Shift to one-day delivery hurt earnings

SEATTLE — Amazon said revenue grew 24% to $70 billion in its third quarter. But earnings fell short of expectations as the company spent heavily to increase delivery capacity. The company is shifting from two-day to one-day shipping as a core benefit of its Amazon Prime subscription service.

Amazon said it spent $9.6 billion on shipping in the quarter, and that shipping costs rose 46% from a year earlier.

After investing $800 million in each of the past two quarters to expand one-day delivery to more products and regions, Amazon expects to spend another $1.5 billion on the initiative in the current quarter, the company said October 24. Amazon also said it is allocating more funds to its cloud computing business, and to bolster its advertising sales force.

“We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery,” Jeff Bezos, Amazon’s chief executive officer, said in a statement. “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. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer — it simply becomes impractical to use air or long ground routes. Huge thanks to all the teams helping deliver for customers this holiday.”

Amazon gave fourth-quarter revenue guidance in the range of $80 billion and $86.5 billion, below analysts’ consensus forecast of $87.4 billion.

Advertising sales were a bright spot in the quarter ended September 30. Amazon reported net sales of nearly $3.6 billion in its “other” category, which primarily represents advertising, up from $2.5 billion a year earlier. Advertising revenue grew 45% as Amazon focused on delivering better advertising experiences and helping businesses to find, attract and engage customers. Amazon said it is using machine learning to drive relevant ads.

Third-quarter revenue from subscription services, which includes Prime memberships, came in at $5 billion, up 34% from a year earlier.

Amazon, which just recently began breaking out revenue for its physical stores, said stores had sales of $4.2 billion in the third quarter, down 1% year on year.

Amazon said it hired 100,000 people in the third quarter, pushing its workforce past 750,000 for the first time.

Growth continued to slow at Amazon Web Services. While the cloud again contributed significantly to Amazon’s bottom line, with close to $9 billion in quarterly revenue, the unit’s growth dropped below 40% for the second consecutive quarter.

Still, AWS is growing faster than the company as a whole. It accounted for 13% of Amazon’s third-quarter revenue, and the unit’s operating income of $2.26 billion made up more than 70% of Amazon’s operating profits.