CFO Talks International Growth, Prime, and Cost Savings — The Motley Fool

Amazon.com (NASDAQ:AMZN) released a strong third-quarter 2018 earnings report on Thursday after the market close. The e-commerce and cloud-computing giant’s revenue jumped 29% year over year to $56.6 billion, and earnings per share (EPS) increased about 11 times to $5.75.

As it did in the previous three quarters, the bottom-line result trounced Wall Street’s expectation. Analysts were looking for $3.14 per share. That said, shares declined 7.8% on Friday, which we can primarily attribute to revenue for the fourth quarter — the big holiday quarter — that came in lower than Wall Street was expecting. Amazon guided for revenue growth of 10% to 20% year over year in the fourth quarter.

Earnings releases only tell part of the story. Here are three key things management shared on the earnings call that investors should know. 

Two main factors negatively affected international’s revenue growth

In the third quarter, Amazon’s international segment’s revenue increased 15% year over year in constant currency (and 13% on a reported basis) to $15.5 billion. In constant currency, that represents a 6-percentage-point slowdown in growth from the first two quarters of the year. In Q1, revenue grew 21% in constant currency and 34% as reported, and in Q2, revenue rose 21% in constant currency and 27% as reported.

CFO Brian Olsavsky explained two main reasons for this slowdown:

We did the Souq acquisition last year in May. So the full pick-up on that year-over-year was in 2017 and now we’re lapping that. There’s also material change in the Diwali calendar in India. About half of our Diwali sales last year were in Q3. This year they’ll be fully in Q4.

Importantly, neither of these reasons suggests that Amazon’s long-term growth potential in international markets has weakened. Souq.com is a Middle Eastern e-commerce company that Amazon acquired. In fact, it was reportedly the largest e-commerce player in the Middle Eastern region when Amazon acquired it. In India, the five-day Diwali holiday began in mid-October last year and begins in early November this year. 

While we’re talking international, it’s worth noting that Amazon launched in Turkey in the quarter, which brings its number of websites up to 17 globally.

Prime program “remains strong” after price increase

Here’s Olsavsky’s response to an analyst who asked if the price increase earlier this year has negatively affected the company’s Prime loyalty program: 

We’re very pleased with the renewal data and annual sign-up data that we’ve seen. Since [the price increase], the program remains very strong, both in membership and engagement. … We just continue to see that ramp up, not only in the U.S., but in other countries.

In mid-May, the price of a new Amazon Prime annual membership increased from $99 to $119, while the price for renewals increased to the same amount starting in mid-June. The price for monthly memberships remained unchanged at $12.99, which comes out to about $156 per year.

The company continues to add new benefits to its Prime program. In the third quarter, for instance, it had “greater expansion of our grocery delivery out of Whole Foods using Prime Now.” Olsavsky added, “We’re now in 60 cities in the U.S., giving customers delivery in as fast as an hour.” This is a really convenient service. Delivery is free if you choose a two-hour delivery window, and $4.99 if you want a one-hour window. The minimum order is $35. 

Cost savings were a significant reason for Q3’s operating income outperformance

In the quarter, operating income was $3.7 billion, up a whopping 966% from the year-ago period. Olsasvky called out the particularly strong revenue growth of two “very profitable” businesses, Amazon Web Services and advertising, along with the company’s “great cost performance,” as being reasons for operating income significantly outperforming the company’s guidance. He outlined three specific areas most responsible for this great cost performance the company has been experiencing throughout 2018:

• Headcount: For the first nine months of the year, Amazon has grown headcount just 13% year over year. That compares with 38% last year, excluding Whole Foods, and 66% including Whole Foods, and 48% in 2016. “We have looked to really leverage our investment from the last couple of years,” Olsavsky said.
• Fulfillment centers: In 2018, the company plans to add just 15% year over year to its total fulfillment center square footage. That compares with more than 30% increases in the prior two years. The company is “getting better efficiencies on what we have and banking the multi-year investments that we’ve been making,” Olsavsky noted.
• Infrastructure: Increased efficiencies in the company’s data centers helped drive AWS’s operating margin to 31.1%, up from 26.9% in the second quarter. Spending on capital leases is up only 9% year over year over the trailing 12 months, compared with 69% for 2017.

In short, Amazon turned in a terrific quarter. Since the company has been demolishing its operating income outlook all year, the chances seem good that it will beat its Q4 operating income guidance, which is for growth of 0% to 71% year over year. However, coming in “just” near the high end of this range would represent robust growth.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.