Amazon Guides to Lower Q3 Revenue, Profit; Shares Fall

Amazon shares fell 6.7% in morning trading Friday on lower-than-expected Q2 revenue and a tempered Q3 outlook. The company’s results for the quarter ended June 30 were “softer than expected” at $113 billion, the midpoint of guidance and 1.8% below consensus, Cowen analyst John Blackledge wrote investors Friday. “Higher consumer mobility” affected e-commerce demand, he said.

Q3 revenue guidance is $106 billion-$112 billion, for 10%-16% growth year on year, said the company Thursday. Operating income guidance is $2.5 billion-$6 billion vs. $6.2 billion a year earlier and assumes $1 billion of COVID-19 costs, said Chief Financial Officer Brian Olsavsky on a Thursday earnings call. Shares closed 7.6% lower Friday at $3,327.59.

Amazon’s 27% year-on-year Q2 revenue growth included record Prime Day receipts, the first time Prime Day has taken place in the quarter. Prime Day was in Q3 last year. Third-party products were 56% of Amazon’s paid units in Q2, up from 53% last year, and revenue in the segment is growing faster than online store revenue, said Olsavsky.

Lower revenue and operating income in Q2 muted growth at Amazon Web Services, Blackledge said. AWS net sales were $14.8 billion in Q2, up from $10.8 billion. The fulfillment network nearly doubled in size over the past 18 months, requiring a “significant amount of investment,” said Olsavsky. AWS is at a $59 billion annualized run rate vs. $43 billion a year ago, he said.

Olsavsky called Q2 a “transition period” for Amazon customers who were home less as travel restrictions and lockdowns eased in the U.S. and parts of Europe. Prime members continued to spend more at Amazon but their “spend moderated” vs. the peak of the pandemic, he said. Prime membership and associated purchasing levels accelerated over the past 18 months, said Olsavsky. Amazon added more than 50 million new members over the span, and “benefits usage remains high,” he said.

Before COVID-19, Amazon’s revenue growth rate was close to 20% annually, said Olsavsky. In 2019, it was 22%, and 21% for the first two months of 2020. When the pandemic hit in March 2020, the growth rate jumped to the mid-30% range; that quarter ended with a 27% growth rate. Demand outpaced supply in April and early May, and by mid-May, Amazon added employees and capacity, enabling 35%-40% revenue growth, said the executive. That pace continued through Q1 this year when Amazon had 41% growth.

Since May, Amazon’s year-on-year growth rate, excluding Prime Day, slowed to the mid-teens, Olsavsky said. The Q3 guidance range of 10-16% “reflects an expected continuation of this trend.” The company expects the pattern of “difficult year-over-year revenue comps to continue for the next few quarters.” Amazon’s two-year compounded annual growth rate is 25%-30%, Olsavsky noted, compared with a pre-pandemic 21% rate. Responding to a question on whether Amazon is considering separate Prime Day events to meet different seasonal trends, Olsavsky said, “Our trend has been once a year,” acknowledging that Prime Day has taken place in three different quarters in as many years.

Amazon Advertising announced in the quarter that Amazon Streaming TV ads and Twitch jointly reach an audience of 120 million monthly viewers across the U.S., pitching the coverage as an opportunity for brands to create “interactive product discovery experiences” across IMDb TV, Twitch, ad-supported apps on Fire TV and Thursday Night Football on Prime Video.

New CEO Andy Jassy wasn't on the call. Responding to a question on possible changes in direction under new stewardship, Olsavsky said the company expects Jassy “to add his unique brand of positive attitude and optimism and forward-looking focus to help Amazon keep going and delighting customers.” He also noted founder Jeff Bezos, who stepped down as CEO July 5, moved into the executive chairman role, and “he will not be leaving.” It was also Bezos' regular practice to skip Amazon's quarterly earnings calls.