Q2 2022 Amazon.com Inc Earnings Call
Our guidance also assumes among other things that we don't conclude any additional business acquisitions restructurings or legal settlements.
It is not possible to accurately predict demand for our goods and services and therefore, our actual results could differ materially from our guidance.
And now I will turn the call over to Brian .
Thank you for joining today's call before we get the questions I'll make some comments about our Q2 performance and the outlook for Q3.
Let's start with Q2.
During the quarter, we saw improvement in many of our key operational metrics, including in stock levels and delivery speed and saw a subsequent step up in consumer demand.
For the quarter worldwide net sales of $121 2 billion exceeded the top end of our revenue guidance range and represented an increase of 10% year over year, excluding approximately 320 basis points of unfavorable impact from changes in foreign exchange rates.
This was a larger foreign exchange headwind than the 200 basis point impact we had incorporated into our Q2 guidance.
As a reminder, our revenue growth accelerated to over 40% growth from the period between May 2020 in May 2021.
While demand has remained strong the lapping of this high growth period depressed our revenue growth rate for the following 12 months ending in May of this year.
Our growth rates going forward, we will no longer require this historical explanation.
Q2 of last year was also in vaccines have become more available, particularly in the United States and we began to see more normal shopping patterns.
Prime day also occurred in Q2 last year and contributed about 400 basis points to our Q2 2021 year over year revenue growth rate.
This year's Prime day sales event occurred on July 12, and 13 and.
It is incorporated into our third quarter guidance.
As the impacts of the last two years are normalizing, we're happy with how we serve customers and how they've responded.
Our compound annual growth since the start of the pandemic stands at 25%.
Our growth rate higher than what we were seeing prior to the pandemic.
Prime members have meaningfully increase their spend since the start of the pandemic.
Over that period, we've seen stronger usage of prime benefits by Prime members and a greater reliance on Amazon for their shopping and entertainment.
We continue to improve the customer experience in Q2, including quarter over quarter improvements in delivery speed and inventory in stock levels.
We've also moved quickly to adjust our staffing levels and improve the efficiency of our significantly expanded operations network.
We have slowed our 2022 and 2023 operations expansion plans to better align with expected customer demand.
While theres still work to be done we've made good progress in Q2.
Our prime membership program remains a key driver of our worldwide stores business and we continue innovating to make the membership even more useful and valuable.
That includes the upcoming Premier the Lord of the rings that brings the power on September 2nd and exclusive access to NFL Thursday night football games, starting September 15th.
Our seller community also had a strong Q2.
Third party sellers represented 57% of all units sold on Amazon in Q2, the highest percentage ever.
Selling partners helped to expand the selection we can offer customers.
Filmed by Amazon provide sellers the ability to offer a SaaS delivery.
Operating income was $3 3 billion in the quarter above the top end of our guidance range.
Last quarter I discussed several cost pressures facing our worldwide stores business.
<unk> costs fulfillment network productivity and fixed cost deleverage.
Recall that these amounted to approximately $6 billion of incremental costs in Q1 compared to Q1 2021.
We made solid progress in reducing these costs for the second quarter incremental costs were in line with our expectations at approximately $4 billion.
<unk> to Q2 2021.
Inflationary pressures remained at elevated levels in Q2 similar to what we saw in Q1.
These include pressures from higher fuel trucking air and ocean shipping rates, which.
Which we expect will continue into Q3.
We made strides to improve fulfillment network productivity in Q2.
Staffing levels were more in line with rising Q2 demand and we saw better optimization of our fulfillment network.
On the transportation side, we continue to improve delivery route density and improved package deliveries per hour.
We're encouraged by the progress during the quarter and see opportunity to further improve in the second half of the year.
Lastly, the year over year negative impact of fixed cost leverage was relatively consistent with Q1.
There are two main drivers has been talking about fixed cost leverage first as the unfavorable comparison to very high holiday level utilization rates that we saw in the first half of 2021.
And second is the normal step down in volumes off of our Q4 peak that we saw in the first half of 2022 on.
The first point, we expect this challenging year over year comp will have ended in Q2.
On the second point, we expect fixed cost leverage to improve in the second half of the year as we continue to grow into our capacity. We've also taken steps to slow future network capacity additions.
