Amazon’s cost cuts push operating margin into double digits for first time

For most of its 27 years as a public company, Amazon investors were asked to sacrifice profit for growth. This is no longer necessary.

In Tuesday’s first-quarter earnings report, Amazon’s operating margin reached double digits for the first time ever. The company’s margin rose to 10.7% in the period, up from 7.8% in the fourth quarter and surpassed the previous peak of 8.2% in the first quarter of 2021.

Although overall revenue growth has hovered in the low double digits for several quarters — and was mired in the single digits for parts of 2021 and 2022 — profit-hungry investors were pleased by the combination of CEO Andy’s deep cost-cutting Jassi and stronger growth rates in higher-margin businesses such as advertising and cloud computing.

Operating income more than tripled in the quarter to $15.3 billion, while net profit also jumped more than 200% to $10.4 billion.

“This tells us that Andy Jassy’s emphasis on services for Amazon is working,” Tom Forte, an analyst at Maxim Group, said in an interview on CNBC’s “Closing Bell: Overtime” on Tuesday. “When you combine that with his very aggressive cost management, you see these impressive margins.”

Amazon shares rose about 1% in extended trading. Shares were up 15% for the year at Tuesday’s close.

Amazon Web Services revenue rose 17% in the first quarter, a faster pace than Wall Street expected. Almost two-thirds of operating revenue for all of Amazon comes from AWS, which now generates more than $100 billion in annual revenue. AWS growth accelerated from 13% in the fourth quarter.

Digital advertising, a business that was created Meta and Alphabet two of the most profitable companies on the planet, has become a booming business for Amazon as well. Ad revenue rose 24% to $11.8 billion in the first quarter from $9.5 billion a year earlier.

“Advertising is growing and AWS is strong,” Amazon CFO Brian Olsavsky said on Tuesday’s earnings call, discussing improvements in operating income. But there is more. “A lot of that is due to cost control and top-line revenue expansion and lower cost structures across the company,” Olsavsky said.

He added that retail has also become more efficient due to “regionalization efforts,” which include retooling the logistics network so that packages are delivered from facilities closer to shoppers.

Redundancies are a big part of the story.

The company has cut more than 27,000 jobs since the end of 2022, with cuts continuing into 2024. In the first quarter, Amazon cut hundreds of jobs in its healthcare and AWS businesses.

Technology and infrastructure spending was down slightly from a year earlier, and sales and marketing spending fell 5%. Amazon has cut G&A costs by 10%.

Amazon expects a continued surge in second-quarter profitability, but at a more measured pace. Operating income will be $10 billion to $14 billion, up from $7.7 billion a year earlier. That’s still much higher growth than the company expects revenue to rise 7% to 11% to between $144 billion and $149 billion.

Although Jassy continues to look for ways to cut costs, he has approved major investments in generative artificial intelligence, particularly in the cloud business, where the company has launched AI services.

Olsavsky said on the call that he expects these efforts, along with investments in AWS infrastructure, to lead to a “significant” increase in Amazon’s capital spending for 2024 compared to last year. Capital spending by Amazon and its cloud partners Microsoft and Google has accelerated in recent quarters as companies respond to demand for cloud and AI.

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