You may know of Amazon as the world’s largest e-commerce firm in terms of revenue. But Amazon also dominates the cloud computing market with its AWS cloud computing segment.

On 28 October 2021, Amazon announced its earnings for the third quarter ended 30 September 2021.

In this article, we’ll be looking at the highlights of the conglomerate’s latest earnings release.

1. Revenue

Net sales increased 15% to $110.8 billion 3Q 2021, compared with $96.1 billion in third quarter 2020. However, on a QoQ basis, net sales decreased slightly from $113.1 billion in 2Q 2021 to $110.8 billion in 3Q 2021.  

Amazon saw net sales increase across its three business segments, namely North America, International e-commerce and AWS, which is the cloud computing segment of Amazon.

AWS had the sharpest increase in net sales of 39%, reflecting increased customer usage.

Growth in Amazon’s e-commerce sales is mainly attributed to increased unit sales, including sales by third-party sellers, and advertising sales. The increase in unit sales is mainly attributable to continued efforts to reduce prices for Amazon customers (such as shipping offers) and an increased demand. 

2. Decline in operating income

Operating income decreased from $6.2 billion in Q3 2020 to $4.9 billion in Q3 2021, a 22% decline YoY.

Across business segments, operating income decreased in both the North America and International segments. Only AWS showed an increase in operating income.

The decline in operating income is primarily due to increased shipping and fulfilment costs, as Amazon continues to invest in its fulfilment network, increased wage rates, fulfilment network inefficiencies, and growth in certain operating expenses, including marketing. 

In addition, operating income turned negative, culminating in an operating loss of $900 million. This can be partly attributed to the continued investments Amazon makes to establish its brand in the new countries it is expanding into. 

That said, management is confident that the international segment will make operating profits in the long run. Hence, Amazon continues to invest in its business by building up its fulfilment capacity. This is to allow the company to bring more items in stock and to deliver them quickly to customers.

Moreover, if we take a longer term view, Amazon’s operating income increased from $16.0 billion for the nine months ended September 30, 2020, to $21.4 billion for the nine months ended September 30, 2021. 

3. Increase in operating expenses

As can be seen, Amazon’s operating expenses have increased, as the company is investing in key business areas such as fulfilment, technology and content and marketing.

Amazon’s management is planning to add physical capacity in order to meet customer demand. In September alone, Amazon brought online more than 100 new buildings in the United States, including fulfilment centers, sort centers, and last-mile delivery stations.

In the 2021 3Q earnings call, management has said that they are on track to double Amazon’s fulfilment network over the two-year period since the pandemic’s early days.

All these investments are made to support Amazon’s ever-growing business in the e-commerce as well as cloud computing space. 

There is also another reason why fulfilment expenses have been increasing for Amazon. Global supply chain disruptions from the pandemic have brought about fulfilment network inefficiencies. 

Instead of passing down the increased fulfilment costs to customers and third-party sellers on their platform (in terms of higher prices), Amazon has decided to absorb the increased costs themselves. Amazon believes that this will help to protect its customers’ interests.

4. Increase in wage rates

The labour shortage has proved to be a very real constraint that the e-commerce firm has to actively deal with. To attract and retain employees, the company has rolled out a slew of incentives, including increased wages, bonuses, and free college tuition.

5. Decline in cash flows

Operating cash flow decreased 1% to $54.7 billion for the trailing twelve months, compared with $55.3 billion for the trailing twelve months ended September 30, 2020.

Operating cash flow also dropped sharply to 7.3 billion in 2021 3Q from 12 billion in the same quarter last year.

Free cash flow decreased to $2.6 billion for the trailing twelve months, compared with $29.5 billion for the trailing twelve months ended September 30, 2020. This translates into a 91% decline year-on-year.

Free cash flow equals operating income minus the company’s capex (capital expenditure).

Free cash flow has been dropping even faster than operating income because of Amazon’s aggressive capital expenditure the past year.

6. Innovating for retail customers

One vital aspect for any e-commerce business is ensuring a robust logistics network that can provide a seamless and fast delivery experience to its customers.

Amazon is continuing to make progress towards providing ultrafast delivery for things like grocery.

Amazon expanded its faster Same-Day Delivery service to 9 more cities — bringing the total number of cities with the service, which launched in 2020, to 15.

Currently, Amazon has over 170,000 products that customers can get within two hours from Amazon Fresh, Whole Foods Market and other participating stores in over 5,000 cities and towns. 

7. 2021 4Q guidance

Net sales is expected to be between $130.0 billion and $140.0 billion, or to grow between 4% and 12% compared with fourth quarter 2020.

Operating income is expected to be between $0 and $3.0 billion, compared with $6.9 billion in fourth quarter 2020.

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labour supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs.” Amazon CEO Andy Jassy said in the company’s earnings release.

In 2021 2Q, management also gave guidance on 2021 3Q, and the forecasted financial figures turned out to be pretty accurate. So we can optimistically expect 2021 4Q figures to be in line with estimates. 

8. Longer term perspective

While the financials in 2021 3Q and guidance for 2021 4Q might seem disappointing, if we take a longer term perspective, it can be said that Amazon still had a very good year nonetheless.

For the trailing twelve months, net sales is up 32%, operating income up 42%, net income up 51% YoY.

Conclusion 

While short term headwinds such as increased fulfilment and labour costs are definitely worth taking note of, Amazon’s business still seems intact and poised for future growth.

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