The e-commerce and cloud computing behemoth's revenue jumped 20% year over year to $63.4 billion -- $1 billion more than Wall Street had expected. But the company's earnings per share (EPS) edged up just 3% to $5.22, falling short of the $5.75 consensus estimate.
Shares fell 1.6% on Friday, which we can attribute to the earnings miss and third-quarter operating income guidance coming in lower than analysts had been projecting.
Earnings releases tell only part of the story. Here are two key things management shared on the Q2 call that you should know.
One-day Prime deliveries increased
From CFO Brian Olsavsky's remarks:
So we are really pleased with the customer response into our growing one-day offering. In Q2 we had a meaningful step up in the one-day shipments, primarily in North America, and one-day volume was accelerating throughout the quarter. ...So we're in the middle of a journey here. We expect to see a continued ramp of the one-day selection and availability for the next few quarters, both in North America and International. International [one-day shipment volume] was up slightly in Q2, but for the most part, the improvement in delivery speeds will be in future quarters there.
In the second quarter, the company began upgrading Amazon Prime's core free-delivery benefit from two days to one day. Management said that this multiquarter initiative has already had a positive impact on revenue growth. In Q2, Amazon's revenue jumped 20% year over year, which represents an acceleration from a 17% growth rate in the first quarter.
Naturally, the cost of this huge project is eating into current profits. Amazon spent a little more than $800 million in the quarter on this initiative, which was a main reason for the anemic growth -- 3% year over year -- in overall operating income and the driver behind the North America segment's profit decline of 15% year over year. In the third quarter, Olsavsky said the cost of the Prime delivery upgrade is expected to accelerate from Q2's $800 million. This continued cost is the primary reason that third-quarter operating income outlook came in lighter than many were expecting. For Q3, management guided for operating income in the range of $2.1 billion to $3.1 billion, representing a decline of 16% to 43% year over year.
Sacrificing some short-term profits in order to spend money on initiatives aimed at powering long-term growth is nothing new for Amazon. In fact, that's its usual strategy, and so far it has worked out extremely well for the company and its investors.
Positive happenings in India
From Olsavsky's remarks:
[In India, we] continue to see growth in programs for both our sellers and delivery partners. In the last 18 months, we've doubled the number of paid Prime members ...
Our engagement with the Indian government makes us optimistic about partnering and collaborating to seek a stable predicable policy that allows us to continue investing in our technology and infrastructure. And it also helps us to create jobs and scale local businesses.
The Indian government recently updated its rules for foreign direct investments (FDI) in e-commerce platforms, with the aim of helping smaller retailers better compete with Amazon and Walmart's Flipkart, which have a near duopoly in India's e-commerce market.
While these policy updates have been making it more challenging for Amazon to grow in the Indian market, the company has been making some solid progress, as Olsavsky discussed. Naturally, this is a big positive, given that India's population of about 1.3 billion makes it the second most populous country in the world, behind only China, which is home to about 1.4 billion people. While India is a developing country with a low per capita income, large waves of people continue to pour into the middle class, and this dynamic is expected to continue.
Olsavsky said that Amazon has invested a lot of money in its global selling program, "which helps Indian sellers not only reach customers in India, but also in other geographies around the world." He added that the company "started Amazon Flex in India, which helps our local partners to deliver packages, gives them jobs, grows our delivery capacity for sellers and increases our speed of delivery. So it's a win-win."