Amazon.com, Inc. Earnings: It's All About Web Services

By Markets Fool.com

Image source: Amazon.

Continue Reading Below

Online retailer and cloud-computing services giant Amazon.com (NASDAQ: AMZN) reported second-quarter results on Thursday night.Let's have a closer look at the latest business update.

Amazon's Q2 results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (Year over year)

Revenue

$30.4 billion

$23.2 billion

31%

Net income

$857 million

$92 million

832%

GAAP EPS (diluted)

$1.78

$0.19

837%

Data source: Amazon.

What happened with Amazon this quarter?

Continue Reading Below

Amazon web services led the way, once again, both in revenue growth and profitability. The top line finished near the very top-end of Amazon's own guidance range.

  • Amazon's domestic and international e-tailing operations saw year-over-year sales growth of 30% and 28%, respectively. Meanwhile, web services revenue raced 59% higher.
  • The cloud-computing division now accounts for 9.5% of Amazon's quarterly sales, up from 7.9% a year ago. The slim revenue slice notwithstanding, web services now accounts for 41% of Amazon's unadjusted operating income, up from 36% in the year-ago quarter.
  • Operating income was $1.3 billion, up from $464 million in the year-ago period. The top end of management's guidance tapped out at $975 million.
  • The company has now generated $2.5 billion of free cash flows over the last four quarters, after taking out capital lease payments and lease prepayment costs. At the same point in 2015, that metric amounted to $492 million of negative cash flows.

Management offered the usual sparse set of next-quarter projections.

  • Net sales should stop at approximately $32.2 billion, which would work out to 27% year-over-year growth.
  • Operating income could land anywhere between $50 million and $650 million, which compares to $406 million in the third quarter of 2015.

What management had to say

As expected, Amazon spent some time fawning over the recent Prime Day event. This sale set a new record for single-day sales, and was 60% larger than last year's Prime Day debut. But the financial windfall from that event will show up in the next report, because Prime Day fell a couple of weeks after closing the books on the second quarter.

Otherwise, CEO Jeff Bezos underscored Amazon's expanding operations in India. The world's second most-populous nation now has access to free Prime shipping in over 100 cities, with more features to come:

It's been a busy few months for Amazon around the world, and particularly in India, where we launched a new AWS Region, introduced Prime with unlimited free shipping, and announced that Prime Video is coming soon, offering Prime members in India exclusive access to Amazon Original Series and Movies, including original content featuring top Indian creators and talent.

The team in India is inventing at a torrid pace, and we're very grateful to our Indian customers for their welcoming response.

Looking ahead

The web services division is a big piece of Amazon's operating puzzle these days, and only growing larger. Thanks to this adrenaline shot of additional profits, Bezos and his leadership team are enjoying greater freedom to take financial risks. For example, Amazon-branded hardware has grown from just the Kindle line of e-book readers to a wide range of media players, home automation tools, and more.

Investors are not complaining. Amazon's share prices spiked 2% higher in after-hours trading, setting new all-time highs in the process. The stock has now gained 45% over the last 52 weeks, thanks to a newfound tendency to report solidly positive earnings in all seasons.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.