Let's turn to AWS, we saw another strong quarter of innovation and customer engagement in AWS.
Net sales were $19 7 billion in Q2 up 33% year over year.
And now represent an annualized sales run rate of nearly $79 billion.
AWS continues to grow at a fast pace and we believe we're still in the early stages of enterprise and public sector adoption of the cloud.
See great opportunity to continue to make investments on behalf of AWS customers.
We continue to invest thoughtfully and new infrastructure to meet capacity needs, while expanding AWS to new regions.
<unk>, new services and Iterating quickly to enhance existing services.
Developers that organizations of all sizes from governments and not for profits to startups and enterprises continue to choose Amazon Web services.
Companies like Delta Airlines riot games, British Telecom and Jefferies investment Bank to name, a few announced new agreements and service launches supported by AWS.
AWS operating income was $5 7 billion in Q2.
As a reminder, this includes a portion of our seasonal Q2 step up in stock based compensation expense.
<unk> results include a greater mix of these cost, reflecting wage inflation high demand areas, including engineers and other tech workers.
As well as increasing technology infrastructure investment to support long term growth.
Now, let's talk about capital investments as usual, we will discuss the combination of Capex plus equipment finance leases.
In 2021, we incurred approximately $60 billion in capital investments.
About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business.
Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation.
The remaining 5% was comprised of things like corporate space in physical stores.
For full year 2022, we do expect to spend slightly more on capital investments and last year, but the proportion of capital spending shifts among our businesses.
We expect technology infrastructure spend to grow year over year, primarily to support throughout the growth and innovation, we are seeing with AWS.
We expect infrastructure to represent a bit more than half of our total capital investments in 2022.
For the worldwide tours business, we've continued to moderate our build expectations to better align with customer demand.
We expect the fulfillment and transportation dollars spent on capital projects to be lower in 2022 versus the prior year.
Finally, I'd highlight a few additional items.
Reported an overall net loss of $2 billion in the second quarter.
We primarily focus our comments on operating income I'd point out that this net loss includes a pre tax valuation loss of $3 9 billion.
Which is included in non operating expense from our common stock investment in Libya in automotive.
In the U S. We've started making customer deliveries using the Arabian electric delivery vehicles.
This rollout is the start of what we expect to be thousands of <unk> and more than 100 cities by the end of the year in.
100000 vehicles across the U S by the year 2030.
Additionally, note that all of our share and per share information included in our financial materials has been retroactively adjusted to reflect the two for one stock split which was effective on may 27th.
We also provided our third quarter financial guidance as part of our earnings release.
Again, a reminder, that this year our prime day sales event occurred on July 12, and 13th and is incorporated into our third quarter guidance Prime day occurred in Q2 in 2021.
For revenue note that our guidance includes an estimated approximately 390 basis points of unfavorable impact from year over year change in foreign exchange rates.
The estimated FX impact to operating income is not significant.
Our third quarter operating income guidance range zero to $3 5 billion.
This compares to Q2 operating income of $3 3 billion.
This third quarter guidance assumes we see approximately $1 5 billion in quarter over quarter sequential cost improvement in our fulfillment network operations, which we expect will be largely offset by investments in AWS and additional digital content for prime members.
For AWS each quarter over quarter increases are primarily driven by higher infrastructure investments to support continued strong customer growth, including larger depreciation on a growing fixed asset base we have.
Also expect increased energy costs as we continue to see volatility in utility prices around the world and operating our AWS data centers.
Quarter over quarter increase in digital content, primarily relates to new Prime video content in Q3, including Thursday night football and the Lord of the rings that brings the power.
Thank you and now let's move on to your questions.
At this time, we will now open the call up for questions. We ask each caller to please limit yourself to one question if you'd like to ask a question. Please press star one on your telephone keypad.
We ask that when you pose your question you pick up your handset to provide optimum sound quality once again to initiate a question. Please press Star then one on your touch on telephone at this time, please hold while we poll for questions.
Yeah.
Thank you. Our first question comes from Brian Nowak with Morgan Stanley . Please proceed with your question.
Thanks for taking my questions I have.
To the.
