Jeff Bezos tells Amazon shareowners: "Take a seat" as COVID-19 eats into profits

After a mixed Q1, Amazon expects to spend about all $4 billion of its Q2 operating income on expenses related to the pandemic.

After a mixed first quarter impacted by the COVID-19 pandemic, Amazon CEO Jeff Bezos on Thursday told Amazon shareowners to prepare to "take a seat" as the crisis eats into the company's profits. For the second quarter, Amazon said in its outlook, the company expects just about all of its operating income -- approximately $4 billion -- to go toward costs related to the pandemic. That includes spending hundreds of millions on COVID-19 testing capabilities, Bezos said. 

Amazon's net income decreased to $2.5 billion in the first quarter, or $5.01 per diluted share, compared with net income of $3.6 billion, or $7.09 per diluted share, in first quarter 2019. Net sales increased 26 percent to $75.5 billion in the first quarter. 

amazon.png

Analysts were looking for earnings of $6.25 per share on revenue of $73.61 billion. 

Expenses related to COVID-19 in the first quarter came to $600 million, CFO Brian Olsavsky said in a conference call Thursday.

Once again, Amazon Web Services grew at a faster rate than the rest of the company. The cloud computing segment brought in $10.2 billion in net sales in Q1, growing at 33 percent. That's slightly lower than Q4's 34 percent growth rate and slower than the 41 percent growth rate posted in Q1 2019.

In a lengthy statement, Bezos explained why the company could report losses in Q2:

"From online shopping to AWS to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon's business as never before, but it's also the hardest time we've ever faced. We are inspired by all the essential workers we see doing their jobs — nurses and doctors, grocery store cashiers, police officers, and our own extraordinary frontline employees. The service we provide has never been more critical, and the people doing the frontline work — our employees and all the contractors throughout our supply chain — are counting on us to keep them safe as they do that work. We're not going to let them down. Providing for customers and protecting employees as this crisis continues for more months is going to take skill, humility, invention, and money. If you're a shareowner in Amazon, you may want to take a seat, because we're not thinking small. Under normal circumstances, in this coming Q2, we'd expect to make some $4 billion or more in operating profit. But these aren't normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities. There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I'm confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less "

More specifically for the second quarter, Amazon expects net sales between $75 billion and $81 billion. It expects operating income to come in as high as $1.5 billion, or as low as a loss of $1.5 billion. That assumes $4 billion in costs related to COVID-19. By comparison, in the second quarter of 2019, Amazon brought in operating income of $3.1 billion. 

For the first quarter, Amazon's North America segment brought in net sales of $46.1 billion. International net sales accounted for $19.1 billion. At $10.2 billion, AWS accounted for just 14 percent of Amazon's total net sales. 

However, AWS once again accounted for the bulk of operating income, bringing in $3.1 billion in Q1. By comparison, Q1 North America operating income was $1.3 billion, while the International segment posted an operating loss of $398 million. 

aws.png

Advertising services is the primary driver of sales in Amazon's "Other" category, which is not an official business segment. Amazon said the category grew 44 percent in the first quarter to bring in $3.9 billion in net sales.

The past two months have already demonstrated how the pandemic has thrown Amazon operations into overdrive, creating some upheaval. Beginning in March, the company announced plans to hire more than 100,000 new employees to cope with COVID-19 demand, as well as its investment of $350 million globally to give a slight pay rise to fulfilment centers workers and its delivery network.

Meanwhile, the company has taken a number of steps to address the health risks posed to its warehouse workers, such as implementing enhanced cleaning and social distancing measures, delivering  personal protective gear like masks to employees and implementing temperature checks across its operations.

Some of these measures, however, were only implemented after workers at Amazon fulfillment centers began speaking out in protest over the company's lack of precautionary measures -- and after workers began getting sick. In France, Amazon temporarily closed its warehouses after a court said it had failed to protect its workers. 

In Thursday's release, Amazon highlighted many of the steps it's taking to respond to the crisis, including its investment in its own testing capabilities. The company has assembled a team -- comprising professionals like research scientists, program managers, procurement specialists and software engineers — that's dedicated to building incremental testing capacity. The team is building its first lab and has begun a pilot to test front-line employees. 

"We're not sure how far we will get in the relevant timeframe, but we think it's worth trying, and we stand ready to share anything we learn," the release said. 

Amazon estimates it will spend about $300 million working on its own COVID-19 testing in Q2, "if we're successful," Olsavsky said Thursday. 

"We've put some of our best people on it," he said. "I think everyone is trying to get testing. It's not readily available on the scale that we needed for -- to test our scale of employees."

Asked about whether this research could open up a new revenue stream for Amazon, Olsavsky said he wasn't sure. "Our main concern is getting testing in the hands of our employees," he said. "And then, potentially as we have excess capacity, perhaps we can help in other areas."