E-commerce powerhouse Amazon.com (NASDAQ:AMZN) reported Q1 earnings last week, and investors loved what they saw. While the company's operating margin remains very thin, investors were pleased by revenue that came in near the top of Amazon's guidance range, as well as new information on the growth and profitability of the Amazon Web Services cloud computing segment.
Following the earnings release, Amazon CFO Tom Szkutak and CFO-in-waiting Brian Olsavsky discussed the results with Wall Street analysts. Here are five key points they emphasized in their remarks.
Strong growth despite currency headwinds
Worldwide revenue grew 15% to $22.72 billion or 22% excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange. -- Amazon.com Vice President of Finance, Global Consumer Business Brian Olsavsky
Amazon.com posted strong revenue growth of 15% in Q1, despite facing a significant headwind from the strong dollar. Currency fluctuations dented revenue growth by 7 percentage points last quarter and will probably dampen Q2 revenue by around 7.5 percentage points.
Amazon's 15% growth rate in Q1 equaled its growth rate from the previous quarter. However, after adjusting for the exchange rate headwind, Amazon's 22% revenue growth in Q1 was noticeably better than the 18% figure reported for Q4 2014.
Investing in Prime Instant Video
We mentioned last call that we spent approximately $1.3 billion on content globally for Prime customers. [...] It's certainly impacting our operating results, but we like what we see. -- Amazon.com CFO Tom Szkutak
One of the ways Amazon hopes to continue its growth is by attracting new members to its Prime membership program. To do that, it has been investing heavily in both licensed and original video content, spending about $1.3 billion last year.
Amazon CFO Tom Szkutak freely admitted that the company's video spending is pressuring its profitability. However, he also stated that people who first join Prime to watch its video content ultimately end up spending more money with Amazon across a wide range of product categories. If this trend continues, the investments in video content will ultimately pay off handsomely.
Prime Now roll-out just getting started
[...] [W]e're in 7 cities today and there'd be more to come. We haven't said how many, but you should be definitely expecting more to come, and we're very excited to do that. -- Tom Szkutak
Last December, Amazon.com launched "Prime Now" in Manhattan: a service offering one-hour delivery for tens of thousands of items from 6 a.m. to midnight, seven days a week.
At the time, Amazon promised that Prime Now would be coming to more cities in 2015, and it's already following through. Aside from expanding within New York City to Brooklyn, it has become available in Atlanta, Austin, Baltimore, Dallas, and Miami in the past couple of months.
On the earnings call, Amazon executives told listeners that the Prime Now roll-out will continue as 2015 progresses. They didn't provide exact guidance for how big this initiative could become, but they implied that Prime Now is still in the very early innings and has big potential.
Amazon Web Services has pricing power
It probably is worth adding that although price is a factor, the primary factor for customers choosing AWS is really around their ability to move quickly and to be nimble and agile. -- Brian Olsavsky
Amazon bulls were particularly delighted to see that the company's Amazon Web Services unit is not only the company's fastest-growing business segment, but also its most profitable one.
Granted, the reported 16.9% AWS segment margin leaves out stock-based compensation, which is a major expense category. But even if this reported margin is somewhat inflated, it's clear that AWS is solidly profitable. This is encouraging since it has been caught up in an off-and-on price war with other top cloud computing companies in recent years.
Incoming Amazon.com CFO Brian Olsavsky tried to emphasize that AWS is not just selling a commodity product. He noted that while price is obviously important, customers choose AWS primarily for the flexibility and easy scalability that it provides. That may bode well for its long-term profitability.
Bullish on India
We're also very excited about India. [...] We think it's very -- a big opportunity, and we're investing appropriately for that big opportunity. -- Tom Szkutak
International markets have been a soft spot for Amazon lately, at least compared to the U.S. Last quarter, Amazon's international revenue declined 2% because of the massive negative impact of the strong dollar. Holding exchange rates constant, international revenue would have increased 14% -- still not extraordinary by Amazon's lofty standards.
But India has been a bright spot. Amazon CFO Szkutak mentioned India several times on the call as a market where Amazon sees big opportunities and is investing heavily.
Amazon hasn't been especially successful in China, probably because of the dominance of local e-commerce heavyweight Alibaba. Amazon's management may be hoping that the lack of a similarly entrenched local competitor in India will make that a more successful market.