Amazon's cloud services drives $23.2B profit surprise, while Prime subscriptions bolster margin

Retail and online video streaming giant Amazon (NASDAQ: AMZN) once again surprised analysts, this time by doing something it hasn't done in several quarters: posting a profit. Revenue for the second quarter jumped 20 percent year over year to $23.2 billion, with a profit of $92 million, coming to 19 cents per share.

Compare that to the first quarter of 2015, when Amazon posted a net loss of $57 million. The company had predicted it would bring in between $20.6 billion and $22.8 billion with a half-billion-dollar operating loss; analysts had expected it to bring in revenues of $22.4 billion with a net loss of 14 cents per share.

Amazon instead brought in operating income of $464 million.

The biggest factor in Amazon's turnaround was clearly AWS (Amazon Web Services), its huge cloud services offering. The company reported that revenue increased 81 percent year-on-year to $1.82 billion. Operating income for the AWS segment skyrocketed 407 percent to $391 million with a 21.4 percent operating margin.

What's driving the jump in AWS usage? Amazon executives were, as usual, mostly mum about the details, noting on an earnings calls with investors and analysts that they would not provide specific customer details. However, SVP and CFO Brian Olsavsky said that the increase in the quarter "was somewhat expected" and noted that AWS revenues also increased 49 percent in the first quarter. "We did announce a region in India. The other thing to mention is that we continue to see very strong usage of growth that's outpacing the revenue growth of 81 percent obviously." A focus on cost efficiencies and Amazon's own growing consumer base were also cited as factors in AWS growth.

In North America, Amazon saw its revenue grow 26 percent to $13.8 billion. Media revenue was up 6 percent to $2.62 billion. Internationally, growth was slower at 3 percent, or $7.56 billion in revenue, with media revenue decreasing 12 percent to $2.09 billion.

Amazon has approximately 285 million active customer accounts worldwide.

Olsavsky noted that Prime memberships are growing faster outside the U.S. than they are domestically, but the company is happy with both its U.S. and International segments. Amazon's U.S. segment saw a 5.1 percent operating margin in Q2, up from 3.9 percent in Q1. "So we are getting very good top-line growth. A lot of that is fueled by Prime adoption and we are dropping a lot of it to the bottom line with many of the efficiency projects," he said on the earnings call.

Prime, of course, includes access to Amazon's Prime Instant Video streaming service.

While the SVOD service didn't get as much attention in this quarter's report as in previous periods, Amazon noted several high points for Prime Instant Video. Its original series, such as Transparent and kids' programming like Tumble Leaf, saw numerous Emmy nominations--and five Daytime Emmy wins for Tumble Leaf.

Olsavsky noted on the call that both fulfillment center costs and content costs for Prime Instant Video will affect its forecast for the third quarter of 2015. Amazon intends to "step-up" its content spend in Q3, not just for new seasons of its original content but also its next pilot season. "You will see extensions of a lot of the successful shows that we've had so far this year," he said, adding in response to another analyst question, "we're looking to invest to strengthen the Prime platform. That includes video content including Amazon Originals, Prime Music, Prime Now."

For the third quarter, Amazon is expecting net sales between $23.3 billion and $25.5 billion, a 13 to 24 percent growth year-on-year. Its operating income forecast remained on the cautious side, with the company expecting somewhere between a loss of $480 million to income of $70 million.

Wall Street responded to the earnings news with a 20 percent surge in Amazon stock price on the Nasdaq, bringing it to a record $580.57 per share in Friday morning trading. At midday, shares remained up at $556.55, or $73.85 higher than Thursday's closing price.

For more:
- see the earnings release
- USA Today has this story
- Seeking Alpha has a transcript

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