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3 Key Things From Amazon's Q1 Earnings Call Investors Should Know

By Beth McKenna - Updated May 1, 2018 at 3:49PM

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A growing advertising business, accelerating growth in its cloud service, and Prime's price increase were among the main topics discussed by the e-commerce giant's management.

Amazon.com (AMZN -1.85%) turned in a fantastic first-quarter 2018 earnings report last week. The e-commerce and cloud-computing titan's revenue soared 43% year over year to $51.0 billion, and earnings per share (EPS) adjusted for one-time items rocketed 121% to $3.27.

As it did in the previous quarter, the bottom-line result demolished Wall Street's expectation. Analysts were looking for $1.27 per share. These gigantic earnings beats have helped power Amazon stock up more than 69% over the one-year period through Monday. The S&P 500 has returned 13.3% over this period.

Earnings releases only tell part of the story. Here are three key things management shared on the earnings call that investors should know.

View of the back of delivery man carrying an Amazon package as he walks toward a house.

Image source: Amazon.

Advertising is a fast-growing, multibillion-dollar business

From CFO Brian Olsavsky's remarks:

[A]dvertising continues to be a bright spot, both from a product standpoint, and also, financially. ... It's now a multibillion-dollar program. 

Amazon doesn't break out its ad revenue, but Olsavky said it accounts for the "majority" of the "other revenue" line item. This item totals $2.03 billion, so we know ad revenue was more than $1.0 billion in the quarter, and I'd guess it was probably greater than $1.5 billion. This range would equate to an annual run rate of $4 billion to $6 billion.

Other revenue surged 139% year over year, or 132% on a constant-currency basis. While ad revenue is obviously growing fast, it's not growing as fast as these numbers suggest. Amazon adopted an accounting standard update on Jan. 1 that amended its revenue recognition policies. This change added $560 million to other revenue in the quarter. If we were to back this out, other revenue grew at about 72% year over year.

Price of annual U.S. Prime membership is going up to $119

From Olsavsky's remarks:

Prime program continues to drive great strength in our top line ... We continue to increase the value of Prime, including [shipping] speed selection and digital entertainment options. ... And the cost is also high. ... So effective May 11, we're going to increase the price of our U.S. annual plan from $99 to $119, for new members. The new price will apply to renewals starting on June 16.

Olsavksy outlined how Amazon has been increasing the value of its Prime membership. He cited rising costs, particularly those associated with shipping and the membership program's digital benefits, as the reason for the price hike. This is Amazon's second ever price increase for a U.S. annual Prime membership, with the first one occurring in March 2014. This price hike follows Amazon raising the price of its U.S. monthly Prime membership in January from $10.99 to $12.99. 

Amazon said last month in its annual shareholder letter that its Prime members recently surpassed 100 million paid subscribers globally. 

Drivers of accelerating growth in the North America and AWS segments

From Olsavsky's remarks about what's driving the accelerating growth in the company's largest business by revenue, North America:

[T]he general drivers continue to be Prime and the Prime Flywheel ... [W]e're seeing better engagement with Prime Benefits, especially Digital and Benefits, and that is always good news for eventual sales of other things. We're also selling more subscriptions, Amazon Music Unlimited ... Kindle Unlimited ... 

He also commented on what's driving growth in the company's profit engine, its Amazon Web Services (AWS) cloud-computing service:

We have the functionality and pace of innovation that others don't. We have partner and ecosystem that others don't, and we have proven operational capability and security expertise that's highly valued to AWS customer base.

AWS's revenue growth has accelerated for two consecutive quarters. In the first quarter, growth was 48% year over year on a constant-currency basis, up from 44% in the fourth quarter and 42% in the third quarter. Existing customers are increasing their usage, and the company has been successful in adding new customers. 

This accelerating growth bodes extremely well for Amazon's profitability outlook. AWS accounted for just 11% of total revenue in the quarter, yet a whopping 73% of total operating income, so its revenue growth has an outsize effect on the company's overall profitability. Moreover, the robust growth of this high-profit-margin business means Amazon should have plenty of cash rolling in to fuel growth in its existing businesses and enable it to continue to expand into new arenas.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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