWS) passed the $10 billion milestone in Q1, even as growth continues to slow down. In Q2 2019, AWS growth fell to 37% — the first sub-40% growth rate since Amazon started breaking out AWS numbers. Then growth slipped to 35% in Q3 2019, 34% in Q4 2019, and now 33% in Q1 2020. It would appear that COVID-19 has done little to change the trend — next quarter we’ll know for sure.

AWS is the cloud computing market leader, ahead of Microsoft Azure and Google Cloud. High-percentage growth cannot continue unabated. And for a market leader, growth of 33% in sales to $10.2 billion is nothing to scoff at. AWS accounted for about 13.5% of Amazon’s total revenue for the quarter, which is on the higher end.

Subscriptions and “other” (ads)

Subscription services were up 28% to $5.56 billion. This segment mainly constitutes Amazon Prime and its 150 million paid members. Amazon didn’t want to talk much about Prime today, aside from Prime Video. That arm launched a premium movie rental offering — Prime Video Cinema — in the U.S., the U.K., and Germany for streaming in-theater movies at home. That’s right, everywhere you look there’s a pandemic tidbit.

Amazon’s “other” category, which mostly covers the company’s advertising business, was up 44% to $3.91 billion in revenue. The company knows plenty about what its customers want to buy, or don’t want to buy, and it’s increasingly leveraging this for its advertising business. In Q4 2019, Olsavsky said on the earnings call that “it’s still early,” but the company was using machine learning to “drive better relevancy.”

On the Q1 2020 earnings call, he noted that Amazon saw “some pullback from advertisers and some downward pressure on price” in March. On the flipside, it wasn’t “as noticeable as maybe some others are seeing, and probably offset a bit by the continued strong traffic we have to the site. So it’s a bit of a mixed bag. A large portion of our advertising relates to Amazon sales, not things like travel and auto off-site, which may have been disproportionately impacted at least early on here in the COVID-19 crisis. I think our advertising will prove to be very efficient as well. It can be directly measured so even as people are cutting back, perhaps on advertising, or their costs, I think this will be one area that will prove its value. It has in the past.”

As always, Alexa was mentioned many times (12, to be exact) in the company’s press release, even though Amazon won’t break out the voice assistant in its earnings reports. The company did note that Alexa “can now answer tens of thousands of questions related to COVID-19.”

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