Amazon (NASDAQ:AMZN) provided another strong earnings report when it posted its first-quarter earnings results at the end of April. The company generated $35.7 billion in sales last quarter, up 23% year over year. Net income increased 41% to $724 million.
Following the earnings report, CFO Brian Olsavsky and other members of Amazon's management answered questions from analysts. Here are five key takeaways from Olsavsky's answers on the earnings call.
Prime is still growing strong
Amazon ended 2016 without giving an exact growth figure for Prime membership growth like it had in each of the previous two years. Nonetheless, Prime appears to be growing relatively quickly, and that strength continued into the first quarter.
We're not breaking out the specific growth rates for Prime, but certainly it – we like what we see in terms of the growth, and it's been consistent with what we have seen over the last quarter or so.
The numbers back that claim up. Amazon's unearned revenue increased 45% year over year. Retail and subscription services revenue climbed 52%. Both offer strong indicators of Prime subscription growth.
Investing so much it hurts
Amazon's North America operating margin fell about 65 basis points year over year last quarter. While that might not sound like a lot, it's pretty significant when margins are as thin as Amazon's. The company's operating margin in North America was just 2.8% for the first quarter. Olsavsky says the lower margin is due to spending more on growing the company.
So right now, we're just seeing a lot of great opportunities before us. And we're continuing to ramp up the investments in pursuit of those opportunities. And the big picture is, again, as we've said, customers -- the things customers love can grow to be large, we'll have strong financial returns and they're durable and can last for decades.
Amazon continues to invest in its Alexa digital assistant, Echo products, and Prime Video. It's also working to expand other Prime benefits such as Prime Music, Prime Now, and Amazon Fresh. Additionally, it's spending a lot on building out its fulfillment network both in North America and the rest of the world.
Fulfillment centers aren't cheap, but they're very necessary
One of the biggest factors in Amazon's capex growth is its decision to continue opening new fulfillment centers. Capex increased 51% year over year mostly to build out the fulfillment capacity. Amazon built 23 new fulfillment centers in the second half of last year, and some of the cost of getting them up and running carried over to the first quarter. Amazon also continues to build out new capacity.
The main thing driving Amazon's need for more capacity is the growth of the Fulfilled by Amazon program.
Nearly 40% growth in Amazon fulfilled units last year, and the continuation of the strong growth higher than the paid unit growth that we see in 2017 is resulting in a lot of fulfillment center capacity.
Olsavsky also noted that the robotics technology in the new fulfillment centers is more capital-intensive upfront. In the long run, however, it reduces total costs.
Still interested in brick-and-mortar
Amazon made a big splash last year when it introduced Amazon Go, a new small-format grocery store where you just grab what you want and go. The company also has a total of six brick-and-mortar bookstores now, and it's experimenting with other physical retail formats.
Along with the bookstores, we also have -- you'll see us in pop-up stores and college pickup points. So, for us it's another way to reach the customer and test what resonates with them, and we're pleased with the results.
Amazon's plans for brick-and-mortar are relatively small right now compared to its dominant online presence. Its efforts could, however, turn into another major growth driver as it brings its retail and customer service expertise to physical stores. At the very least, the physical stores act as a marketing tool for its online store.
Advertising still growing
Amazon's advertising business is quickly growing very large. The company's other revenue, which primarily consists of advertising and co-branded credit card sign-ups, increased 58% year over year. Olsavsky says the company benefits from its sizable customer base.
I think scale is helping. We've had great teams working on advertising for a while now. Our scale and number of customers, number of clicks, number of eyeballs, and new content -- video content and other opportunities for advertising has really helped create some scale in that business.
Amazon is still in the early days of its advertising business, but with its scale and customer data, it has the potential to be huge.
Overall, Amazon posted another great quarter with some promising commentary from management.