Amazon’s profit margins close to record highs after CEO Andy Jass’s dramatic cost-cutting efforts

Andy Jass, CEO of Amazon, speaks during tomorrow's opening night ribbon-cutting ceremony for the NHL's newest hockey franchise, the Seattle Kraken, at the Climate Pledge Arena, Oct. 22, 2021, in Seattle.

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Amazon founder Jeff Bezos told his competitors, “Your edge is my opportunity.” His successor as CEO, Andy Jass, is telling Wall Street about the opportunity to increase margins.

Jass, who takes the helm in mid-2021, has been laser-focused on cutting the company's costs for a year, cutting 27,000 jobs since last fall, halting some of its riskier bets and overhauling Amazon's fulfillment network to emphasize speed and efficiency.

Suddenly, Amazon is a profit machine.

In its third-quarter earnings report Thursday, Amazon reported an operating margin of 7.8%, the highest since it hit a record 8.2% in the first quarter of 2021. A company's operating margin, which is the profit left over after deducting costs. doing business was 2% a year ago and historically in the low single digits. Bezos was perfectly comfortable running with a negative margin at times.

But the world has changed since early last year, when Wall Street turned on technology and the extended bull market came to a halt. Rising inflation and high rates have pushed investors away from risk and forced tech companies to retrench.

Jassi used the word optimization more than 20 times during Thursday's earnings call. It primarily referred to Amazon's cost-cutting efforts or Amazon Web Services customers' efforts to lower their cloud bills while maintaining or even improving performance.

As for client spending, Jassi said things are looking better.

“While optimization remains the opposite, we've seen a slowing pace of new cost optimization in AWS, and we're encouraged by the strength of our customer pipeline,” he said. AWS has seen slower growth in recent quarters, but is seeing some “weakening of price optimization,” especially as demand for generative artificial intelligence increases, he said.

AWS revenue grew 12% in the quarter, a slower pace of expansion than smaller rivals. Microsoft blue and Google cloud.

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Amazon shares were initially seen after hours. But Jassy's upbeat comments on the call sent shares up more than 5% to $125.98. Jassi and other Amazon executives spoke at length about the company's progress when it comes to cutting costs.

Net income more than tripled to $9.9 billion, or 94 cents a share, from $2.9 billion, or 28 cents a share, a year earlier. Analysts had expected earnings of 58 cents a share, according to LSEG, formerly known as Refinitiv. Revenue also beat estimates, rising 13% to $143.1 billion.

The company pointed to “regionalization” efforts within its shipping operations that have resulted in faster but cheaper deliveries. Rather than operate as a national model, the company has divided its shipping network into eight regions, which means packages travel shorter distances and are handled by fewer employees. This reduced the “cost of service”, Jassi said.

Advertising services, which together with AWS generate more profit than major retailers, were the key to revenue growth in the third quarter. Revenue increased by 26% and reached 12 billion dollars. The growth in advertising is mainly due to third-party sellers and brands paying to have their products appear higher in search results on Amazon's website and app, said CFO Brian Olsavsky.

Jassi said the advertising business is also getting a big boost from the company's National Football League deal. Amazon Prime Video is in its second season of carrying Thursday Night Football, and Jassi said ratings are up 25% in the first six weeks compared to last year.

“We're also doing a lot better on the advertising side than we were the first year, and that's an asset that's really valuable,” Jassi said. “It's one game that week and advertisers want to be in front of consumers because 13 million consumers are watching a week.”

In terms of cost reduction, Jas is not done. Amazon is still cautious about headcount, taking a slow approach to hiring, rehiring and filling open positions, Olsavsky told analysts.

Amazon's sales and marketing expenses fell in the quarter from a year earlier, and the company implemented better cost controls in “non-human categories” such as infrastructure, Olsavsky added.

WATCHING: Amazon shares jump after third-quarter earnings report

Amazon shares jump in extended trading after its third-quarter earnings report