Q3 2019 Earnings Call
Thank you for standing by good day, everyone and welcome to the amazon.com Q3, 2019 financial results teleconference. At this time all participants are in a listen only mode. After the presentation. We will conduct a question and answer session. Today's call is being recorded for opening remarks, I'll be turning the call over to the director of Investor.
Lesions Shelley K Pfeiffer. Please go ahead.
Hello, and welcome to our Q3 2019 financial results Conference call.
Joining us today to answer your question is bridal Sasaki, our CFO and do filed director of Investor Relations.
As you listen to today's conference call. We encourage you to have our press release in front of view, which includes our financial results as well as metrics and commentary on the quarter. Please note unless otherwise stated all comparisons in this call will be against our results for the comparable period of 2018.
Our comments and responses to your questions reflect management's views as of today October 24th 2019, only and will include forward looking statements actual results may differ materially.
Additional information about factors that could potentially impact our financial results is included in today's press release, and our filings with the FCC, including our most recent annual report on Form 10-K and subsequent filings.
During this call we may discuss certain non-GAAP financial measures in our press release slides accompanying this webcast and our filings with the FCC each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures.
Including reconciliations of these measures with comparable GAAP measures.
Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions.
Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rate changes in global economic conditions and customer spending world events the rate of growth of the Internet online commerce and cloud services and the various factors detailed in our filings with the FCC.
Okay.
Our guidance also assumes among other things that we don't conclude any additional business acquisitions investments restructurings or legal settlements.
It's not possible to accurately predict demand for our goods and services and therefore actual results could differ materially from our guidance.
With that we will move to Q in a operator, please remind our listeners how to initiate a question.
Thank you at this time, we'll now open the call for questions. We ask each caller. Please limit yourself to one question. If you like to ask your question. Please press star one on your telephone keypad, we ask that when you pose your question you pick up your hands that specified optimum sound quality once again to initiate a question. Please press star.
And one on your Touchtone telephone at this time, please hold only poll for questions.
Thank you. Our first question comes for a line of Eric Sheridan, What do you B.S. Please proceed.
Thanks, So much for taking my question I wanted to know if I could go a little bit deeper in the framework around revenue guidance for Q4. Historically you have seen you celery shouldn't be you're on your growth rate in Q4 versus Q3, but maybe if your businesses look like they re accelerated in Q3 over Q2. So just wanted to know whether it was either for you.
Last or advertising or some other things ecommerce business, which are there things we should be keeping in front of buying from a headwind or tailwind perspective, as we speak to some of the moving pieces in Q4. Thanks so much.
Sure Hi, Eric Yes, let me make clear we are really a excited and looking forward to a great holiday season.
We feel like we had agreed Q3 as well and have made a rapid progress on our one day shipping or the ops teams done a great job getting us the position, where we're in and I think that's going to be agreed additional service for customers in Q4.
On the guidance of front, here's what I would have you keep in mind. If you. If you look back over the last few years and adjust for the acquisition of a whole foods and suit which.
Obscure this a bit in the last couple of years, there's been a a noticeable drop in a run rate between Q2 excuse me Q3 in Q4.
General and the lives of about 300 basis points, we're factoring that in this year that's.
Just something we're expecting it it's a bit about the law of large numbers and the differential between growth and the holiday season, that's very tight few weeks of a holiday season versus the rest of the year, but so we factored that in and then there's also to other issues. The Devalle holiday in India was all in Q4 last year and a bit of it was.
In Q3. This year also the Japan consumption tax was raised from 8% to 10% on October Onest and what we saw was a pre buy a bit in Q3 at the end of the quarter and based on our history with the last time the consumption tax went up a many years.
We'll go Oh, we've we've expected a slight negative impact from that tax in Q4 in Japan. So if you wrap those together we expect.
It's going to be more of an issue with our international growth rate I would say it's a.
Let me do have helped us by 150 basis points in Q3 and will be a negative headwind of 300 basis points year over year in Q4 for the company, it's not as large and issued its is about 40 basis points of favorability in Q3, and it's expected to be about 80 basis point headwind in Q4. So.
So that's it that's a little bit more on our guidance, but again, we're looking I'm really looking forward to Q4.
