Amazon's Q2: $4 Billion Spent On COVID-19 And Still Nets $5.2 Billion

Amazon's second quarter crushed expectations as the company spent more than $4 billion on COVID-19-related costs and still had enough operating leverage to post $5.2 billion in profits. AWS' annual revenue run rate topped $43.2 billion. 

The company reported net income of $5.2 billion, or $10.30 a share, on revenue of $88.9 billion, up 40% from a year ago. Wall Street was expecting Amazon to report second quarter revenue of $81.56 billion with non-GAAP earnings of $1.46 a share.

AWS delivered second quarter sales of $10.81 billion, up 29% from a year ago, and "other" revenue, which is mostly advertising was up 41% excluding currency fluctuations.

Like most quarters of late, AWS generated the most operating income. AWS delivered second quarter $3.38 billion in operating income on $10.81 billion in sales. Amazon's North American retail unit reported operating income of $2.14 billion on sales of $55.44 billion. International delivered an operating profit of $345 million on revenue of $22.67 billion. 

Going into the earnings, Amazon shares were up more than 65% year to date on e-commerce demand amid the COVID-19 pandemic and scale for the company's cloud and advertising businesses. There were also high expectations for AWS after Microsoft reported strong growth for commercial cloud as well as Microsoft 365 bundles. Google Cloud also fared well after recently fleshing out its plans. 

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CEO Jeff Bezos said with what had to be a bit of understatement: "This was another highly unusual quarter." Bezos then noted the more than $4 billion spent on COVID-19,175,000 new jobs created since March and $9 billion invested in capital projects. Bezos comments come a day after antitrust hearings before a House committee.

On a call with press, Amazon CFO Brian Olsavsky said the profit gains were because the company was able to ship more than expected and customers purchased more profitable items. Olsvasky also said that Prime Day will move to the fourth quarter this year. 

Olsavsky broke down the $4 billion in COVID-19 spending on Amazon's earnings conference call: 

In Q2, we incurred more than $4 billion of COVID-related expenses, getting products to customers and keeping employees safe. The largest portion of these costs related to compensation for our frontline employees, including higher hourly wages through the end of May and a more than $500 million Thank You bonus in June. We also experienced productivity headwinds in our facilities. This included changes to over 150 of our processes to provide for social distancing as well as costs to onboard and train over 175,000 new employees who are hired to meet the higher customer demand. This $4 billion also included investments in personal protective equipment for employees and enhanced cleaning for our facilities. 

On AWS, Olsavsky said the cloud unit's run rate is up $10 billion in just 10 months. "Customer usage remains strong, although growth varies across industries as a result of the COVID-19 crisis," he said. 

In addition, Olsavsky said that some AWS customers in hospitality and travel have cut costs and AWS is helping those customers adopt best practices to cut costs. In other areas, companies are spending on cloud because of digital transfomration and to scale better with demand up or down. 

Analysts were pressing Olsavsky on when demand would normalize as well as Amazon's new profit profile. 

If you look at our historic run rates and can see how big a quarter Q2 was, Q2 was actually higher revenue than Q4 of last year, which is unheard of. And Q3 is now forecast to be also higher than Q4 of last year. So we've kind of moved the peak forward and for different reasons, and we're trying to -- mainly like, as I said, first priority is getting -- is making sure our employees are safe and that we continue to do social distancing and keep everybody safe and healthy. Second priority is getting capacity online because we do not have -- in Q2, we generally have lower revenue. And in Q2, like I mentioned, we were able to use the excess capacity that did exist to serve the higher demand. Now as we move into Q3, we're starting to -- we need to build the inventory more for Q4, and we've run out of space. So we've got our hands full on that challenge, but we've got a really good team that's been working very hard probably since late February on this issue. And when you talk about profitability, we'll also mention that there are a couple of expenses that have gone down in the interim. Marketing, we cut marketing probably by about 1/3 in Q2 as mainly because we're trying to manage demand. It started to normalize and get back to somewhat normal levels in -- at the end of Q2, but -- and therefore, we'll see a higher level in Q3. But certainly, marketing costs were lower. You probably saw it in a lot of companies. Travel expenses have almost grown to a halt. Meeting costs, even medical costs in some examples or in some cases have been delayed as people don't go to the doctor or don't go there as quickly. We think that will normalize over time. And as far as investments, I think we've got a lot of investments already in play.

Amazon's outlook was also strong. Amazon projected third quarter sales between $87 billion and $93 billion, or up 24% to 33%. Operating income will be between $2 billion and $5 billion in the third quarter. Amazon estimated it will spend $2 billion on COVID-19 related costs.  Wall Street was expecting sales of $86.34 billion. 

By the numbers:

• Amazon increased grocery delivery capacity by more than 160% and tripled grocery pickup locations. Online grocery sales tripled in the second quarter.
• Amazon's purchases of property and equipment in the second quarter totaled $7.46 billion, up from $3.56 a year ago.
• Technology and content costs in the second quarter were $10.39 billion, up from $9.06 billion a year ago.
• Physical store sales were $3.77 billion, down 13% from a year ago.
• Subscription sales were $6.02 billion, up 29% from a year ago.
• Global shipping costs were up 68% in the second quarter compared to a year ago to $13.65 billion.
• Amazon ended the quarter with 876,800 employees.

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