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5 Ways Amazon.com, Inc. Crushed Its 3rd Quarter

By Daniel Sparks - Updated Oct 27, 2017 at 1:31PM

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Amazon just obliterated its third-quarter guidance. Here's what investors should know.

There was lots of uncertainty before Amazon.com's (AMZN 0.73%) third-quarter earnings release Thursday. Since Amazon's third quarter has often been marked by big investments ahead of the holiday season, management provided an extremely wide guidance range for both revenue and profitability.

But any worries about the quarter were quickly forgotten when the e-commerce giant announced quarterly results well beyond management's outlook. With improved profitability, rapidly rising revenue, continued success of its Alexa-enabled devices, and more, Amazon's third quarter was a big win for shareholders. Here are five key takeaways from the quarter.

Amazon boxes in Amazon fulfillment center

Image source: Amazon.com.

1. Profits increased

Amazon's net income for the quarter was $256 million, up from $252 million in the year-ago quarter. This might not seem notable, but some context enhances the story. Management had guided for third-quarter operating income to be between a loss of $400 million and a gain of $300 million. Operating income at the low end of this guidance could have meant a steep year-over-year decline in net income. But Amazon's actual operating income was $347 million, well ahead of its guidance range for the metric -- and high enough to help Amazon report year-over-year growth in net income.

2. Revenue growth accelerated

Amazon's third-quarter revenue increased 34% year over year. But this included $1.3 billion in sales from Whole Foods Market. Without these sales, revenue increased 29% year over year to $42.4 billion. Amazon's adjusted net sales, therefore, handily exceeded management's forecast for third-quarter net sales between $39.25 billion and $41.75 billion.

But here's why Amazon's net sales trend is particularly exciting: The 29% year-over-year increase in adjusted net sales marked a sharp acceleration from the 25% growth in net sales Amazon reported in its second quarter.

3. Amazon Web Services drove Amazon's profitability

With e-commerce accounting for nearly 90% of Amazon's total revenue, it's easy to think that Amazon's online retail business drives the bulk of the company's profits. But this is far from the truth. Operating income from e-commerce sales in North America was $112 million. Meanwhile, Amazon's international e-commerce business fared even worse, losing $936 million during the quarter. But Amazon Web Services' operating income was close to $1.2 billion, up from $861 million in the year-ago quarter.

4. Alexa-enabled devices were a hit

Amazon's Alexa-enabled devices remain a hit with customers. Amazon CEO Jeff Bezos said customers have now purchased "tens of millions of Alexa-enabled devices." In addition, Bezos said active customers on Alexa-enabled devices are up five times over the same period last year.

This is good news given that Amazon just rolled out an array of new Alexa-enabled devices just before the holiday season.

Amazon Echo and its different interchangeable fabric finishes

The updated Amazon Echo offers several options for colored interchangeable fabric finishes. Image source: Amazon.com.

5. Whole Foods didn't impair profitability

One big question ahead of Amazon's third-quarter report was whether the Whole Foods acquisition would impair profitability. Given Amazon's appetite for growth -- even when it comes at the expense of near-term profitability -- it seemed logical that Amazon might spend a significant sum integrating Whole Foods' operations into its business.

But Whole Foods Market's integration during the quarter didn't stop the new business from contributing operating income to Amazon's overall business. Whole Foods' operating income was $21 million.

With numbers like these, it's no surprise Amazon stock traded higher in after-hours trading following the company's third-quarter earnings release.

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