Online retail titan and cloud-computing trailblazer Amazon.com (NASDAQ:AMZN) is gearing up for its fourth-quarter earnings report after the closing bell on Thursday. The holiday period accounts for an outsized portion of Amazon's annual sales and profits, so this report should be a head-turner. Here are the three most important things that Amazon investors should keep an eye on in Wednesday's business update.
Revenue and operating profits
Three months ago, Amazon issued some financial guidance. According to those figures, revenue should rise 15% year over year to roughly $69.5 billion. Operating income was pointed toward approximately $2.7 billion. Hitting the midpoint of the guidance range would mean a 29% increase from the year-ago period.
For comparative purposes, Amazon's year-over-year sales growth has averaged 37% in the first three quarters of 2018. Last year's holiday quarter saw a 38% revenue boost. On this line of Amazon's income statement, operating profit has more than quadrupled year over year over the first three quarters. Last year, this metric showed a 69% increase.
So, management's guidance settled for relatively modest double-digit growth in a year marked by more impressive results. Did Amazon's leadership play lowball in that guidance update, or did the company's growth really slow down at the end of 2018?
The company is notoriously tight-lipped regarding the number of subscribers its Amazon Prime discount shipping and streaming-video program carries. However, there is no doubt that Prime makes a serious difference to Amazon's overall results.
Last April, CEO Jeff Bezos said the program had gained more than 100 million members worldwide. That translates into a serious chunk of top-line change. After last year's price increase, a Prime membership costs $119 per year for U.S. subscribers. Prices vary in other parts of the world, and Bezos didn't say how many of those 100 million members fell in the domestic or international buckets. We haven't seen any firm updates to the program's growth rates or actual subscriber numbers since then. But a recent change to the way Amazon accounts for its Prime subscription fees over time -- moving from a holidays-heavy model based on the number of free shipping orders Prime members used to a simpler straight-line system -- will reduce Amazon's fourth-quarter sales by roughly $300 million. I'm not enough of a math whiz to figure out exactly how large that makes Prime's revenue contribution, but it is definitely a large one.
So, any updates to Prime's current subscriber count or revenue intake would be welcome news. Bezos seems more likely to share these kinds of figures when Prime is doing absolutely great.
The cloud-computing division known as Amazon Web Services, or AWS, accounts for a small portion of the company's top-line sales but a huge share of its operating profit. AWS is also Amazon's fastest-growing segment by a long shot. If Amazon were to spin out this division as a stand-alone business, one analyst estimates that it could be worth as much as $350 billion. It pays to keep an eye on this crucial business unit.
AWS revenue shot 46% higher in the third quarter, compared to the same period in 2017. That worked out to 12% of Amazon's total sales for the quarter. At the same time, the business segment's operating profit rose by 77% and accounted for a full 56% of Amazon's total operating income.
Did AWS keep up that incredible momentum in the fourth quarter? Will Amazon provide more detailed expectations for this important business going forward?
Wednesday's fourth-quarter update and earnings call will answer these burning questions and more. Stay tuned for a full analysis of the final report.
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.