Amazon Announces Q3 Earnings, Revealing the True Cost of “Free” One-Day Shipping

Q3 Earnings Call Results  

Along with the close of the markets yesterday evening came Amazon’s Q3 Earnings call, where Amazon reported a shrink in earnings year-over-year for the first time since June 2017. The company mostly attributes this to the tremendous cost of providing “free” one-day shipping for their Prime members, which involves hiring many, many more employees (nearly 100,000 in Q3 alone, a staggering statistic revealed in the call) to handle logistics like shipping and fulfillment.  

Overall, the company reported a third-quarter profit of $2.1 billion, or $4.23 a share, on sales of $69.98 billion. Sales rose from $56.58 billion a year ago, but earnings declined from $5.75 a share. 

You may remember that members of the Amazon C-Suite, including Jeff Bezos and Chief Financial Officer Brian Olsavsky, prepared investors to expect lower profits over the next few quarters during the last earnings call in July. During that call, the company reported slowed growth in their “other” category (largely composed of ad sales) for the first time since they went public and projected the cost of one-day shipping to be about $800 million.  

As it turns out, those numbers were conservative; Olsavsky reported that the company has already spent more than that and plans to spend even more in Q4. Amazon’s worldwide spending on shipping jumped 46% year-over-year in the third quarter to a record $9.6 billion, more than a half-billion dollars over what Amazon spent in the busier holiday season a year ago.  

The domestic e-commerce business provided net sales of $42.64 billion and operating income of $1.28 billion, while international operations recorded an operating loss of $386 million on sales of $18.35 billion. Amazon’s brick-and-mortar retail offerings produced their lowest quarterly revenue since Whole Foods Market was fully acquired in 2017, with $4.19 billion in net sales falling 1.3% from the year before and 3.2% sequentially. 

As usual, Amazon’s huge expenses were propped up by the profits of their cloud-computing business, Amazon Web Services, which reported revenue of $9 billion and operating income of $2.26 billion, amounting to 71.6% of Amazon’s total operating profit. The revenue in this division of the business grew 35% from the year before. 

So besides one-day shipping, what else is Amazon spending that money on?  

In the four months since their last call, Amazon has made several announcements that hint at a developing, soon-to-be-robust ad offering. The company has been heavily invested in creating a network of ad products to draw big-label brands in for partnerships, and with competitors at Facebook fighting claims of election fraud and faked video metrics, we may see an uptick in the percentages of ad spend flowing Amazon’s way. 

This is especially likely now that Nielsen announced that it can now measure viewing taking place on Amazon Prime Video in the U.S. This is great news for advertisers who want to measure the reach of their campaigns on streaming properties and will likely help Amazon boost their ad sales now that they have an outside party to verify the audiences tuned into their streaming services.  

Their annual fall announcement in September (which we also covered on the blog) touted a myriad of new smart home and Alexa-enabled devices, meaning that brands who are interested in building voice skills now have countless avenues through which they can connect to customers. The development of “smart” devices is hardly a cheap endeavor, but Amazon seems determined to get a smart device in the hands of every person on the planet. Much like their devotion to (nearly immediate) shipping, these immense costs will eventually pay off in the form of customer convenience – and loyalty.  

While the initial numbers may make Amazon’s stock drop temporarily, the company maintains that investing in even quicker shipping will be well worth it. July’s Prime Day was once again reported to be the largest day of sales ever for Amazon, and Bezos reassured investors on the call: “customers love the transition of Prime from two days to one day — they’ve already ordered billions of items with free one-day delivery this year. It’s a big investment, and it’s the right long-term decision for customers.”