I think we're well positioned to make it the best holiday ever for our customers I think one day should help with holiday shipping Oh, we've got a great new device line up the May have seen announced in September and on the best side. We're looking forward to our re:Invent Conference in Las Vegas, where we'll welcome over 65000.
Conference attendees.
Thank you. Our next question is from Doug and less with JP Morgan. Please proceed.
Thanks for taking my questions.
Brian just wanted to ask you a kind of more broadly about crime one day, what your biggest learnings have been so far over the past several months as you've been increasing availability and then how should we think about that availability now and when we get into the heart of a holiday season or in can you also just help us understand how that's playing into your operating income.
Guidance for Fourq you. Thanks sure sure let me start with the second part of that so we're back in Q2 I.
So that we were estimating an 800 million dollar expense in Q tied to one day in Q2, and we actually were just above that in Q2 in Q3, we expected that to grow we put it into our guidance and we hit essentially where we expected on the guidance. So as we head into Q4, we that.
I did a what's just nearly a.
1.5 billion dollar penalty in Q4 year over year for the cost of shipping, which is essentially a transportation cost the cost of expanding our transportation capacity things like adding additional poles and shifts in our warehouses.
The costs of four were deploying inventory closer to customers. There's a lot of tangential cost, but <unk> by a in a way the biggest expenses is on the actual transportation cost.
We've built that into our Q4 guidance estimate, but we're very pleased with the customer response to one day you can see it in our revenue acceleration and also in our unit growth acceleration I. Once again the ops team has really done yeoman's work here to create this capacity for us and they continue to unlock.
No capacity daily we're expecting that it will be a again a great helped to customers in Q4, we have seen prime members increased their orders spend more so they must also see it as a real help to them in their daily lives.
Thank you. Our next question comes on line of she is that Squali with Suntrust Robinson Humphrey. Please proceed.
Great. Thank you so much Brent could just couple of quick one of the 400 basis points sequential acceleration in growth can you help us just to.
Understand maybe how much of that was driven by Prime day, which I think you guys said was a record day for you versus one day ship interest trying to extract one versus the other because obviously go into Q4, you're only going to have the letter and then on lot a news around counterfeiting.
Not on the side can you just help quantify that for us. If there is a way for you to do that and he's the higher opex.
For Q4 also driven at least in part by the higher investment to combat that thank you.
Yeah sure. So on the second one I would say they were certainly very diligent on the Uh huh.
They're trying to catch a counterfeit products.
Put a lot of effort into that we put a lot of human effort, we put a lot of machine learning and algorithmic effort into that as well.
But I would say the bigger investments in Q4 or certainly a twofold one around the.
Eight I'd be excuse me the one day shipping that I just mentioned the other would be on eight of U.S. we have.
We continue to invest in eight of U.S.. If you look at the progression of our operating margin in that business. It reached the highest 31% last Q4 excuse me Q3 that was a time when we were as we mentioned the time it was very efficient weird been banking some.
Savings from.
It forward investments in infrastructure in 2017.
We continue to feel really good about not only the topline, but also the bottom line that business, but we are investing a lot more this year in salesforce.
And marketing personnel, mainly to handle a you know wider group of customers a increasingly wide group of products. We can continue to add thousands of <unk> new products and features a year and we continue to expand geographically. So the biggest impact that we saw in Q3 year over year in ADW Es segment.
It was tied to a cost related to.
Sales and marketing year over year, and also to secondary extent infrastructure, which.
If you look at our capital leases or equipment leases line. It grew 30% on trailing 12 month basis.
In Q3, this year and that was a 9% last year. So there's been a step up in infrastructure costs to support the higher usage demand. So we we see those trends continuing into Q4.
And that's essentially are probably the other element of operating income year over year, that's a shorter than in prior quarters.
Thank you. Our next question comes from Brian Nowak with Morgan Stanley . Please proceed.
Thanks for taking my questions I've I've to just go back to the one day costs. Yeah. Appreciate the color, but curious to be curious to hear about how you think about what portion of these costs are sort of transitory versus structurally it sounds like there's some shipping costs in there you just sort of talk to some of the steps you have to take over the next one to two years.
