Amazon: Demand for e-commerce and entertainment surged during the epidemic, but rising fulfillment costs dragged down profits

According to Amazon’s 1Q20 financial report, Amazon’s free cash flow in the past 12 months was US$24.34 billion, a year-on-year increase of 6%.

Amazon's net sales in the first quarter were $75.5 billion, up 26% from $59.7 billion in the same period last year, which exceeded analysts' expectations. Excluding the $1.1 billion adverse impact of exchange rate changes, Amazon's net sales in the first quarter increased by 27% year-on-year. In contrast, according to a survey by financial information provider FactSet, analysts had previously expected Amazon's net sales in the first quarter to reach $73.61 billion.

Amazon's net product sales in the first quarter were $41.841 billion, up from $34.283 billion in the same period last year; net service sales were $33.611 billion, up from $25.417 billion in the same period last year.

Amazon's e-commerce business, advertising business, and cloud computing business AWS have surged due to the epidemic . Due to the surge in demand for remote work, AWS's revenue in the first quarter exceeded the 10 billion mark for the first time, reaching 10.2 billion US dollars, a year-on-year increase of 33%; the advertising business increased by 43.8% year-on-year to 3.9 billion US dollars. Amazon said that the tourism and automotive industries were affected by the epidemic, but the increase in traffic in other fields also played a positive role in the advertising business.

As users in Europe, the United States and other regions have increased their e-commerce shopping due to stay-at-home orders during the epidemic, Amazon disclosed that the main changes in users' consumption habits are reflected in the grocery business, with online grocery sales increasing and fresh food delivery also increasing significantly. This change has continued from March to the present.

"We are now working 24 hours a day, and our delivery capacity has increased by 60%. The number of Whole Foods stores that support self-pickup has increased from 80 before the epidemic to more than 150. Physical stores have increased by 8% year-on-year, but they are basically Whole Foods stores. Some of our employees work in stores, and some do delivery to ensure consumers have a good shopping experience." Dave Fildes, Amazon's head of investor relations, said. Amazon Chief Financial Officer Brian Olsavsky said in a conference call that Prime members have performed well during the epidemic. "We have seen that the self-pickup service provides a lot of convenience, and members' consumption has increased, and the types of purchases have also increased. We have also seen that people's use of Amazon's media and digital services business has increased, and streaming viewing has doubled in March."

Cumulative sales in the past 12 months were US$296.3 billion, of which the North American market was US$181.1 billion, accounting for 61%, the international market was US$77.6 billion, accounting for 26%, and AWS was US$37.5 billion, accounting for 13%.

Amazon's operating profit in the first quarter was $3.989 billion, compared with $4.420 billion in the same period last year.

Net profit was US$2.535 billion, down 29% year-on-year.

Amazon's North American division (US, Canada) had net sales of $46.127 billion in the first quarter, up 29% from $35.812 billion in the same period last year, accounting for 61% of total sales, compared with 60% in the same period last year. Amazon's North American division had operating profits of $1.312 billion in the first quarter, compared with $2.287 billion in the same period last year.

Amazon's international division (UK, Germany, France, Japan and China) had net sales of $19.106 billion in the first quarter, up 18% from $16.192 billion in the same period last year; accounting for 25% of total sales, compared with 27% in the same period last year. Amazon's international division had an operating loss of $398 million in the first quarter, compared with an operating loss of $90 million in the same period last year.

Amazon AWS cloud service net sales in the first quarter were $10.219 billion, up 33% from $7.69 billion in the same period last year; accounting for 14% of total sales, compared with 13% in the same period last year. Amazon AWS cloud service operating profit in the first quarter was $3.075 billion, compared with $2.223 billion in the same period last year.

By product and service type:

Amazon's net sales from online stores in the first quarter were $36.652 billion, up 24% from $29.498 billion in the same period last year.

Net sales from physical stores were $4.64 billion, up 8% from $4.307 billion in the same period last year.

Net sales from third-party seller services were $14.479 billion, up 30% from $11.141 billion in the same period last year.

Net sales from subscription services were $5.556 billion, up 28% from $4.342 billion in the same period last year.

Net sales from AWS cloud services were $10.219 billion, up 33% from $7.69 billion in the same period last year.

Net sales from other businesses were $3.906 billion, up 44% from $2.716 billion in the same period last year.

Impact of the epidemic on company profits

Although the COVID-19 pandemic has catalyzed Amazon's business, it has also had a negative impact on Amazon's costs. For example, in terms of logistics, Amazon has increased the hourly wages of employees in many countries and regions, with related expenses as high as $700 million. In addition, due to the surge in e-commerce orders and the overload of logistics centers, Amazon had to suspend its "one-day delivery" service, extended the delivery time of non-critical materials to 1 to 4 days, and suspended the transportation of non-critical materials in many countries. Brian Olsavsky mentioned that the area most affected by Amazon is India. Since Amazon is only allowed to open grocery businesses in India, this has led to a significant decline in the company's product supply. However, he believes that once the Indian government allows Amazon to resume normal operations, the company will soon expand its supply. In addition, a French court ruled that Amazon must close its six storage centers in France, and the company is appealing the matter.

CEO Bezos expects to achieve operating profits of $4 billion or more in the second quarter of this year, but he said the company plans to spend $4 billion or more in profits on related expenses to provide products to customers and ensure employee safety, such as providing free COVID-19 testing for all employees.