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Amazon Executives Talk Prime, Advertising, and AWS

By Danny Vena – May 5, 2018 at 2:18PM

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The e-commerce leader provided a wealth of information for investors beyond just the headline numbers. (AMZN -3.01%) continued to reward investors, producing another standout performance in the first quarter, which obliterated expectations and sent shares soaring to record heights. The company produced net sales of $51 billion, up 43% year over year, generating earnings of $3.27 per share. These results soared past analysts' consensus estimates, which called for earnings per share of $1.25 on net sales of $49.88 billion.

There's a lot going on behind the numbers, and management shared information that provides additional insight for investors. This included discussions about Prime, the growing contribution of advertising, and what's driving the massive dominance of Amazon Web Services (AWS).

An Amazon fulfillment center with a massive solar array on the rooftop

Amazon is pursuing several areas that could produce significant future growth. Image source: Amazon.

Prime is getting more expensive

Amazon's Prime customer loyalty program has been a significant contributor to the company's success, and until recently, also something of a mystery to investors. Amazon had long been tight-lipped about the number of people enrolled in Prime. In Amazon's annual shareholder letter, CEO Jeff Bezos pulled back the curtain, revealing that the company "exceeded 100 million paid Prime members globally."

CFO Brian Olsavsky told analysts on the conference call that the cost of Prime was going up: Effective May 11, the price for the annual plan in the U.S. would increase to $119 from its current level of $99. He pointed to the growing value members receive from Prime to justify the increase -- including the expansion of free same-day and one-day shipping options, the two-day shipping that's available on more than 100 million products, and the growing roster of content on Prime Video.

Prime is the biggest contributor to Amazon's subscription services, which generated $3.1 billion in the first quarter. Expect the number to increase in the near future.

Ad profit grows

Olsavsky said that advertising is a "multibillion-dollar program" that is "growing very quickly" for the company. Amazon reported $2.03 billion in "other" sales, the majority of which is advertising, he said. "Other" sales in the first quarter grew 132% over the same period last year. The company continues to view this as "a bright spot" and ads have "continued to be a strong contributor to profitability" during the quarter.

He also pointed out that this was one area where the company would proceed cautiously, trying to find balance between the helpfulness of advertising and the potential for customers to find it disruptive. Olsavsky said that when in doubt, Amazon will "come down on the side of the customer." When asked about the potential for advertising on video, he said "we chose to not do that right now," though he left open the possibility of revisiting the issue.

Cloud shape superimposed on computer circuitry

AWS is Amazon's cash cow. Image source: Getty Images.

Cloud adoption accelerating

Investors following Amazon recognize the growing importance of its cloud computing business. In 2017, AWS generated a margin of 25%, and provided 10% of Amazon's revenue and all of its operating income for the year. The cloud segment's performance continued to accelerate in the first quarter of 2018: Net sales for AWS grew 49% to $5.4 billion, and operating income jumped 57% to $1.4 billion.

Bezos provided a rare contribution to the earnings press release specifically addressing AWS, saying:

AWS had the unusual advantage of a seven-year head start before facing like-minded competition, and the team has never slowed down. As a result, the AWS services are by far the most evolved and most functionality-rich ... That's why you're seeing this remarkable acceleration in AWS growth, now for two quarters in a row.

Olsavsky provided additional color during the call, pointing out that Amazon was not only seeing new customer growth with its cloud platform, but that existing customers were continuing to add new services.

The biggest takeaway for investors is just how many areas of explosive growth Amazon is pursuing. While AWS is currently the most profitable segment, other businesses may be joining that exclusive club in the months and years to come.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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