Amazon.com. Inc. (NASDAQ:AMZN) late Thursday reported third-quarter revenue of $70 billion, a 24% increase over the same period in 2018, as well as a 46% surge in worldwide shipping costs as it made massive transportation and logistics investments to upgrade delivery times and to take more control of the shipping process amid continued demand for its products and services.
Amazon said it spent a record $9.6 billion on shipping in the quarter. To put the number in perspective, that was $600 million more than it spent during the peak holiday period in 2018, when shipment volumes rise to yearly highs.
Amazon expects to spend $1.5 billion in the fourth quarter to support its ambitious plan guaranteeing one-day deliveries–down from two days–on products ordered through its “Prime” service, CFO Brian Olsavsky told analysts Thursday. It exceeded its original $800 billion budget for the program when it was introduced in the second quarter, and the costs went higher still in the third quarter, Olsavsky said. He didn’t provide specifics on the second- and third-quarter figures.
Most of the costs are earmarked for deploying “forward” inventory closer to the end customer, and for inbound transport to support that objective, company executives said. The bulk of the investment is in the domestic market, though Amazon is also expanding the service internationally. Olsavsky said the program is gaining traction in the U.K., where there isn’t a comporable alternative.
Besides the cost of beefing up one-day deliveries, Amazon is spending heavily to expand its delivery partner network, in which individuals become independent contractors who, in turn, manage a fleet of drivers who work for the contractor and not for Amazon.
Amazon is moving more of its transport services in-house. At the same time, it must maintain customer commitments to hit ever-more stringent delivery times. The company’s ultimate objective is to achieve adequate package density for each stop made so it can lower its cost per-package and maintain a reliable service. Ironically, in order to reduce its overall shipping costs down the road it must ramp up shipping investments now.
Amazon reported operating income of $3.2 billion, a $500 million year-on-year drop. Net income fell $800 million to $2.1 billion. Earnings per diluted share came in at $4.23 a share, down from $5.75 per diluted share in the 2018 quarter, and $0.23 per share below analysts estimates polled by Barchart. Shares were off about 8% in early after-hours trading.
Amazon projected fourth-quarter revenue to range between $80 billion and $86.5 billion, which would be 11% to 20% higher than fourth-quarter 2018. Operating income is expected to be between $1.2 billion and $2.9 billion, compared with $3.8 billion in fourth quarter 2018.