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Amazon’s profit edges higher as regulators scrutinize company’s growing clout

The online retail giant posted strong performances from its cloud computing and advertising businesses amid growing scrutiny from regulators and lawmakers.

Amazon's Seattle headquarters is seen March 13. (David Ryder for The Washington Post)

Amazon tallied big second-quarter gains in its cloud computing and advertising business, even as the tech giant faces regulatory scrutiny for its dominance of online retail sales.

Overall, Amazon’s profits gained 4 percent in the second quarter, rising to $2.6 billion. Sales hit $63.4 billion, a 20 percent increase from the same period a year ago.

Amazon missed analyst expectations of $5.54 earnings per share, as measured by S&P Global Market Intelligence, reporting profits of $5.22 a share. Profit growth slowed at Amazon’s retail operations as the company rang up higher costs than it expected for its new one-day shipping initiative.

The Justice Department said Tuesday it was opening a wide-ranging antitrust review of “market-leading online platforms” that will focus on Amazon, as well as Facebook and Google. And a day later, Treasury Secretary Steven Mnuchin offered support for those efforts, saying the company has “destroyed the retail industry."

(Amazon founder and chief executive Jeff Bezos owns The Washington Post.)

In a call with the media, Amazon finance chief Brian Olsavsky declined to say if the company has been formally notified that it’s under investigation by the Federal Trade Commission. The Washington Post reported last month the FTC was taking charge of antitrust scrutiny of Amazon.

Amazon’s results illustrate just how potent the tech giant has become. The company’s profitability is fueled by businesses most consumers on its site don’t generally know — its market-leading cloud computing operations, used by companies such as Airbnb and Capital One, and the advertising business that sellers on its site use to lure shoppers.

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Operating income at Amazon Web Services, the company’s cloud computing business, jumped 29 percent from the same period a year ago to $2.1 billion. Sales rose 37 percent to $8.4 billion. The company’s cloud computing performance continues to dwarf revenue from the No. 2 player in cloud infrastructure technology, Microsoft, whose comparable cloud businesses tallied $2.4 billion in the same period, according to Stifel Nicolaus & Co. analyst Brad Reback.

Amazon’s digital advertising business, which trails only Google and Facebook, caters to brands as well as merchants selling on its retail site. In the period, Amazon’s “other” category, which is primarily derived from advertising, grew 37 percent year over year to $3.0 billion.

The profit from those operations allows Amazon to run much thinner margins in its retail operations, a competitive advantage that the company’s online retail rivals don’t have. In the second quarter, Amazon’s operating profit in its North American retail business fell 15 percent from the second quarter of 2018 to $1.6 billion. Sales grew 20 percent to $38.7 billion.

Amazon spent more rolling out one-day shipping to top customers than the $800 million it anticipated three months ago, Olsavsky said. And the company’s financial guidance for the current quarter includes higher costs than the company originally expected as well, he added.

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Amazon now expects operating income to fall between $2.1 billion and $3.1 billion, compared with $3.7 billion in the third quarter a year ago. Analysts had expected operating income to hit $4.4 billion in the quarter.

Through its 25-year history, Amazon has gone through long periods of significant spending, a strategy that puts pressure on its margins but often helps the company distance itself from rivals that can’t endure extended streaks of profit strain.

That helped push Amazon shares down just less than half a percent in after-market trading to $1,966. During the day’s trading, Amazon shares fell 1.4 percent to $1,973.82.

But Olsavsky downplayed any concern, noting past costly Amazon initiatives to which the company eventually adapted.

“We’ve been down this road before. We’ve had numerous shocks to the system," Olsavsky says.

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He declined to say how long he expects the increased spending to continue.

Amazon noted that the recently concluded Prime Day — which actually ran two days, July 15 and 16, in the third quarter — generated more revenue for the company than the previous Black Friday and Cyber Monday combined. Moreover, Amazon added more Prime members, its most lucrative group of shoppers, on July 15 than any previous day, and almost as many on July 16, the company said. Amazon doesn’t disclose the number of Prime members, though analysts believe it tops 100 million people.