Amazon’s Stock Skids 5% on Earnings Miss, Holiday Guidance

Revenue of $32.7 billion in Q3 FY16 powered by 55% growth in AWS segment

a1Retail behemoth Amazon.com Inc. (NASDAQ: AMZN) announced its Q3 FY16 financial results on October 27th, 2016.

The Seattle, Washington-based company provides online retail shopping services to consumers, sellers, enterprises, and content creators. It designs its websites to enable its products to be sold by the company and by third parties across dozens of product categories. The company also serves developers and enterprises of all sizes through Amazon Web Services, which provides technology infrastructure to enable virtually any type of business.

The company operates through three segments: North America, International, and Amazon Web Services (AWS). The North America segment includes retail sales of consumer products and subscriptions through North America-focused websites such as www.amazon.com and www.amazon.ca. The International segment includes retail sales of consumer products and subscriptions through internationally focused websites. AWS includes global sales of compute, storage, database, and other AWS service offerings for start-ups, enterprises, government agencies, and academic institutions. Read more about Amazon’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Amazon’s net sales jumped 29% to $32.7 billion compared to $25.4 billion in Q3 FY15. Due to the favorable impact from Y-o-Y changes in foreign exchange rates on Q3 FY16 net sales was $52 million. Operating income grew to $575 million compared to $406 million in Q3 FY15. However, operating expenses climbed 29% to $32.1 billion, because of which Amazon’s operating margin to come in at 1.8%, lower than 4.2% in Q2 FY16.

Source: Amazon
Source: Amazon
Source: Amazon
Source: Amazon
Source: Amazon
Source: Amazon

In all, Amazon’s profit rose to $252 million in Q3 FY16, or $0.52 per share, from $79 million, or $0.17 per share, a year earlier, as against expectations of $0.78 per share on revenue of $32.69 billion and well below the record quarterly profit of $857 million reached in Q2 FY16. On failing to meet these expectations, the Company’s stock fell by more than 5% after the results’ announcement. Amazon posted its lowest quarterly profit in a year as it invested heavily to meet consumer demand for more orders delivered faster. Opening new warehouses and shipping items with shorter delivery times caused its costs to soar during the reporting quarter. Amazon opened 23 warehouses worldwide to fill orders since July 2016, after opening just 3 in H1 FY16. Amazon predicts heavy investments to continue through the rest of the year.

Segmental highlights

North America: Amazon’s Q3 FY16 sales in this segment were at $18.87 billion versus $15 billion in the year-ago period, yet below expectations of $19.09 billion.

International: Amazon’s Q3 FY16 sales in this segment came in at $10.61 billion versus $8.67 billion in the year-ago period and above projections for $10.44 billion. However, Amazon reported a loss of $541 million, steeper than its loss of $208 million a year ago, mainly due to spending on expansion, including in India, which is expected to continue into Q4 FY16.

Source: Amazon
Source: Amazon

Amazon Web Services: Amazon’s Q3 FY16 sales in this segment grew 55% to $3.23 billion versus $2.08 billion in the year-ago period and above expectations of $3.17 billion. Operating margin for AWS climbed to 31.6%, up from 29.9% in Q2 FY16. According to Synergy Research Group, AWS has a 31% share of the cloud market, with Microsoft Corp.’s (NASDAQ: MSFT) Azure running far behind at 9% and Alphabet Inc.’s (NASDAQ: GOOG) Google at 4%. AWS accounted for 9.5% of the company’s total revenue, and its operating income was $718 million, larger than Amazon’s North American retail profit of $702 million.

Source: Amazon
Source: Amazon

Other areas where Amazon significantly increased its spending include promoting its video content. It is also building out teams for its AWS cloud-computing division, and its Echo speaker device and Alexa artificial-intelligence assistant, as well as investing in its operations in India.

Other highlights

Source: Amazon
Source: Amazon

Cash flow: Operating cash flow jumped 49% to $14.6 billion for the trailing 12 months (TTM) compared to $9.8 billion for the year-ago period. Free cash flow increased to $8.6 billion for TTM compared to $5.4 billion for the year-ago period. Free cash flow less lease principal repayments increased to $4.9 billion for the TTM compared to $3.1 billion for the year-ago period. Free cash flow less finance lease principal repayments and assets acquired under capital leases grew to $3.4 billion for the TTM, compared with $637 million for the year-ago period.

Prime memberships: Amazon does not release Prime membership details; however, according to Chicago-based Consumer Intelligence Research Partners, Amazon currently has about 65 million U.S. members, up from an estimated 47 million U.S. Prime members at the end of the September 2015; an increase of 38% Y-o-Y. Prime members are very lucrative for the company, spending on average about $1,200 per year, compared to about $600 per year for non-member customers. Prime promises free, fast shipping on millions of items on its site and access to video content and other perks. However, as the membership grows, Amazon’s shipping costs jumped 43% to $3.9 billion in Q3 FY16.

Hiring for seasonal jobs: Earlier in October 2016, Amazon said that it expects to create 120,000 seasonal jobs this holiday season, up 20% from last year, while transitioning more of those seasonal workers into full-time roles. Amazon said it transitioned 14,000 seasonal workers last year. Amazon’s seasonal hiring comes at a time when many bricks-and-mortar retailers are curbing their spending and hiring.

Expanding delivery capacity for the holiday season: The retail giant has started laying the groundwork for its own shipping business to add more delivery capacity for the holidays, a8with long-term ambitions of hauling and delivering packages for itself, other retailers, and consumers. Accordingly, the Company is leasing 40 planes to carry goods and buying branded truck trailers as part of these plans. Amazon also is shipping more units because it has expanded a program to handle third-party seller merchandise, Fulfillment by Amazon. The company has been adding warehouses in part to accommodate that increase.

Grocery business to be expanded with new convenience stores: On October 12th, 2016, The Wall Street Journal reported that Amazon is expanding its grocery business through the launch of convenience stores as well as curbside pickup locations. The Company aims to build small brick-and-mortar stores that would sell produce, milk, meats, and other perishable items. Primarily using their mobile phones or touch screens around the store, customers could also order peanut butter, cereal, and other goods with longer shelf lives for same-day delivery.

The grocery stores, known internally as Project Como, are slated exclusively for customers of its Fresh subscription service. Last week, Amazon dropped its $299 annual price for Fresh and instituted a $15 monthly fee, available to members of its $99-a-year Prime delivery service. The curbside pickup service is mainly meant to compete with other large grocery distributors such as Wal-Mart Stores Inc. (NYSE: WMT). Groceries account for about a fifth of consumer spending in the U.S. In a Morgan Stanley survey of U.S. consumers in October 2015, 8% of people said they got fresh groceries delivered and 26% are expected to do so in 2016, as per The Wall Street Journal.

Guidance for Q4 FY16

For Q4 FY16, Amazon’s revenue outlook came in slightly below expectations. The company said it expects Q4 FY16 sales to come in between $42 billion and $45.5 billion, which would be between 17% and 27% growth compared to Q4 FY15 versus expectations of around $44.58 billion. This guidance anticipates approximately 60 basis points of favorable impact from foreign exchange rates. Operating income is expected to be between $0 and $1.25 billion compared with $1.1 billion in the year-ago period.

Stock Performance

a9Amazon’s stock finished the day at $776.32, slipping 5.14%, at the close on Friday, October 28th, 2016, having vacillated between an intraday high of $789.49 and a low of $774.61 during the session. The stock’s trading volume was at 10,831,942 for the day. The Company’s market cap was at $73.67 billion as of Friday’s close.

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