- Amazon saved nearly $2.6 billion in net profits last quarter by cutting its marketing spend and through a previously announced estimate change for its server costs.
- The change is noteworthy given how Amazon's net profit doubled to a record $2.6 billion last quarter, and shows how the company boosted its profitability in the face of a pandemic.
- Analysts say the growth in Amazon's high-margin businesses also helped offset the increased costs during the quarter, such as the $4 billion COVID-related expenses.
- Visit Business Insider's homepage for more stories.
Amazon surprised many investors last week when it doubled its second-quarter profits to a record $5.2 billion — nearly seven times more than Street expectations.
But Amazon's quarterly filings show a large portion of its profit gains were led by a change in accounting estimates and a marketing cutback, showing how the company was able to boost its bottom line in the face of a pandemic. Growth in its higher-margin businesses, such as its cloud and advertising units, helped too, as its retail profitability dropped during the quarter.
According to Amazon's quarterly filings, it added $534 million in net income last quarter due to a previously announced change in the way it accounts for its servers' lifetime value. The extended "useful life" of its servers, a legitimate change that speaks to Amazon's infrastructure efficiency, helped spread out the depreciation cost by another year, resulting in a bump in profits.
The bigger impact, however, came from a reduction in marketing expenses. Amazon's CFO Brian Olsavsky said in a call with analysts that the company cut its marketing spend by "about a third" in the quarter to reduce the heavy customer demand pressuring its supply chain during COVID-19. That means Amazon spent roughly $2.1 billion less on marketing than it normally would have during the quarter. Its marketing expense grew just 1% to $4.3 billion in the three months ending in June, a sharp decrease from the 37% growth seen all of last year.
Combining those two figures ($534 million and $2.1 billion) results in roughly $2.6 billion in savings — almost exactly the same amount Amazon reported in its year-over-year profit gains for the quarter.
Daniel Aobdia, an accounting professor at Northwestern University and a former fellow at the Public Company Accounting Oversight Board, told Business Insider that those two factors were key to Amazon's record profits. Given Amazon spent more than $4 billion on COVID-related initiatives, those changes helped offset the loss. The bigger question, he said, is how to make future profit estimates, since Amazon will most likely have to ramp up its marketing spend once COVID-driven demand cools down, possibly making last quarter's profit gains an outlier.
"One might wonder how much the increase in earnings will be sustained over the long run if marketing expenditures need to revert back to traditional levels," he said.
Amazon's spokesperson declined to comment.High-margin businesses
Aobdia said Amazon still deserves a lot of credit for being able to absorb the cost increases it saw in shipping and fulfilling products during the pandemic. Amazon said it plans to spend another $2 billion on COVID-related expenses this quarter.
During last week's earnings call, Olsavsky credited the huge increase in sales, which grew 40% to $88.9 billion, and a mix-shift to more profitable items being sold for the record profits. Amazon's international business also turned a rare profit at $345 million.
R.J. Hottovy, an analyst at Morningstar, said because of the massive $4 billion COVID-related expenses during the quarter, Amazon had to make up profits from other sources as well. That primarily came from Amazon's higher-margin units, including its cloud, advertising, and third-party seller marketplace, he said. While Amazon doesn't give a profit breakdown for its advertising and marketplace businesses, each unit's quarterly sales grew by 41% and 52%, respectively. The Amazon Web Services cloud segment's sales growth slowed to 29%, but its profit margins expanded by 6 percentage points.
"The key takeaway from this quarter was that Amazon needs these higher-margin businesses to drive profitability going forward," Hottovy said.
All this is particularly important because Amazon's retail efficiency appears to have worsened during the quarter, according to Anup Srivastava, an accounting professor at University of Calgary.
Amazon's gross margins decreased by 2 percentage points last quarter, while its fulfillment costs also grew as a percentage of total sales. North America retail margins slightly dipped as well, which Amazon blamed for the "increased shipping and fulfillment costs due in part to COVID-19" in its filings.
"I don't see any significant improvement in retail profitability," Srivastava said.
Still, the fact that Amazon saw significant sales growth without doing more marketing should pay off in the future, said Colin Sebastian, an analyst at R.W. Baird. The customers Amazon acquired very cheaply during the quarter are likely going to continue shopping on its site, adding to its growth and margins ahead. But even with that, it's hard to see Amazon maintaining the huge profit levels it saw from the second quarter, he said.
"I don't think the Street is expecting those Q2 margins to continue in the near term," he said.
NOW WATCH: Why you don't see brilliantly blue fireworks
- Amazon quietly launched a new website for its big ad conference, which returns for its second straight year amid the company's surging digital ad sales
- Amazon's UK sellers are facing a 2% fee hike after the company decided to pass along the entire cost of a new national digital tax
- This chart shows Amazon's one-day shipping has significantly rebounded, but many sellers still face long delays getting their own shipments to warehouses