Amazon.com Inc. is not selling that much more of its own merchandise, but it’s making a lot of money from the growing sales by other merchants on its marketplaces and especially from its highly profitable Amazon Web Services cloud computing unit.
Amazon reported Thursday a record $2.883 billion in net income for the third quarter, more than 10 times its profit from the same quarter last year. 72% of that profit came from the $2.077 billion in net income from AWS.
The e-retailer’s total revenue increased 29.3% to $56.58 billion, including 35.0% growth in North American sales. But Amazon’s revenue from merchandise it sells on its own behalf grew only 10.1%, and represented 51.4% of total revenue versus 60.3% in the prior-year quarter. That growth fell short of analysts’ projected $57.1 billion.
A growing share of Amazon’s revenue comes from the rapidly growing AWS, whose revenue increased 45.7% year over year, and the increasing share of sales on Amazon sites by third-party merchants. Those outside sellers accounted for 53% of unit sales in the third quarter, up from 50% a year earlier.
Moody’s lead retail analyst Charlie O’Shea commented that the faster growth of third-party sales on Amazon’s global e-commerce sites “reflects the continuing attractiveness of Amazon’s services and capabilities to other retailers, and further validates Amazon’s ongoing and prodigious investments in fulfillment and delivery.”
One rapidly growing area for Amazon is its advertising business, which accounts for a significant share of the revenue it presents in the “other” category in its earnings release. Amazon’s other category revenue grew 122.2% to $2.495 billion from $1.123 billion.
While Amazon is seeing “really strong adoption” of its ads, it is looking for ways to improve its service, said Brian Olsavsky, the retailer’s chief financial officer on a conference call with analysts. “We’re continuing to invent both on the product side, the tools side with our goal being improve the usability of the tools for advertisers, make smarter recommendations for customers, automate activities so that advertisers don’t have to work as hard, and invent new products for advertisers. If we do this right, we think we’ll both help advertisers and help Amazon consumers at the same time.”
Amazon has grown increasingly efficient, Olsavsky said, noting that the retailer added 15% square footage to its distribution center. “This year we’re only adding about 15% to our square footage. [But we’re] getting better efficiencies on what we have and banking the multi-year investment that we’ve been making. … On the infrastructure side, you see the operating margin for AWS is up to 31% this quarter. A lot of that is based on efficiencies of our data centers, not only for the AWS business, but also for our Amazon consumer businesses, who is AWS’ biggest customer.”
For the fourth quarter, including the important holiday shopping season, Amazon today projected revenue of between $66.5 billion and $72.5 billion. That disappointed Wall Street analysts whose consensus estimate projected fourth quarter revenue of $73.8 billion. Amazon’s share price fell soon after the retailer announced its earnings report and forecast, despite the company’s higher-than-expected profit.
“[The fourth quarter] is always a very difficult period for us to estimate,” Olsavsky said. “We feel we’re in great shape for the holiday. The warehouses are very clean. We feel like we’re going to have great capacity not only for retail products but also for [Fulfillment by Amazon]. We’re going to have great capacity for shipping to our customers. So we’re very ready to go. Selection should be at its highest point, especially for Prime members. So we’re very bullish on the fourth quarter. And we’ll just have to see how revenue comes in.”
Olsavsky noted that Amazon has also made an accounting change that impacts its fourth quarter: It is amortizing its Prime subscription revenue on a straight line method instead of the uneven method that was weighted more heavily on the fourth quarter that it previously used. That means that it will have $300 million less revenue and operating income in the quarter than it had with the previous methodology.
In the fourth quarter, and beyond, Amazon is increasingly bullish on physical stores. It is experimenting with numerous store formats, including AmazonGo, 4-Star that features a curated selection of top-rated items, AmazonBooks, as well as a fashion pop-up store in the United Kingdom. It currently has six AmazonGo locations, five of which opened in the third quarter.
It is also adding new fulfillment options for its Whole Foods stores. It currently offers Prime Now grocery delivery from those stores in 60 cities, grocery pickup in 10 cities and started integrate Whole Foods into Alexa by enabling consumers to build their cart using Alexa and then checking out using the Prime Now app.
In a prepared statement that accompanied the earnings release, Amazon CEO Jeff Bezos pointed to the growth in Amazon Business, the business-to-business marketplace that Amazon has been rapidly growing in recent years.
“Amazon Business has now reached a $10 billion annual sales run rate and is serving millions of private and public-sector organizations in eight countries,” Bezos said. “And we’re not slowing down—Amazon Business is adding customers rapidly, including large educational institutions, local governments, and more than half of the Fortune 100. These organizations are choosing Amazon Business because it increases transparency into business spending and streamlines purchasing, with increased control.”
For the quarter ended Sept. 30, Amazon reported:
- Net sales of $56.58 billion, up 29.3% from $43.74 billion in Q3 2017.
- North American net sales of $34.35 billion, up 34.4% from $25.45 billion.
- International net sales of $15.55 billion, up 13.4% from $13.71 billion.
- Revenue from the sale of goods sold by Amazon online was $29.06 billion, up 10.1% from $26.39 billion.
- Revenue from third-party seller services was $10.40 billion, up 31.1% from $7.93 billion. This includes commissions paid to Amazon from marketplace sellers, revenue from Fulfillment by Amazon and other services.
- Revenue from subscriptions, including Prime fees, was $3.70 billion, up 51.6% from $2.44 billion.
- Revenue from stores, primarily Whole Foods but also Amazon Book Stores and other pop-up stores, was $4.25 billion.
- AWS contributed $6.68 billion in revenue, up 45.9% from $4.58 billion.
- Unit sales grew 15%, a decrease from 25% growth a year earlier.
- Worldwide shipping costs increased 21.7% to $6.57 billion from $5.40 billion.
- Fulfillment costs increased 29.0% to $8.28 billion from $6.42 billion.
- Marketing costs increased 33.1% to $3.30 from $2.48 billion.
- Technology and content costs increased 20.5% to $7.16 billion from $5.94 billion.
- General and administrative costs increased 8.3% to $1.04 billion from $960 million.
- The company employed 613,300 people at the end of the third quarter, an increase of 13.2% from 541,900 at the same time last year.
- Amazon logged $2.88 billion in net income in the quarter, up from $256 million.
For the nine months ended Sept. 30, Amazon reported:
- Net sales of $160.50 billion, up 36.7% from $117.41 billion in the first nine months of 2017.
- North American net sales of $97.24 billion, up 41.3% from $68.81 billion.
- Net income of $7.046 billion, up 497.1% from $1.180 billion.
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