Amazon.com (AMZN +3.47%) released third-quarter 2019 results on Thursday afternoon that disappointed the market.
The e-commerce and tech titan's revenue growth accelerated to 24% year over year from 20% in the second quarter and beat Wall Street's consensus estimate. But its earnings per share (EPS) dropped 26% to $4.23, falling short of the $4.62 that analysts had expected.
Shares plunged nearly 7% in after-hours trading on Thursday, which we can attribute to the earnings miss and fourth-quarter operating income guidance coming in considerably lower than the Street had been projecting. The latter was likely the bigger factor, as the market is a forward-looking machine, and the fourth quarter is the all-important holiday quarter. Once investors had time to digest the results and guidance, however, they didn't feel nearly as bad about them, as shares closed down just 1.1% on Friday.
Earnings releases tell only part of the story. Here are three key things management shared on the Q3 call that you should know.
Image source: Amazon.
One-day Prime deliveries continue to increase
From CFO Brian Olsavsky's remarks:
[W]e're very pleased with the customer response to one day [free shipping]. You can see it in our revenue acceleration and also in our unit growth acceleration. ... We have seen Prime members increase their orders [and] spend more.
In the second quarter, Amazon began transitioning its core free-delivery benefit for Prime members from two days to one day. This upgrade has accelerated year-over-year revenue growth from 17% in the first quarter to 20% in the second quarter to 24% in the third quarter.
Of course, this big project is negatively affecting current profits. Olsavsky said that Q4 guidance includes a cost of nearly $1.5 billion for this upgrading. That's nearly double the little more than $800 million that he said the company spent on this project in Q2. He didn't disclose how much was spent on this upgrading in Q3, only that it was more than in Q2.
As to Q4 guidance, Amazon expects net sales between $80.0 billion and $86.5 billion, representing growth of 11% to 20% year over year. And it projects operating income between $1.2 billion and $2.9 billion, representing a decline of 24% to 68% from the year-ago period.
As I opined in my earnings article, "long-term investors shouldn't be concerned about this quarter's results or next quarter's weaker-than-anticipated guidance. ... The company is sacrificing some current profits to fuel longer-term growth."
Advertising revenue grew faster than 45% year over year
From Olsavsky's remarks:
So "other revenue," which is principally advertising, grew 45% [in constant currency] this quarter, up from 37% last quarter. And the biggest thing in [that line item] is advertising, and advertising grew at a rate higher than that 45%. So we are very happy with the progress in the advertising business.
Other revenue jumped 44% as reported, and 45% in constant currency, to $3.6 billion. So this line item's annual run rate is $14.4 billion. We don't know exactly how much of this category is advertising, but I'd take a word such as "principally" to mean at least 70% or 80%. So we're probably talking annual ad revenue in the neighborhood of $10 billion or more. For context, Amazon's total Q3 revenue was $70 billion, so ad revenue is probably accounting for at least 3.5% of total revenue. But this percentage is poised to increase at a brisk pace because the ad business is growing much faster than the overall business.
Why is this important? Because there can be little doubt that the ad business has a fat profit margin.
AWS has $27 billion in future commitments from customers
From Olsavsky's remarks:
[I]f you look at our disclosure on our 10-Q, it shows that we have $27 billion in future commitments for AWS from AWS customers and that's up 54% year over year.
This data wasn't included in the company's earnings release. It's an important tidbit about the Amazon Web Services (AWS) cloud computing business that investors would only learn by thoroughly reading the company's 10-Q (quarterly filing submitted to the U.S. Securities and Exchange Commission, or SEC) or by tuning into the earnings call (or reading a transcript of it -- or an article like this one).
In the third quarter, AWS's revenue jumped 35% year over year to $9.0 billion. So its $27 billion in future commitments is the current equivalent of three-quarters of a year's revenue. That's a nice cushion. Moreover, it's worth noting that AWS's future commitment revenue grew at a particularly brisk pace of 54% year over year, which is faster than Q3 revenue's growth of 35%.