To get the one day shipping costs closer to what they used to be for for today. How do you think about how long is going to take then secondly on one date I think it's mostly U.S. to date is that right and then if not how do you think about sort of timing I'm pushing more internationally. Thanks.
Sure Yes, most of the expense has been international excuse me in the U.S., but we have also increased our one day selection internationally, we're starting to see some benefits from that but I would say the biggest impact so far both on the topline lift and also the bottom line cost is in the U.S. you know we're still.
You know learning here on the one day costs as we go about what the a long term cost structure will be.
We have we know we have temporary costs in the short run as we do things like forward deploy inventory I get greater in bound into those in a into those warehouses set up new.
Amazon logistics mcl capacity.
Staff multiple shifts so that we can have late late or pull times to hit one day cut offs things like that adding sort centers. So it's a it's a you know drastic change to the whole a network topology that would.
Yeah, we're glad to do and working through it and we've we've been down this road before obviously in a number of different incarnations in Amazons history. So we will keep it keep are posted on a are you know.
Quarterly basis as best we can but right now Oh I'm really forward are guiding us for Q4.
Thank you. Our next question comes on line of Heath, Terry with Goldman Sachs. Please proceed.
Great. Thanks, Yeah, I know most of the focus on one day has been on speed, but based on the fans. We're all seeing it would it would seem the shift to more of your own last mile infrastructure is maybe the bigger part of this as it scales and you get to higher levels of efficiency and Youtube.
Innovation does that become margin accretive or profitability accretive relative to two using third parties I'm almost exclusively in the way that you have in the past and then this was also a very big hiring quarter for you or 100000 people.
Can you give us a sense of where those those those people are going your relative to the ADW S fulfillment retail kind of under understanding sort of where they where they've been prioritized.
Sure. Thank you for your questions he's.
On the first question I think it boils down to weather will be competitive long term with other options out there.
Yes, we will be we've we believe that.
In many cases, we already are and Oh places, where we have very high mcl percentages.
The UK for instance.
There is some cases, there's we're lacking a alternative options for the type of delivery that we're doing but in the long run we're going to have a combination both of our own capacity.
Certainly fueled by.
It helps with third party.
Carriers are large carriers that weve used in the past so we see a role for for all carriers in fact, a including the delivery service partner program that we've developed to help spur small businesses to help fill this need as well so.
On the cost side, yeah, it's going to be the a route density and other things will improve over time and get our cost structure down but for now yeah. There's certainly some startup pain in adding new capacity.
On the head Count question, Yes, we increased <unk> as you said a close to 100000 people in Q3, it and were up 22% year over year in the past appointed two investments in technology teams and that's certainly part of it but buying away. The biggest driver. This time is the.
People that were adding for fulfillment and transportation roles, especially as we head into Q4 and add this additional transportation capacity.
To service one day.
Thank you. Our next question comes from Stephen Ju with Credit Suisse. Please proceed.
Okay. Thank you so Brian I'm wondering if you can weigh in on the puts and takes on the long term potential margin for it or would you us. When this was first launch it pretty much sold itself now you are employing a greater number of salespeople with that I guess, the incremental marketing dollars, but you know the other how to seems like the engineering talent hiring should slow down or.
Overtime. So I'm just wondering if you can we add on to on what's coming into whats coming out. Thanks, Yeah sure I would say Oh the margins our margins expectations are that we will.
Price competitively and continue to pass along pricing reductions to customers. Both in the form of absolute price reductions and also in the form of new products that will is in effect cannibalize the old ones.
And where are you know we also see I'll point out that you.
Yeah.
In.
Recently, what we're doing is re negotiating or negotiating incremental price decreases for customers, who they commit to us long term and if you look in our disclosure in our 10-Q. It shows that we have $27 billion in future commitments for E.W. us from it enables customers and that's up 54% year over year. So that's another thing to watch is not only the.
Short term commitment, but also the long term commitment that we see.
On the you know the rest of the personnel. There again, we have I believe some of the best infrastructure people.
In the industry, if not the best we're continually driving up efficiency and lowering down lowering costs and we see that in our bottom line the sales and marketing investment we're chasing a large opportunity here and that will be.