The first one Brian I wanted to talk a little bit about the bridge from <unk> EBIT guide a little bit it sounds like youre going to have revenue up nicely you talked about the efficiencies of the $1 5 billion quarter over quarter, some of the incremental investments in content et cetera.
Where are there other areas, where you're sort of investing more to grow and is any of that associated with merchandise margin or step ups and discounting that would be the first one and the second one just kind of going back to your comment about you slowed 'twenty, two and 'twenty three operations expansion plans.
How should we think about the fulfillment and transportation capex sort of looking into the fourth quarter and into next year. How far ahead of this build have you gone through for the last call. It nine months.
Sure. Thanks, Brian Let me start with your second question so.
Any particular year when were spending capital a good portion of it.
We estimate about 40% this year is being spent.
Supportive warehouses or transportation capacity that will be opening up an effective in 2023 and beyond so there's always a.
Pre spend to keep the.
Again the pipeline moving.
So when we make adjustments to the time horizon.
The impact is not as great as you might expect in the year 2022 book.
Again, we have moved things out and capital is coming down in those areas as we just mentioned.
We'll just have to keep you posted as we go quarter to quarter on what our expectations are.
On the bridge for Q2 to Q3, so again you have the.
Mentioned three items the ops improvement that we see of a $1 billion in half and offsetting that is increased costs in AWS as we filled that depreciation we also are heading.
Continuing to add people in that space.
Product engineers salespeople.
Customer support.
Speaking more broadly we know AWS is a huge opportunity.
Early days in the adoption curve for companies and governments.
We invest with that.
That confidence in mind and.
Customers have responded and we're going to keep to keep investing there.
And your comment on discounting.
We're not seeing some of the pressures that other people are seeing right now are macroeconomic issues are principally on inflation and.
Pretty.
Yes, transparent on that I think the new thing this quarter is additional pressure on the energy electricity rates in our data centers because of the.
Ramp up in natural gas prices, if you've seen that so that's probably the new information and then the other inflationary.
Factors will some of them are coming down slightly there is still significantly a penalty year over year.
Other cost pressures are principally on our caution employees, if you'd look at a stock based comp as a percent of revenue. It's gone up 150 basis points quarter over quarter as we stepped up from Q1 to Q2, we see that pattern every year, but when I see that magnitude and thats, where a lot of.
Our wage inflation is for.
Particularly our technology technical employees so.
There is certain amount of conservatism always built into this because we are in a very difficult Matt.
Macroeconomic state potentially Ken it's not we're not seeing it hit our businesses directly in fact, we're seeing strong growth in sales through the quarter in Q2.
We're cognizant that things could change quickly.
We will see and monitor and.
Thats, how we set our forward guidance.
Our next question comes from Doug Anmuth with Jpmorgan. Please proceed with your question.
Thanks for taking my questions, Brian I wanted to ask about AWS. Some of your peers in the cloud space have talked about some slowdown in booking rates just as customers take longer to work your deal terms and duration.
Comment on whether AWS, we see similar dynamics and then also when you think about margins the 35% for AWS and <unk> going to 29% and <unk>. What are some of the puts and takes that we should think about going forward, just given decreasing server life benefits and tougher macro environment.
Thanks.
Sure Doug I'll start with second question.
So on margins in AWS, yes, as you've mentioned that it's dropping sequentially.
The.
Margin rate is going to is going to fluctuate in this business, it's going to be a.
Factor of.
New investment in things like the sales force in new regions and infrastructure capacity offset by infrastructure efficiency gains that we see.
Pricing issues.
As we.
<unk> contracts, we've seen really good progress with our customer base longer and longer commitments really committing to the cloud some of that comes with.
Credits to help them make their conversion to the cloud and you said that the revenue pattern can be and the margin on that revenue can fluctuate quite a bit quarter to quarter, but.
See a lot of strength in the business right now, we're very happy with the growth rate.
Happy with the adoption of <unk>.
The cloud.
As you hit a potential.
Rough patch in the economy I think the last time, we saw this was back in 2008 ish.
And it's hard to draw the lessons from that but we did notice that.
It did help our cloud business at the time because.
Again, when Youre trying to launch a new product or service and you have to face with building your own data center and getting capital for a data center in building yourself or moving to the cloud and essentially buying incremental infrastructure capacity cloud computing really shows its value. So.
Where.
