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Here's How Amazon.com, Inc. Nailed the Third Quarter

On Thursday night, Amazon.com (NASDAQ: AMZN) reported its third-quarter results. Sales soared while earnings and cash profits backed down, all landing well above the top end of management's guidance ranges. Here's a closer look at the e-tailer's latest business update.

Amazon's third-quarter results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Net sales

$43.7 billion

$32.7 billion

34%

Free cash flow

$3.54 billion

$5.25 billion

(33%)

Operating income

$347 million

$575 million

(40%)

Net income

$256 million

$252 million

(2%)

GAAP Earnings per share (diluted)

$0.52

$0.52

--

Data source: Amazon.

The third-quarter sales tally included $1.3 billion from Whole Foods Market, which Amazon acquired at the end of August. Excluding Whole Foods from these results would amount to 30% year-over-year sales growth.

Both revenue and operating income landed above the top end of Amazon's guidance for this quarter, which topped out at $41.75 billion and $300 million, respectively. That forecast assumed a foreign exchange headwind of roughly $125 million, but the reported currency impact worked out to a $124 million tailwind instead. Any way you slice it, Amazon's net sales exceeded expectations.

The company's stated goal is to optimize free cash flows in the long run. This report pulled in the opposite direction, as free cash flows declined year over year. Amazon's third-quarter capital expenses rose by 45%, stopping at $2.7 billion, as the company continued to invest in more shipping fulfillment centers in preparation for the upcoming holiday rush. Amazon's capital expenses tend to expand in the back half of every fiscal year, and this year is no different.

Image source: Amazon.

Breaking down the big numbers

Worldwide retail sales increased by 22% year over year to $26.4 billion, accounting for 60% of Amazon's total revenue. The network of third-party sellers operating through Amazon's e-commerce services increased their fees to the company by 40%, landing at $7.9 billion.

Splitting the e-commerce results from a different angle, North American sales rose 35% overall while international sales increased by 29%. The domestic market accounted for 65% of the global e-commerce tally.

The Amazon Web Services division, or AWS, pushed its sales 42% higher to stop at $4.6 billion. This division also produced $1.2 billion of operating income while the retail divisions added up to a $824 million operating loss. The computing services business is pulling more than its own weight.

Subscription services, including Amazon Prime and other streaming media services, boosted their revenue by 59% to $2.4 billion. Amazon does not like to break this figure down in great detail, so we don't have enough data to figure out how many Prime subscribers the company has landed.

If we assume that services like Audible.com and the Kindle e-books subscription program add up to an insignificant contribution, Amazon could have as many as 98 million Prime subscribers under its belt. That would be up from 61 million potential members a year ago, under the same hypothetical assumptions. But that's just a thought experiment, placing a ceiling over Amazon's Prime progress. The company just isn't sharing this proprietary data point.

What's next?

According to this report, Amazon received 238 proposals from North American cities hoping to host the company's second headquarters. Management has a lot of data to sift through there, and no decision has been reached yet.

The total headcount of full-time and part-time Amazon employees skyrocketed 77% higher, and the company now manages 542,000 staffers. Whole Foods brought in 90,000 of these new workers. Another 120,000 people will find temporary positions to help Amazon through the holiday season. The asset-light business model of yore is not so lightweight anymore.

Looking ahead to the next report, Amazon expects holiday-quarter sales of approximately billion. That target includes a Whole Foods contribution of roughly $4.4 billion. As usual, operating income was given a wide range, stretching from $300 million to $1.65 billion. That compares to a $1.3 billion result in the fourth quarter of 2016.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.