Amazon.com (NASDAQ:AMZN) reported second-quarter 2019 results after the market closed on Thursday. 

The e-commerce titan's five-quarter string of demolishing Wall Street's earnings estimates came to an end, as it fell short of bottom-line expectations. However, it did surpass the consensus estimate on the top line.

Shares closed Thursday's after-hours trading session down 1.7%. We can attribute the market's negative reaction to the earnings miss and third-quarter operating income guidance coming in lighter than analysts were expecting. 

Here's an overview of Amazon's quarter, along with its guidance for the third quarter, using five metrics.

An Amazon package traveling on a conveyor belt in a fulfillment center.

Image source: Amazon.com.

1. Revenue jumped 20%

Amazon's net quarterly sales increased 20% year over year to $63.4 billion, coming in nearly $1 billion higher than Wall Street had expected and landing at the high end of the company's guidance range of $59.5 billion to $63.5 billion. Excluding the negative impact from foreign currency exchange, revenue climbed 21%.

The revenue growth rate represents an acceleration from 17% in the first quarter and is on par with the fourth quarter of 2018's rate. In the earnings release, CEO Jeff Bezos said revenue growth got a boost from "Prime's move to one-day delivery," referencing the company's upgrading of Amazon Prime's core free delivery benefit from two days to one day.

Here's how revenue broke out by segment:

Segment

Revenue for Q2 2019

Change (YOY)

North America

$38.7 billion

20%

International

$16.4 billion

12%

Amazon Web Services (AWS)

$8.4 billion

37%

Total

$63.4 billion

20%

Data source: Amazon. YOY = year-over-year.

While the company's cloud computing service, AWS, continued to post robust revenue growth, its sequential growth rate slowed more a bit more than it has recently -- 5 percentage points on a constant currency basis. In constant currency, AWS's revenue has increased year over year as follows: 37% in Q2 2019, 42% in Q1 2019, 46% in Q4 2018, 46% in Q3 2018, and 49% in Q2 2018.

Breaking out revenue another way:

  • Online retail sales grew 14% year over year as reported, and 16% in constant currency, to $31.1 billion.
  • Physical-store sales (which primarily consist of Whole Foods store sales) were $4.3 billion, which was flat with the year-ago period and up 1% in constant currency. This number doesn't include online orders from Whole Foods via the Prime Now app. 
  • Third-party seller commission and fulfillment fees rose 23% as reported, and 25% in constant currency, to $12 billion. 
  • Subscription services (Prime and other) jumped 37% as reported, and 39% in constant currency, to $4.7 billion. 
  • AWS sales surged 37% both as reported and in constant currency to $8.4 billion.
  • Other sales (primarily comprised of advertising revenue) jumped 37% both as reported and in constant currency to $3 billion. 

2. Operating income rose 3.3% 

Operating income increased 3.3% year over year to $3.1 billion, falling at the midpoint of Amazon's guidance of $2.6 billion to $3.6 billion. 

Segment

Operating Income for Q2 2019

Change (YOY)

North America

$1.56 billion

(15%)

International

($601 million)

Loss widened $105 million, or 21%

AWS

$2.12 billion

21%

Total

$3.1 billion

3.3%

Data source: Amazon. YOY = year-over-year.

North America's 15% operating income decline was largely driven by the cost of transitioning the core Prime free delivery benefit from two days to one. Last quarter, CFO Brian Olsavsky said the company had planned to spend about $800 million in the quarter on this huge initiative. On the current earnings call, he said that the cost came in " a little bit higher than that number." 

AWS' operating margin contracted, with revenue growth (37%) considerably exceeding operating income growth (21%). Its operating margin was 25.2%, down from 28.9% last quarter and 29.3% in the fourth quarter of 2018. The cloud service is still mighty profitable, just not as profitable as it's been, and accounted for a whopping 69% of Amazon's total operating income in the quarter.

A notable factor in the company's overall declining operating margin was a 48% increase in marketing expense. On the call, Olsavsky said that this was due to several reasons, including Amazon continuing to add to its AWS sales and marketing teams and adding "more and more advertising as we roll out devices and new Prime Video content, in particular internationally."

3. EPS edged up 3% 

Net income rose 4% year over year to $2.6 billion. Earnings per share (EPS) went up 3% to $5.22. Wall Street was looking for EPS of $5.57, so Amazon fell short here. 

4. Operating cash flow surged 65% over the trailing-12-month period

Operating cash flow jumped 65% year over year to $36 billion for the trailing 12 months. Free cash flow skyrocketed 140% to $25 billion.

5. Operating income is expected to drop 16% to 43% in Q3 

For the third quarter, Amazon guided for net sales between $66 billion and $70 billion, representing growth of 17% to 24% year over year. The midpoint of this range, $68 billion, is a little higher than the $67.3 billion Wall Street was projecting. 

The company expects operating income in the range of $2.1 billion to $3.1 billion, representing a contraction of 16% to 43% from the year-ago period's $3.7 billion. The Street doesn't provide operating income estimates per se, but we can surmise that Amazon's outlook fell short of expectations because analysts had been projecting EPS growth of 15.5% in the third quarter.

Playing the long game

In the second quarter, a big reason for Amazon's anemic operating income and earnings growth was the expense -- somewhere a little north of $800 million -- of upgrading its standard Prime free delivery benefit to one day. The company is sacrificing some short-term profits in order to boost growth over the long term. This is a good thing for long-term-focused investors.

On the earnings call, Olsavsky said "we expect to see continued ramp of the one-day selection availability for the next few quarters both in North America and international." The cost associated with this ramp-up is likely the primary reason that Q3 operating income guidance came in lighter than many were expecting. While he didn't provide guidance for this cost, Olsavsky did say that it's expected to accelerate from Q2's cost. In other words, it's anticipated to be higher than $800 million.