Amazon.com Inc. Earnings: AWS Takes the Lead Again

By Markets Fool.com

Image source: Amazon.com.

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After the closing bell on Thursday, online retailer and cloud-computing giant Amazon.com (NASDAQ: AMZN) released results for the third quarter of 2016. In after-hours trading, share prices fell more than 5% on the news, retreating to prices not seen since September 30.

Here's a closer look at Amazon's actual results.

Amazon's Third-Quarter results: The raw numbers

Q3 2016 Actuals

Q3 2015 Actuals

Growth (Year over year)

Revenue

$32.7 billion

$25.4 billion

29%

Operating income

$575 million

$406 million

42%

Free cash flows

$1.66 billion

$738 million

125%

GAAP net income

$252 million

$79 million

219%

GAAP EPS (diluted)

$0.52

$0.17

206%

Source: Amazon.

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What happened with Amazon this quarter?

Both sales and operating profits were in the upper half of Amazon's guidance for the quarter.

  • The cloud-computing segment known as Amazon Web Services (or AWS) led the way with 55% year-over-year sales growth and 101% higher operating profits.
  • AWS accounted for 10% of Amazon's total revenue, but contributed the lion's share of operating income. The division's $861 million operating profit was more than three times larger than the North American retailing profits, and the international retail segment reported another operating loss.
  • Amazon is not in the habit of providing firm bottom-line guidance, leaving analysts and investors guessing regarding items below the operating income line. In the third quarter, solid operating profits were decimated by an effective GAAP tax rate of 46.6%. Note that this accounting construct is quite different from Amazon's cash taxes, which were only $91 million, or 18% of Amazon's GAAP income before taxes.

Amazon's management provided the following guidance for the fourth quarter:

  • Net sales should increase approximately 22% year over year, stopping near $43.8 billion. Hitting that target would place Amazon's fourth-quarter sales growth in line with the rate seen a year earlier. This guidance assumes a fairly insignificant currency exchange boost of 0.6%.
  • Operating income could land anywhere between breakeven and $1.25 billion. In the fourth quarter of 2015, this metric stood at $1.1 billion.

Amazon Echo. Image source: Amazon.com.

What management had to say

In a prepared statement, Amazon CEO Jeff Bezos highlighted the promise of personal assistant Alexa, which is found inside Amazon-branded products such as the Fire tablet, the Echo home automation tool, and the Fire TV set-top box.

"Alexa may be Amazon's most loved invention yet -- literally -- with over 250,000 marriage proposals from customers, and counting," Bezos said. "And she's just getting better. Because Alexa's brain is in the cloud, we can easily and continuously add to her capabilities and make her more useful -- wait until you see some of the surprises the team is working on now."

That was the only direct management quote in this earnings release, but the Alexa, Echo, and Fire brands got plenty of column inches as the company ran down a list of recent consumer-facing announcements and product introductions.

Looking ahead

The quarter itself lived up to management's published expectations, and the fourth-quarter forecast was in line with the year-ago result. If the stock needed a cold shower at this point, it might have been because Amazon shares had been running a little hot recently. As of Thursday's market close, the stock had gained a market-beating 35% over the last six months and 11% since the second-quarter report.

AWS is certainly pulling its weight in a big way, and the holidays of 2016 come with solid revenue projections. The operating income guidance might be a little less rosy, if we're picking nits.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.