We are prepared just like when the slowdown in 2020.
We are prepared to help customers optimize their costs.
We'll help them.
Any who are scaling down.
We will also again continue to find new.
Customers in new industries, including government government agencies and <unk>.
Happy with that and if you look at again, where our investment has been over Alaska.
A few years and the growth of our sales force and our sales support.
It is showing benefits and we expect that to continue.
On your.
Sorry, your other question was.
Janet just.
Just about current trends.
Alright.
Got it all blended blended into one Anthony.
Yes, hopefully that covered what you're.
Asking about it.
Yes, Doug.
Doug.
Just to just to pile on to that too I mean, I think just.
The longer term vision that Brian talked about here, we are right now with.
80, 84 availability zones, so thats 26 geographic regions and we've got plans for launch 24 more of those available.
Availability zones cross eight regions and this is Australia, Canada, India, Israel, New Zealand, Spain, Switzerland.
A lot of different spots and so I think continuing.
Continuing to focus on building out going out to customers working on that pipeline and building longer commitments.
Finding customers that are making longer commitments is really important to that and just to that point I know the backlog figure that we've discussed in the past and disclose on a quarterly basis on our filings.
65% year over year.
About 13%.
Over quarter and the weighted average.
Life of those.
And our long term commitments that we're talking about here continues to grow so it's at about three nine years on a weighted average remaining life basis. So again.
A lot of good work monarch is still good opportunity out there to comment as Bryan talked about were.
At the heart of the fastest and investing in that to make sure. We're in good position to serve folks.
Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.
Thanks for taking the questions maybe two parter on the advertising business, where you saw continued strength is there any way to give us an update of how much of the advertising services line. At this point is driven by North America E Commerce versus International E Commerce, and how you think about the relative growth rates in advertising going forward between North America.
And then international and the second part would be away from the E Commerce driven parts of advertising how are you feeling about the positioning and the investments you need to make around things like connected television and programmatic advertising where from the outside and it looks like you're continuing to make greater levels of investment in increasing your exposure to a wider array of advertising products.
Thanks.
Great Hi, Eric.
Your questions.
I would say on the geographic split we haven't broken that out the majority of advertising revenue is in North America, but having said that we are making great strides in international as well and we're also as you mentioned.
<unk> R.
Array of advertising products.
Our consumer web sites too.
Video opportunities Twitch and others.
I just want to take the second part of that.
Yes, I think it was.
Congrats a question around kind of interactive work I mean, we've got.
One of our main priorities is building relevant and engaging AD experiences and so.
Of course introduced interactive ads last year for streaming video content.
It seems like for EV.
Amazon music AD supported tier as well for audio ads, so looking for opportunities like that where customers can more easily engage with with brands for all streaming content. So I think there is theres a lot of good opportunity for for that.
Great video advertising as you mentioned, it's still early in that space.
It's increasingly becoming mainstream viewing behaviors have really shifted away from some of the more traditional cable or kind of traditional viewing and advertisers are using our AD supported content to reach those viewers. So things that are ongoing we've talked about around a freebie around twitch and then of course some things.
Obviously excited about it Thursday night football and Amazon streaming TV ads.
<unk>.
We're going to continue to work with.
These partners and work with our own credit technology capabilities to keep building out.
Eric I'll, just add a little more on advertising.
Because you're probably wondering again about <unk>.
Softness attached for softness in that or macro economic factors right now, we still see strong advertising growth.
Again, it's got to be a positive both for the customer and for the brand I think our advantage is that we have highly efficient advertising people are advertising at the point, where customers have their credit cards out and are ready to make a purchase it's also very.
Measurable.
And when people are looking at your companies are looking to potentially streamline or optimize their advertising spend we think our products compete very well in that in that regard.
In addition to maybe longer term things like brand building.
<unk> brings new selection to bear in front of customers.
Our next question comes from Jason <unk> with Oppenheimer. Please proceed with your question.
Thanks.
I can ask two so.
You called out just three P mix being a kind of highest level.
Maybe talk about your focus to increase the mix of <unk> and how that fits into the plan for improved efficiency and then secondly on international how much of the weakness in the margin sequentially what was FX driven.
Thank you.
Let me start with your first one so.
The challenge with perhaps a little bit thereabout.
