Amazon (NASDAQ: AMZN) disappointed shareholders with Q3 earnings missing analyst expectations. Unfortunately, supply chain issues and delivery delays persist, painting a bearish picture for Q4. The AMZN share price fell 2% the following day.
For the trailing 12 month period to September 30, 2021, here are Amazon’s year-over-year results:
Operating cash flow decreased 1% to $54.7 billion.
Free cash flow decreased 91% to $2.6 billion, compared with $29.5 billion.
Common shares outstanding plus shares underlying stock-based awards increased by 5 million.
And for Q3 year-over-year:
Net sales increased 15% to $110.8 billion (vs $111.6 billion expected).
Operating income decreased nearly 21% to $4.9 billion.
Net income decreased 49% to $3.2 billion.
Earnings per share came in 31% below consensus estimates of $8.90.
Investors don’t like to see those declines!
Amazon also posted an operating loss in its international segment of $911 million, after two-quarters of profit. The company is growing at varying rates across regions. Therefore, how well established the brand is, varies from region to region.
Brian T. Olsavsky, Amazon’s CFO and Senior VP said:
“We find Video is a really strong attractor of customers, and it’s a gateway to Prime in a lot of those countries.”
Amazon Prime productions that viewers are looking forward to include The Wheel of Time, Lord of the Rings, and Citadel, along with new seasons from Jack Ryan, The Marvelous Mrs. Maisel and The Boys. Furthermore, viewers are enjoying the UEFA Champions League and Ligue 1 soccer in France as well as NFL Thursday Night Football in the United States.
Is AWS still growing?
Amazon Web Services (AWS) announced significant customer momentum. And is showing new commitments and migrations from customers across major industries.
Amazon now has more than a 40% share of the global cloud-computing market.
Furthermore, AWS does indeed continue to grow, which is where most of Amazon's free cash flow (FCF) comes from. Therefore, being cash flow positive, even if it's plummeted 91% year-over-year, gives it staying power.
Interestingly, this was the first time in the company’s history where revenues from Amazon Services outpaced its retail sales.
Net product sales came in at $54.9 billion in Q3. Meanwhile, revenues from AWS, advertising, third-party seller services and Prime subscriptions reached $55.9 billion.
Amazon Web Services rose 39% to $16.11 billion, beating analyst expectations of $15.48 billion. Operating profit at AWS was $4.88 billion compared with Amazon’s $880 million.
AWS has seen a re-acceleration of revenue growth as customers have expanded their commitment to the cloud and selected AWS as their cloud partner. As a result, Amazon’s Q3 revenue of $110.8 billion represented a two-year compounded annual growth rate (CAGR) of 25%, versus a pre-pandemic growth rate in the low 20% range.
AWS Q3 highlights include:
NXP, a leading European designer and manufacturer of specialized semiconductors, selected AWS as its preferred cloud provider.
Leaders across the automotive industry, including Capgemini Engineering, CARIAD, and Continental, joined AWS in a special interest group supporting Arm’s Scalable Open Architecture for Embedded Edge to bring cloud-native practices and software-defined architectures to the automotive industry.
Wyndham Hotels & Resorts, Inc., the world’s largest hotel franchising company, selected AWS to upgrade its technology infrastructure and develop and deliver new guest services across its 21 hotel brands—including Ramada, Travelodge, and Wyndham.
VTEX, a global e-commerce solution provider, is working with AWS to create a new direct-to-consumer solution that gives large enterprises the ability to quickly and easily launch e-commerce sites and experiences to sell directly to consumers.
Boingo Wireless, a leading distributed antenna system, Wi-Fi, and private network provider, announced an expanded collaboration with AWS to enable airports, stadiums, and large businesses to unlock new 5G use cases with advanced multi-access edge computing.
Sun Life, an international financial services and insurance company selected AWS as its long-term strategic cloud technology provider.
Black Knight, a software, data, and analytics provider to the mortgage, real estate, and capital markets verticals, selected AWS to develop mortgage-specific AI applications.
Baxter International Inc., a global medical products company, is moving from its own data centers into AWS. It has already seen benefits, including increased speed to market for new tools and solutions, the ability to quickly expand technology solutions to new geographies, and significant cost savings.
Arctic Wolf Networks selected AWS as its primary cloud provider to power its innovative, cloud-native security operations platform as it expands globally.
What can Amazon shareholders expect in Q4?
Guidance for Q4 offers bearish sentiment with labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs all expected to continue.
The company is doing its best to improve its supply chain amid the global challenges. It is adding new shipping ports and boosting its fleet of planes and trucks.
And attempting to get ahead of the curve, Amazon kicked off its holiday deals early on October 4. With supply chain constraints expected to continue, shoppers are encouraged to start Christmas shopping early.
Q4 operating income is projected to come in between $0 and $3 billion compared with $6.9 billion in Q4 2020.
Net sales are projected to grow between 4% and 12% compared with Q4 2020, coming between $130 billion to $140 billion. Analysts surveyed by FactSet projected revenue to rise 13.2% year-over-year to $142.1 billion.
Andy Jassy, Amazon CEO said:
“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs... It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”
Growing labor costs
Amazon’s growing labor costs are not insignificant. Labor constraints, wage inflation, and supply chain issues cost the company $2 billion in Q3. This is projected to double to $4 billion next quarter.
Growing demand for labor coincides with a shortage of available workers.
Amazon recently announced plans to hire 275,000 permanent and seasonal employees nationwide, partly to steady the holiday shopping rush.
It’s had to drastically improve its wages and is now offering a starting wage of $18 an hour with a potential $3 uplift and sign-on bonuses up to $3,000.
Nevertheless, in a bid to improve its image and invest in employees, Amazon announced it will fund education. This includes full college tuition, high school diplomas, GED diplomas, and English as a Second Language proficiency certifications for its U.S. front-line employees through its Career Choice program.
More than 750,000 operations employees will be eligible for this benefit starting in January 2022.
Upskilling 2025 is Amazon’s $1.2 billion investment to provide free skills training to the company’s US employees over the next four years.