Watch Now

Amazon to continue pouring billions into transport network, CFO says

Olsavsky said transport accounted for more than half of CapEx through first three quarters

More money heading transport's way at Amazon (Photo: Jim Allen/FreightWaves) Inc. (NASDAQ:AMZN) late Thursday posted strong third-quarter results, with net revenue of $96.1 billion exceeding the high end of its estimates, and net income of $12.37 a share exceeding analysts’ median estimates by more than $5 a share.

The Seattle-based giant also said that transportation costs accounted for more than half of its $30 billion in capital expenditures for the first nine months. Brian Olsavsky, Amazon’s CFO, said transportation network investments will consume at least half of the company’s capital spending over a multiyear period.

Olsavsky sidestepped an analyst’s question about the impact of scarce parcel-delivery supply on the company’s peak-season performance, saying that everyone will be running tight but that the company feels it’s ready for what is expected to be an unprecedented onslaught of traffic.

Amazon today self-handles about two-thirds of its deliveries, the highest ever in its history, according to estimates from consultancy ShipMatrix. Amazon’s third-quarter shipping costs totaled more than $15 billion, a 57% year-over-year increase. As high as those costs are, they may be dwarfed by what Amazon will spend between October and the end of 2020.

The third-quarter financial metrics were clearly positive. Net sales increased 36% compared with third quarter 2019. Operating income increased to $6.2 billion in the third quarter, nearly doubling 2019 levels. Net income tripled 2019 levels, Amazon said.

Amazon forecast between $112 billion and $121 billion in fourth-quarter net sales, a 28% and 38% year-on-year increase. Operating income is expected to range between $1 billion and $4.5 billion, compared with $3.9 billion in fourth quarter 2019, Amazon said. The guidance includes about $4 billion in costs related to the COVID-19 pandemic, according to the company.

In after-hours trading near 7 p.m. ET, Amazon shares were down nearly 2%. For the year, shares are up 74%.

In a Thursday evening note, Brian P. Yarbrough, analyst for Edward Jones & Co., said the company is “well positioned longer term” based on its third-quarter results. The only negative, Yarbrough said, was the forward guidance on fourth-quarter operating income growth. He surmised that Amazon was trying to guide conservatively after beating operating income estimates in the prior two quarters.

In addition, the $4 billion in COVID-19-related fourth-quarter costs was way above what investors had expected, Yarbrough said. Most investors believed those expenses would be behind the company by now, he said.

Amazon has been furiously adding fulfillment and logistics center capacity before the peak, and hopes to have 50% more warehouse and transport capacity by the end of 2020 than in 2019. Most of the capacity will be allocated to parcel sortation and delivery, Olsavsky said.

Third-party sellers using Amazon’s platform accounted for more than half of its third-quarter unit volume, Olsavsky said. The balance of the volume are from sales of products that Amazon itself procures.

The company experienced front-end productivity headwinds in its newly opened facilities as it welcomed tens of thousands of new employees during the quarter, Olsavsky said. It also must contend with ongoing expenses related to the COVID-19 pandemic, and efficiencies have been affected by social-distancing measures in its facilities, he added. 

Olsavsky acknowledged the sizable spend on fulfillment assets, noting that “we are erring on the side of too much capacity” for the peak season. Amazon will adjust any future investments based on what it observes coming out of the peak season, he said.

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.