Amazon.com (NASDAQ:AMZN) reported first-quarter results Thursday evening. The company crushed its own profit projections, based on sales near the top end of the official guidance range. Let's have a closer look at Amazon's solid report.

By the numbers

Amazon's net sales rose 17% year over year, landing at $59.7 billion. This was achieved despite a currency exchange headwind of $1.1 billion on the top line -- roughly in line with the company's forecast. Back out the currency effects, and Amazon's revenue growth swells to 19%. Management's guidance range for this metric stretched from $56 billion to $60 billion and the actual result nearly matched the very top of this range.

Further down the income statement, Amazon's management set up a guidance range between $2.3 billion and $3.3 billion for operating income. As a matter of fact, operating profits more than doubled from $1.93 billion to $4.42 billion.

That's the end of Amazon's bare-bones guidance figures for this report, but investors do pay close attention to a few other metrics.

  • GAAP net income surged 119% above the year-ago period's, stopping at $3.56 billion. Earnings rose 117% to $7.09 per diluted share, based on a stable share count.
  • Amazon generated $1.85 billion of cash from operating activities, up from consuming $1.79 billion in the year-ago period. Free cash flow remained negative, as it usually does in the seasonally challenging first quarter, but the cash outflow decreased from $4.52 billion to $875 million. On a trailing-12-month basis, Amazon's free cash flow more than tripled from $7.3 billion to $23 billion.
Bar chart showing Amazon's free cash flow showing a steady climb of 217% over the last five quarters.

Image source: Amazon.

Breaking it down by business segment

North American retail sales rose 17% to $35.8 billion. Operating profits in this segment doubled to $2.29 billion.

International e-commerce revenue increased by 9%, stopping at $16.2 billion. This division tightened up its operating losses from $622 million to $90 million.

The cloud computing services found in the Amazon Web Services (AWS) segment produced net sales of $7.7 billion. That's a 41% year-over-year boost, driving the division's operating profits 58% higher to $2.22 billion.

In other words, the bulk of Amazon's revenue growth came from the AWS division, but the North American e-commerce and Whole Foods operations pulled their weight in terms of profit increases.

Looking ahead

For the second quarter, Amazon provided the following guidance ranges:

  • Net sales should land between $59.5 billion and $63.5 billion, which amounts to a 17% year-over-year increase at the midpoint. This target includes a softer currency exchange headwind, slowing down from 1.8% in the first quarter to approximately 1.5% in the current period.
  • Operating income could come in as low as $2.6 billion or as high as $3.6 billion. At the midpoint, that's fairly comparable to the year-ago quarter's $3 billion result.
  • Work the math on these guidance targets and you'll see that Amazon's operating margin should stop somewhere between 4.1% and 6.1%. That would be down from 7.4% in Q1 and mostly below the 5.6% margin that was recorded in the second quarter of 2018.
A parking lot full of Amazon Prime delivery vans, all dark blue with prominent Prime logos on their sides.

This growing fleet will put some pressure on Amazon's margins in the second quarter. Image source: Amazon.

What management said

On the earnings call, CFO Brian Olsavsky provided some commentary on why the second-quarter profit margins are trending lower. It's all about rising costs related to upgrades in the Amazon Prime shipping program:

We're currently working on evolving our Prime free two-day shipping program to be a free one-day shipping program. We're able to do this because we've spent 20-plus years expanding our fulfillment and logistics network, but this is still a big investment and a lot of work to do ahead of us. For Q2 guidance, we've included approximately $800 million of incremental spend related to this investment.

And just to clarify, we have been offering obviously faster than two-day shipping for Prime members for years. One-day, same-day, even down to one- to two-hour delivery for Prime Now. So we're going to continue to do to offer same-day and Prime Now selection on accelerated basis, but this is all about the core free two-day offer evolving into a free one-day offer. We've already started down this path.

The company has already started these improvements, expanding both the service area and the items eligible for one-day shipping during the first quarter. There's simply a lot more work left to do.

"It's a significant step and it will take us time to achieve and we want to ensure that we have a good delivery experience for our customers as we evolve the software," Olsavsky said.

Editor's note: The GAAP net income figure in this article has been corrected to $3.56 billion.