Amazon commits to reinvesting $4bn of projected second-quarter profit into coronavirus response

Online retail giant Amazon sees revenue surge, but profits drop during first quarter of 2020 following surge in reinvestment to ready its business for Covid-19-induced uptick in consumer demand for online orders

Amazon has notified shareholders that it will plough at least $4bn of its projected second-quarter profit into responding to the Covid-19 coronavirus pandemic, which includes investing in measures to protect and test staff for the virus.

The online retail giant’s CEO, Jeff Bezos, said Amazon would expect to make $4bn during the second quarter of 2020 under “normal circumstances”, but given all of the “uncertainty” going on in the world right now, it will reinvest that money in its coronavirus response.

“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 $4bn or more in operating profit,” said Bezos. 

“But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4bn, 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.”

The reinvestment pledge coincided with the release of the firm’s first-quarter financial results, with Bezos reflecting on the first quarter of 2020 as being “the hardest time” Amazon has ever faced, as it has sought to respond to uncharacteristic and unseasonal surges in consumer demand for online deliveries.

“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 they would expect no less,” he added.

The company’s first-quarter results shed some light on the lengths the company has gone to in recent months to rapidly rejig its business in response to the pandemic, and the financial impact those efforts have had on its bottom line.

Amazon banked a revenue of $75.45bn during the second quarter, which is up 26% on the previous year, but profit was down 29% year-on-year (YoY) to $2.5bn, because many of the “essential items” it is seeing surging demand for are being essentially sold at cost price, according to the firm’s chief financial officer, Brian Olsavsky.

“While customer demand remains high, the incremental revenue we are seeing on many of the lower [average selling price] essential products is basically coming at cost,” he told analysts on a conference call about the results, transcribed by Seeking Alpha.

“We’ve invested more than $600m in Covid-related costs in Q1, and expect these costs could grow to $4bn or more in Q2. These include productivity headwinds in our facilities as we provide for social distancing and allow for the ramp up of new employees.

“Most of what we see are temporary costs in the scheme of things, but certainly very expensive temporary costs. And also ones that we’re not sure how long they’ll last.”

The company has, during the quarter, reduced costs in other areas in-house to make up for this, namely travel, entertainment and meeting expenditures. It has also sought to dampen demand for non-essential items by cutting its marketing investments, he added.

Olsavsky said the company estimates the in-house development of its Covid-19 tests will cost around $300m in quarter two, but that is a necessary cost as testing is not “readily available” on the scale it needs to protect its workforce.

Once that is addressed, he said there is potential scope, if the firm has excess capacity, to open up access to those tests beyond Amazon’s own workforce.

The quarter also included a notable achievement by its cloud arm, Amazon Web Services (AWS), in that it posted a first-quarter revenue in excess of $10bn for the first time in its history.

AWS first-quarter revenue hit $10.22bn, which is up 33% on the same period last year, although how much of this was down to enterprises speeding up their cloud migration efforts in response to Covid-19 is unclear.

When asked about this on the call, Olsavsky said the continued revenue growth trajectory that AWS is on is being driven by a lot of the same trends as in the pre-Covid-19 world.

“Our backlog of future contracts continues to build, and I still think the basic value proposition of AWS that we’ve always pointed to, things like having the most functionality, largest vibrant community of customers and partners having really proven operational and security experience,” he said.

“And building what customers need in the areas of machine learning and artificial intelligence, and other really key areas, has not been impeded by this Covid crisis yet.”

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