Reported operating profit was $261 million, up 7%, and EPS was $0.51 per share.
Although the Q3 numbers were toward the high-end of consensus estimates, Wall Street is disappointed with the company’s forecast for Q4, the critical holiday selling season. The stock is trading down about 4% after hours.
Specifically, Amazon’s predicted operating margins for Q4 are lower than expected, which raises questions about whether the company’s got its operating expenses under control. During the earnings call, Amazon CFO Tom Szkutak blamed the company’s recent opening of 10 fulfillment centres, with three more coming in Q4.
He also noted that the company’s launched a lot of new product categories, which puts pressure on margins. Over time, as these segments get more mature and Amazon can buy inventory more efficiently, the margins on these new categories should improve.
Szkutak also talked about the company’s grocery delivery service, Amazon Fresh, which has been under testing in Seattle for several years now. I personally love this service–it’s a lifesaver if you hate taking young kids to the grocery store–but unfortunately for the rest of you, it’s still under testing and they don’t have any specific plans for a national rollout yet.
As usual, the company was silent on Kindle device sales and profit margins.
It’s also worthy noting that despite Amazon’s status as a leader in cloud computing, the “Other” segment that includes Amazon Web Services took in only $240 million during the quarter. No wonder CEO Jeff Bezos was pushing AWS so hard during today’s announcement of a new fund for social networking startups. (Amazon is partnered with Facebook, Zynga, and Kleiner Perkins in the new fund, which is called sFund.)
Also earlier today, Amazon announced a new free tier of AWS, which will let developers try and become familiar with the service for up to one year without paying (assuming that there aren’t any spikes beyond the fairly low usage limits for the free tier).
Here’s JP Morgan analyst Imran Khan’s assessment of the earnings report prior to the earnings call:
- Revenue beats expectations. 3Q revenue was $7.56B, slightly ahead of $7.37B consensus, and above our $7.43B estimate. Guidance had been $6.9B-$7.625B.
- Pro forma operating margin at 5.3%. This represented a ~110 bps decline vs. the year-ago quarter, and reported operating income of $268M was slightly above the midpoint of guidance and in line with our $271M estimate.
- Domestic revenue growth in line with 2Q. North America Media revenue was up 13% Y/Y, down from 15% growth in 2Q. EGM accelerated for a fifth straight quarter to 80% growth, compared to 76% in 2Q, with overall NA sales up 45% Y/Y, down from 46% last quarter. International Media revenue was up 16% (18% ex-FX), while EGM rose 54% (60% ex-FX). International revenue growth was 32%, or 35% ex-FX, a slight deceleration from the 2Q ex-FX growth rate of 38%.
- Gross margin up ~10 bps Y/Y. The gross margin figure of 23.5% was an improvement from 23.4% in 3Q’09. North America gross margin improved ~60 bps Y/Y, partly offset by a ~80 bps decline in International gross margin. We think International gross margins continue to be impacted by the addition of new categories in the last year.
- Revenue guidance ahead of consensus. 4Q revenue is expected to be $12.0B-$13.3B, representing 26%-40% growth. This compares to incoming consensus of $12.2B and, at the midpoint, matches our estimate of $12.65B.
- Operating income guidance implies 4.7% pro forma operating margin. Amazon expects 4Q pro forma OI of $500M-$700M, compared to our estimate of $753M going into the print.
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