With Surging Profits (And Creeping Costs), Amazon Ups The Price Of Prime

There are good earnings days, there are great earnings days and there are astonishing earnings days. Amazon’s earnings day yesterday floated someplace between great and astonishing – and the market took note. As soon as the news broke, Amazon’s share price jumped 7 percent in afterhours trading and continued to climb from there.

Aside from the numbers (we’ll get to those in a minute), analysts were particularly dialed into Amazon Prime. CFO Brian Olsavsky publicly announced that Amazon Prime will be getting its first price hike in four years – a 20 percent hike for annual subscribers to $119, which will take effect in May.

“We do still feel the best deal in retail is Prime, and we just work to make it better and better each day,” Olsavsky said.

It’s an effort that, as we learned last week, has attracted more than 100 million subscribers worldwide.

By the Numbers

Amazon reported Q1 revenue of $51.04 billion — $1.25 billion dollars more than the $49.78 billion forecast by analysts. Year-on-year, net sales were up 43 percent from the $35.7 billion Amazon clocked in Q1 2017. North American revenue climbed to 46 percent to $30.7 billion. International sales were up 34 percent to $14.8 billion.

Earnings per share were $3.27 — more than double analyst estimates of $1.26 – for a net income of $1.6 billion. That’s an $876 million pickup on Q1 2017’s $724 million, or $1.48 EPS.

Amazon Web Services (AWS) posted $5.44 billion in revenue, beating out the $5.24 billion analysts were looking for. As it has in quarters past, AWS acted as the virtual cash printing press, pushing growth across the organization. AWS revenue is up 49 percent year over year during Q1, generating $1.4 billion in operating income (about 73 percent of Amazon’s total income).

“AWS had the unusual advantage of a seven-year head start before facing like-minded competition, and the team has never slowed down,” said CEO Jeff Bezos in a statement that accompanied the earnings release. “As a result, the AWS services are by far the most evolved and most functionality-rich.”

Amazon’s physical stores – an earnings category that is nearly entirely Whole Foods revenue – brought in $4.2 billion in sales. Subscription services – a category dominated by Prime but which also represents things like Amazon Music Unlimited and Kindle Unlimited offerings – brought in about $3.1 billion in revenue.

Amazon does not break out numbers for its Echo devices, as they are categorized under “other” along with revenue from Amazon’s advertising business. Notably, however, that “other” section did see its revenue increase 139 percent year-on-year, to a little over $2 billion.

But for all those good green arrows, Amazon also had some increases on the costs side of the ledger as well. The cost of order fulfillment was up 49 percent to $244 million, and shipping costs rose 38 percent to a little over $6 billion. Cost of content and technology were also on the rise for Amazon, up 43 percent to $630 million.

And given those cost increases in the service areas for which Prime is best known – shipping and content – the price hike is somewhat less surprising.

Pushing Prime, Perfecting Whole Foods and Going International

The plans for Prime was the subject of many analysts’ questions: Would the move make it harder for Amazon to gain additional penetration among working-class consumers, and did Amazon risk further slowing new Prime membership?

Olsavsky was fairly consistent in his reply that Amazon offered a variety of options for Prime membership, including monthly payments models and discounts for students that they believe will continue to make it easier for a wide range of consumers to sign on.

“We always evaluate the price of Prime in all the countries we’re in, and we’re always looking for creative ways to reach the customer,” he said. “If you look at four years ago when we last increased the price of Prime, you could get 20 million products within two days. As of today, that number has grown to 100 million within two days, and many, many the next day, same day or in two hours. We have added all kinds of new features we’ve added to the program – it is much different than it was in 2014, and this is a much better reflection of the cost benefit value of the program.”

One such benefit that was mentioned more than once during the call with investors was the expansion of Prime Now to Whole Foods-based grocery delivery in 10 U.S. cities. Analysts were curious about any specific numbers Amazon had to offer (they had none) and any early learnings from the first 19 cities to report. There was also a question of when the program was going to expand, specifically to New York City.

Olsavsky didn’t have many specifics to offer – expansion is planned, but for now Amazon is content to watch and learn in the markets where they are already testing the program, giving the strong impression that new expansions are not on the immediate horizon.

“As far as what we will be looking at when it comes to expanding that grocery delivery:  We are going to use the 10 cities as a test and see how customers respond, just as we always do,” he said. “We are going to make sure those deliveries are great, and we’ll announce expansion plans once we’ve digested that feedback from customers.”

Analysts were also curious about Amazon’s view on its expansion into international markets these days, given the company’s many investments overseas and the fact that the platform is still split approximately 65 (domestic purchases) to 35 (domestic users).

“Would you envision international closing the gap in the coming years?” one analyst asked.

Olsavsky didn’t answer that question directly, either, only noting that he was hesitant to make projections about what will or will not happen in international markets. He did re-affirm Amazon’s commitment to investing internationally and building out its offering – because, he noted, the company believes its best shot at global growth is bringing consumers all over the world the things about Amazon that are post popular in the United States.

“They have different dynamics, but at the end of the day, we believe customers behave the same globally in that they value low prices, great selection and a good customer experience.”