Amazon.com (NASDAQ:AMZN) released a powerful second-quarter 2018 earnings report on Thursday, July 26. The e-commerce and cloud-computing titan's revenue soared 39% year over year to $52.9 billion, while earnings per share (EPS) increased more than 12 times to $5.07.
As it did in the previous two quarters, the bottom-line result trounced Wall Street's expectation. Analysts were looking for $2.50 per share. These huge earnings beats have helped drive Amazon stock up nearly 75% over the one-year period through July 30. The S&P 500 has returned 15.6% 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.
The company's "multimillion-dollar" advertising business is humming along
From CFO Brian Olsavsky's remarks:
[Advertising is] now a multibillion-dollar business for us. We're seeing strong adoption across a number of fronts -- Amazon vendors, sellers, authors, as well as third-party advertisers who want to reach Amazon customers.
Olsavky said on last quarter's earnings call that advertising revenue accounts for the "majority" of the "other revenue" line item in the company's supplemental financial information. This line item was $2.19 billion for the second quarter, so it's probably safe to assume that ad revenue was somewhere north of about $1.5 billion. While this may seem relatively small -- it's roughly 3% of Amazon's total revenue -- there's little doubt that this business contributes an outsize amount to earnings. Digital advertising, in general, is a high profit-margin business. (Google parent Alphabet's and Facebook's financial results attest to this fact.)
Here's the bigger gem from Olsavsky that investors should keep in mind (emphasis mine):
[W]e're focused on our measurement capabilities, so advertisers understand what outcomes they're driving on our properties. And we think that we're uniquely positioned to show them the direct benefit of their advertising.
Given the nature of Amazon's core business -- an online retailer -- it is better positioned, in my opinion, than Alphabet, Facebook (the two big players in the space), or just about any other company involved in digital advertising to show advertisers the direct benefit of their advertising. This fact makes it likely that the company's ad business will continue its brisk growth. On this note, we can't know exactly how fast it's growing, but it's likely somewhere in the ballpark of 64% year over year, as that's how much the other line item increased in the quarter, after we adjust for an accounting change.
AWS's revenue growth has accelerated over the last three quarters
The following is from Olsavsky's remarks about the company's Amazon Web Services cloud-computing business, which is the market leader in the public cloud space. It held a 33% share of the global market in the first quarter, according to Synergy Research -- about two-and-a-half times larger than the 13% share held by the No. 2 player, Microsoft [emphasis mine]:
[T]he business has accelerated the last three quarters, and we're seeing great signs in a number of areas. We've added 800 new services and features so far this year; that's an accelerated pace from last year, which was a record year. ...
We've built a very strong partner and customer ecosystem. And frankly we have the most proven reliability of security and performance, and we've been at this longer than anyone else.
In the second quarter, AWS's revenue jumped 49% year over year, as reported and in constant currency, to $6.1 billion. In constancy currency, AWS's revenue grew 48% in the first quarter, 44% in the fourth quarter of 2017, and 42% in both the second and third quarters of last year. AWS is the company's most profitable segment by far, so accelerating revenue growth is a particularly positive sign.
As for the emphasized sentence above, AWS had "a seven-year head start before facing like-minded competition," Amazon CEO Jeff Bezos said in the company's first-quarter earnings press release.
Current Alexa focus is on expanding the reach and usefulness of the virtual assistant
From Olsavsky's remarks:
So right now, our emphasis is around expanding the reach of Alexa and the usefulness. [W]e're now up over 45,000 skills. We have a developer network that's expanded and [Alexa is now embedded in] over 13,000 smart-home devices from 2,500 unique brands. ...
So I think your original question was about monetization of Alexa, but right now, the biggest thing we can do is to make it as useful as possible and make devices that can use the skills.
Alexa's reach is expanding at a torrid pace, with Bezos saying in the earnings press release that the number of Alexa-enabled devices has tripled in the past year.
Olsavsky's remarks were made in response to an analyst who asked how Amazon might monetize third-party devices, with his answer indicating that that's not the company's current focus. Surely, though, top management must be exploring various ideas.