Amazon operating profit could fall to zero, with customer budgets staying tight

The outlook comes as the company is cutting thousands of jobs. In January Amazon said its layoffs will increase to more than 18,000 roles.

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4 min read Inc on Thursday said its operating profit could fall to zero in the current quarter as savings from layoffs do not make up for the financial impact of consumers and cloud customers clamping down on spending.

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And while Amazon’s holiday revenue beat Wall Street’s expectations, the company believes sales growth in its long-lucrative cloud business will slow for the next few quarters, its chief financial officer told reporters.

Shares fell 5 percent in after-hours trade, erasing most of their 7 percent gain before the market’s close Thursday.

Making a rare appearance on Amazon’s quarterly call with financial analysts, Chief Executive Andy Jassy said “virtually every enterprise” was treading carefully on cloud and other costs in light of economic uncertainty.

“We’re going to help our customers find a way to spend less money,” he said. “We’re trying to build a set of relationships in business that outlasts all of us.”

Facing high inflation and recession fears, Jassy has embarked on extensive cost-cutting inside Amazon as well.
Last month, the online retailer said more than 18,000 employees particularly in its commerce and human resources divisions would lose their jobs. It booked a $640 million severance charge in the fourth quarter, CFO Brian Olsavsky told reporters.

Amazon likewise has scaled back or shut down entire services like its virtual primary care offering for employers. It took another $720 million charge from closing or impairing assets of some grocery stores, among other items, believing it has yet to find the right formula in its long-running supermarket bet.

“We’re not going to expand the physical Fresh stores until we have that equation, with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023,” Jassy said.

Despite this cost-cutting, Amazon forecast it would earn between $0 and $4 billion in operating income this quarter, compared with $3.7 billion in the same period a year prior and $4.04 billion that analysts were expecting, according to research firm FactSet.

Olsavsky attributed this to sales growth easing in the cloud, as well as brands pouring money into Amazon ads more slowly now that the holiday shopping season is over. Retail demand is another factor.

“We remain nervous as everyone else is about the consumer spending and ... how people will prioritize their budgets moving forward,” he said.

Value shopping

An October sale to encourage early holiday shopping on Amazon has helped with retail revenue, to a point.
The company’s total net sales were $149.2 billion in the fourth quarter, compared with analysts’ expectations of $145.4 billion, according to IBES data from Refinitiv.

Consumer spending, however, shifted more to value brands in some categories and a greater percentage of sales in home essentials, Olsavsky said.

Demand in Europe and the United Kingdom was also hurt by high inflation and the Ukraine war, lowering international growth rates, he said.

Amazon has sought new revenue in the meanwhile. The company plans to charge certain grocery delivery fees for US Prime members, on top of recent price hikes to join the loyalty program; it has created an add-on generic-drug subscription to attract business as well.

Still, its outlook is particularly tied to the fortunes of its cloud-computing division.

Andrew Lipsman, an analyst at Insider Intelligence, called slower growth in cloud and ads “a drag on profits going forward.”

Tech industry executives, including at rival Microsoft Corp , have said economic uncertainty has prompted enterprises to rethink how much they're willing to spend on cloud.

While AWS is helping customers navigate such terrain, it still has a healthy deal flow and future commitments from customers, making the company optimistic, Amazon CFO Olsavsky said.

But “points of weakness” in cloud included financial services as mortgage volumes are down, and there has been less trading in cryptocurrency, he said.

For now, the division fell short of estimates of more than $22 billion in fourth-quarter cloud sales. They increased 20% to $21.4 billion.

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