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As net income reduces QoQ, Amazon to focus on AWS and One Day shipping in Q4

For the first time since early 2017, Amazon registered a YoY quarterly decline in profits as the company focused on one-day delivery for its Prime members. Its net income reduced to $2.13 billion in Q3FY19, compared to $2.88 billion in Q3FY18.

Operational Figures

  • Operating cash flow: Up 33% to $35.5 billion for trailing 12 months, compared to $26.6 billion for trailing 12 months ending September 30, 2018
  • Free cash flow: Increased to $23.5 billion for trailing 12 months, compared to $15.4 billion for trailing 12 months ending September 30, 2018
  • Net sales: Up 24% to $69.98 billion in Q3FY2019, compared to $56.58 billion in Q3FY2018. Of this, sales in North America accounted for 61% at $42.64 billion.
  • Operating Expenses: Increased to $66.82 billion in Q3FY19, compared to $52.85 billion in Q3FY18
  • Operating Income: Decreased to $3.16 billion in Q3FY19, compared to $3.72 billion in Q3FY2018
  • Net income: Decreased to $2.13 billion in Q3FY19, compared to $2.88 billion in Q3FY2018 (from $5.75/diluted share to $4.23/diluted share)

Closer look at net sales:

  • Online Stores: $35.04 billion (50% of all sales this quarter)
  • Physical stores: $4.19 billion (6% of all sales)
  • Third-party seller services: $13.21 billion (19% of all sales)
  • Subscription services: $4.96 billion (7.09% of all sales, includes fees for Amazon Prime, audiobook, digital video, e-book, digital music and other non-AWS subscription services)
  • AWS: $8.96 billion, (almost 13% of all sales, saw a 35% YoY increase this quarter, the most compared to sales in North America (24%) and international (18%))

Devices

  • 37 million active users of Fire TV worldwide in Q3FY19; #1 selling streaming media player family in USA, UK, Germany, Japan, and India.
  • New line of Echo devices: next generation Echo, Echo Dot with clock, Echo Show 8, Echo Buds, echo Flex, Echo Studio, Echo Frames (all-day glasses with Alexa), Echo Loop (Alexa-enabled smart ring)
  • New Fire TV products: Fire TV Edition soundbar, new Fire TV Cube, first OLED Fire TV Edition smart TV, first Fire TV Edition smart TV with far-field Alexa voice control

Advertising grew 45% in Q3FY19: Amazon CFO Brian Olsavsky said that advertising, which is the principal part of “other revenue”, grew 45% in Q3, up from 37% in Q2. The focus of advertising is relevance.

Impact of Diwali’s timing on sales and Q4 forecasts: Olsavsky explained that the holiday season is usually very tight and centered around a few weeks in Q4. But unlike last year, when Diwali was firmly in Q4 (November 7), this year, “a bit of it was in Q3 this year”. As a result, Amazon’s forecast for Q4FY19 is lower. Also, Japan’s consumption tax was raised from 8% to 10% on October 1, 2019, resulting in lower forecasts for Japan in Q4.

Two-fold focus in Q4 — One Day shipping and AWS: Olsavsky said that in Q4, the company would invest in One Day shipping and AWS. In the case of AWS, operating margins reached 31% in Q3FY19.

“So the biggest impact that we saw in Q3 year-over-year in the AWS segment was tied to costs related to sales and marketing year-over-year and also to a secondary extent, infrastructure, which if you look at our capital leases or equipment leases line, it grew 30% on a trailing 12-month basis in Q3 of this year and that was 9% last year.” — Brian Olsavsky, Amazon CFO

Also, going forward, Amazon intends to price new AWS products competitively so that volume of sales can counteract the expenditure on hiring a greater number of salespeople and greater spending on marketing.

Impact of One Day shipping on costs: Most of the costs have been borne in the US, but Amazon has expanded this service internationally, Olsavsky said. Unit growth has reaccelerated in the last two quarters, with Amazon Fulfilled unit growing at a higher rate because of One Day shipping. The company right now isn’t sure how much of these costs will be transitory, and how many of them will be structural.

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[W]e’re still learning here on the One Day costs as we go about what the long-term cost structure will be. We know we have temporary costs in the short run as we do things like forward deploy inventory, get greater inbound into those warehouses, set up new Amazon Logistics, AMZL capacity, staff you know multiple shifts, so that we can have later pull times to hit One Day cut-offs, things like that, adding sort centers.” — Brian Olsavsky, Amazon CFO

Financials: Earnings Release | Presentation | Earnings Call Transcript

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