Online retailer and cloud computing veteran Amazon.com (NASDAQ:AMZN) reported third-quarter results after the closing bell on Thursday. The company sailed past its own guidance targets across the board, but the forward-looking guidance for the holiday quarter could have been more ambitious. Amazon's shares fell as much as 9.5% lower in after-hours trading before recovering to an 8% drop at the close of the extended trading session.
Here's a closer look at Amazon's results and holiday-season guidance numbers.
By the numbers
In the third quarter, Amazon's net sales rose 30% year over year to land at $56.6 billion. Operating income multiplied many times over, rising from $347 million to $3.72 billion. On the bottom line, net income grew 11-fold to $5.75 per diluted share, up from $256 million in the year-ago period.
Management's guidance ranges for the quarter had centered around top-line sales of roughly $55.8 billion and operating income in the neighborhood of $1.9 billion.
North American retail sales rose 35% to $34.3 billion. International e-commerce saw a 13% revenue boost to stop at $15.5 billion. Cloud computing services under the Amazon Web Services (AWS) banner delivered 46% revenue growth and a total of $6.7 billion in net sales. Segment-level operating income was evenly split between North American e-commerce and AWS at roughly $2 billion each, while the international division suffered an operating loss of $385 million.
Amazon's stated long-term goal is to "optimize free cash flows." To that end, the third quarter's free cash flows came in at $6.06 billion, 442% above the $1.11 billion seen in the same period of 2017.
For the next quarter -- that all-important holiday season when retailers' dreams can be made or crushed -- Amazon issued the following guidance:
- Net sales should land near $69.5 billion, approximately 15% above the fourth quarter of 2017.
- Operating income should at least match the year-ago period's $2.1 billion and could rise as high as $3.6 billion.
These figures include the operating expenses incurred when Amazon raises its minimum wages to $15 per hour on Nov. 1, covering 250,000 employees in the U.S. and U.K. markets. Operating margins were found at 6.2% in the third quarter, up from 5.6% in the second-quarter report and possibly the richest reading in Amazon's history. Hitting the midpoint of the fourth-quarter guidance targets would back this margin down to something like 4.1%, still comfortably above the 3.5% margin seen a year earlier.
It should be noted that 15% year-over-year revenue growth would be the lowest reading on that line since the end of 2014 and one of the worst showings in the last decade. So if you were surprised to see Amazon's shares crashing despite a respectable slate of third-quarter results, there's your answer -- a 15% sales growth target for the holidays doesn't impress many Amazon investors, especially when paired with tighter profit margins.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.