No.
As we say bumpy as we go along but Oh, we're fully confident that that will.
Be a very leveraged cost as we get to scale.
So and then on technology side as you said, yes, we will continue invest in tech SDN <unk> software engineers to build these.
Products the customers love continue to respond to their their demands and that'll push our inform our product portfolio.
Thank you. Our next question is from Lloyd Wamsley with Deutsche Bank. Please proceed.
Okay. Thanks can you talk about the key drivers of the acceleration in what looks like advertising revenue within other and related to that the press release mentions I think you now 37 million fire stick users worldwide. So can you talk about maybe how much AD inventory, you've been able to get inside of <unk>.
Works within that and how meaningful is just to the overall kind of advertising strategy. Thanks.
Yes, sure let me start with the the first question on advertising. So other revenue, which is principally advertising grew 45% this quarter up from 37% last quarter.
And the biggest thing and there is advertising in advertising grew at rates higher than that 45%. So we're very happy with the progress in the advertising business continue to focus a focus on inventing advertising experiences that are.
Helpful for customers, helping them to.
See new products, we want to empower our businesses to find attracting the gauge these customers.
And it's increasingly popular with vendors sellers and third party advertisers. So it's still early and what we're focused on really at this point as.
Relevant say, making sure that the ads are relevant to our customers helpful to our customers and to do that we use machine learning and that's helping us to drive better better and better relevancy.
Yeah, and then Lloyd Hey, Dave. This is Dave just quickly on fire TV I mean I'd have to start with the fact that we did recently introduced 20, new fire TV products.
That includes the new first in the first fire. TV addition, soundbar fire TV cubes. So a number of things have come out recently, we're really excited to get into customers hands.
So more to come there I think specifically on the advertising side the opportunity with that we are continuing to see some increased adoption.
One of our areas of focus is expanding our our video and OTI offerings for brands. It's it's still early in the space, but we've done a few things with I'd be TV.
I've sports things like adding more inventory through fire TV apps, and as I said I am DB TV.
Adding more OTI TV video supply through Amazon publishing services, or Hps integrations and streamlining access for for third party apps and really just making it easier for advertisers to manage their campaigns and provide better results. So as I said early early days, but I think you know with the.
Engagements that the device community. The fact that I'm really excited with the progress and improvements of these devices I think you get a lot of opportunity there.
Thank you. Our next question comes from Scott with Stifel. Please proceed.
Thanks, there's been a meaningful reacceleration in paid unit growth in the past few quarters with the expansion of the one day guarantees for prime customers and I'm. Just wondering if consumers are responding more in certain categories that you would highlight over others are as response fairly broad based across product categories were one day has been expand.
Thank you.
Hi, Scott Yeah, what I can tell you is that yes. The a unit growth has been re accelerate in the last two quarters and actually the Amazon fulfilled unit growth is growing at a higher calypso.
We do attribute it to one day.
We're seeing broad.
You know abroad.
Sales across all categories.
So yes, there's been some reduction in the threshold for some low ASP items that we've been doing separately over the last six months that have.
Spurred some sales and lower ASP items, but we think that is again the right decision for customers, especially over the long term.
Thank you.
Question comes from Mark Mahaney with RBC capital markets. Please proceed.
Thanks want to go back to ADW S. When asked about margins you were first.
Referred to a brand new first referred to.
Bringing down prices have you seen anything different in terms of the level of price competition could you talk about what kind of traction you've had building out into the enterprise and so I know, it's a broad question, but take a shot at it and third part of this is.
Yes, your interest and your success in going in and generate more at probably going up the stack and getting more into the application software space all that ADW s. related thanks.
Sure Hi, Mark So yeah, I would say my comments around pricing, we're as much mix as absolute price decreases or competitive price pressures that certainly a competitive.
Market that we see and we've seen for really number of years.
So everyone.
It's very sharp on their pricing is very eager to lock up a long term commitments from ABS customers.
We do it with.
Combination of price and capability that we think is unmatched.
So the bigger.
Element of that really is around us, creating new products and services that are cheaper and less expensive than the old ones. So there's a certain bit of mix issue.
That we always always up against but.
