Amazon's record profits last quarter would've been impossible without an accounting change and a huge spending cut. That raises questions about future earnings growth.
But Amazon's quarterly filings show a large portion of its profit gains were led by a change in accounting estimates and a marketing cutback, showing how the company was able to boost its bottom line in the face of a pandemic. Growth in its higher-margin businesses, such as its cloud and advertising units, helped too, as its retail profitability dropped during the quarter.
The bigger impact, however, came from a reduction in marketing expenses. Amazon's CFO Brian Olsavsky said in a call with analysts that the company cut its marketing spend by "about a third" in the quarter to reduce the heavy customer demand pressuring its supply chain during COVID-19. That means Amazon spent roughly $2.1 billionon marketing than it normally would have during the quarter. Its marketing expense grew just 1% to $4.
Daniel Aobdia, an accounting professor at Northwestern University and a former fellow at the Public Company Accounting Oversight Board, told Business Insider that those two factors were key to Amazon's record profits. Given Amazon spent more than $4 billion on COVID-related initiatives, those changes helped offset the loss.
R.J. Hottovy, an analyst at Morningstar, said because of the massive $4 billion COVID-related expenses during the quarter, Amazon had to make up profits from other sources as well. That primarily came from Amazon's higher-margin units, including its cloud, advertising, and third-party seller marketplace, he said. While Amazon doesn't give a profit breakdown for its advertising and marketplace businesses, each unit's quarterly sales grew by 41% and 52%, respectively.
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