Again on the end of your question on the enterprise penetration you know I think the enterprise, we're we're making great progress there, it's it's going to be.
Hard to on revenue growth, it's going to fluctuate quarter to quarter, it's hard to predict the pace of the some of the sales cycles and the enterprise migrations that companies are are willing to make or some are faster than others and some have other work to do before they can migrate. So there's you know there's a lot of factors at play there.
On the enterprise business, but we are.
Having great success and were.
Adding a lot of salesforce or sales representatives.
Especially for the enterprise market.
Yeah, Mark Hey, this is Dave just it really quickly just in terms of your question on the stack I mean, I think for really sense as long as AWB has been around.
We really pride ourselves in getting really talk high caliber people both the technical side, but also salespeople that are plugged in and listening to customers understanding issues that are emerging having open lines of communication and that's really allowed us to innovate quickly and really faster than anyone else and we see that and the term in terms of the.
Service and feature breadth and depth that we have so a lot of focus for us is really making sure that that flywheel keeps spinning and that we continue to roll out.
A lot of great services that customers are looking for so I think that's largely what dictates, our our roadmap and making sure that we give ourselves autonomy and availability to.
Look look to new areas and stay on the cost of whether it's kind of emerging technologies are really just a customer needs or pain points that need to be solved.
Thank you. Our next question comes from Colin Sebastian with Baird. Please proceed.
Hi, Thanks, maybe first as a follow up on on the logistics and delivery side wondering if you give us some sense for the portion of skews in the U.S. or orders in the U.S. that are now delivered through your own network of drivers and partners and then secondly, there have been some reports that Amazon.
On his or on occasion as deliver products for other merchants are suppliers not specifically tied to an Amazon order. So just wondering if you view this as another potential opportunity down the road as you get excess capacity on the logistic side. Thanks.
Yeah I call it hits, Dave. Thanks for the question on that second point and in terms of how we think about.
You know the capacity we might have for our own I think I'd start with we've we've got a great relationship with third party carriers across the countries, where we operate.
Overtime I think you know will look and expect to be able to grow our internal volume was using mcl or Amazon logistics, but also continue to grow or threepi volumes with carriers transporters around the world, but our focus is really on.
Ensuring that we've got capacity from available resources, whether it's our own or a great.
Carrier partners to be able to serve a small medium sized businesses in the threepi realm, but also the first party items that were.
We're receiving orders from customers and making sure we're able to deliver those things quickly and reliably.
Thank you our final question will come from Justin Post with Bank of America Merrill Lynch. Please proceed.
Thank you I'll give you a couple of here just wondering I'm back on the shorter holiday season, do you think that's going to be a headwind for for overall <unk> online sales in the quarter anything specific to Amazon and then secondly, just thinking about the regulatory environment I wondered if you could just comment on the.
Opportunities and the competitiveness for third party sellers are there other platforms that you see for them and how do you think about their profitability on Amazon. If you can comment on that at all thank you.
Sure Yeah on third party I would say.
We only succeed if the third party sellers succeeds so we're heavily invested in them.
As they are in us. So we are constantly investing on their behalf, adding new projects of products and features.
And you know, we're cognizant of their economics, as well and we want to business that works for both of us.
And we.
We set our fees accordingly, so I think that.
You know Weve and also point out that with the one day.
The increase in one day sellers have obviously.
Faded and not as much as.
Any or anyone else they need as much as our one one p. offering so it's been a great a boon for sellers as well as particularly an RFP a program on the holiday season question, we're not anticipating that the move of a you know the shorter time period between Thanksgiving and.
Christmas day is going to be <unk> that impactful what we found in the past is that there's generally a holiday budget that is spent somewhere between November 15th in November Onest, maybe and December 25th and well certainly Black Friday cyber Monday are important dates.
In that.
Holiday period.
There is.
The purchase tend to move around some have been moving early in the quarter or some of the movies later in the quarter as.
Yeah customers can count on and receive very quick shipments at the end and have higher faith and in delivery just before the holiday so.
That's a little bit color, that's what's anticipated in our guidance that we've given.
Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website at least through the end of the quarter. We appreciate your interest in Amazon and look forward to talking with you again next quarter.