Incentive mix or I believe that is how I interpreted your question.
We are.
Relatively indifferent as to whether some customer buys a third party or first party product from us.
What we're all about obviously as price selection and convenience and.
<unk>, particularly helps us with selection.
And when it's part of FBA can also help.
As being more prime eligible and available to ship in one two days.
Days or or whatever the prime offer happens to be so.
We're happy with the.
Selection that we've added from third party sellers and I think that shows in the percentage mix that you see.
We're proud of the investment we've made to build tools.
And products that allow sellers to be successful on our site and it's a great partnership.
And it's worked really well.
Sellers and vendors are also some of our larger advertising customers as well and helps that advertising helps them surface new selection to to our customer base. So it's.
It's a it's a very strong partnership and it's been getting stronger and I think you will see also that they had a very.
A big part in our Prime day earlier this month.
Hey, Jason on your second question related to the international and the profitability there reported theirs.
Foreign exchange exposure there on the that segment with the operating income there is <unk>.
And there are about $231 million.
Unfavorable impact to that segment included in that $1 7 billion loss for the quarter just looking.
Broadly speaking on what's going on with.
That business in.
The losses that we're seeing there and the investments I think it's important to remember it's early in many of our international countries, particularly in some of our emerging or more recent launch countries places like India, Brazil, the middle East there are others as well of course, but where we've been operating.
And many of those cases considerably shorter than the tenure we've had in the U S.
Our established international locations U K, Germany, Japan over time, we've continued to.
Prove the profitability of that business as we build out and establish stronger customer relationships and work on the cost structure and how we serve folks.
A lot of that of course is driving improvements through our key pillars with price selection and convenience and working with vendors on commercial terms.
Our emerging locations, there's healthy amount of investment we've done to drive expansion and we expect to continue to do that.
The strong competition across many of these markets and Thats investments in Prime video not just some of the flagship shows that.
Our kind of sourced here in the U S. But also you've seen us continue to push for opportunities for.
In country in local language video content that resonates with customers and can be a meaningful reason people sign up for the prime program engaged and renew.
We're also investing depending on the regions and kind of local.
Structure infrastructure for lack of better term, whereas this building out payment methods third party transportation services, even in some cases the internet in the telecom infrastructure. So we're playing a role along with others not just us investing in.
We used to create creative and enable that infrastructure.
To be successful so those are some of the opportunities and challenges.
As you think about kind of where we are in the U S versus international.
That are out there the network complexities of course, there are some regulatory hurdles and other differences out there, but we think it's important to continue to invest in those opportunities and learn from what we're doing not just in what we've done in the history with the U S. But also in <unk>.
Many of these countries.
Keep that flywheel spinning and continue to serve customers in more efficient ways.
Our next question comes from Youssef Squali with Truest Securities. Please proceed with your question.
Great. Thank you two questions. One can you discuss the impact the price action you took on a prime on merchant fees et cetera ahead on retention during the quarter and do you feel that that's enough to offset the.
The inflationary pressures, we're seeing to date and then on buy with Prime I know, it's early but how do you see the rollout of this initiative from BN by invitation only today to home merchants using FBA to off Amazon merchants et cetera, and just kind of the implications on broader implications on the business from that initiative. Thank you.
Sure. Thank you Youssef.
So first on the let's take them one at a time so on the prime fee increase.
Earlier in the year, we're happy with.
Results were seeing in the Prime program Prime member.
Membership and retention is still strong I think.
That change has been above our expectations positively and I think the.
The benefit of the program continues to get better and better.
And as I mentioned in stocks never been higher.
Yeah delivery speed is increasing so not to mention a lot of the new content, especially on the video side that will be coming in the fall. So we feel good about.
About the program and the state of the Prime members.
After a very rough couple of years of pandemic turmoil.
It's a good base to build upon so.
On the seller fee again.
<unk>.
<unk> added that fee grudgingly and it may just compensate for some of the inflationary pressures, we're seeing I don't want to give you the idea that either of those fee increases.
Can't close to covering our cost you can see from our operating results.
Some of it's internal related but a lot of its external factors that.
We are not passing through that at a 100% to external groups.
If we got to work our way out of this out of the condition, we're in and we're making good progress in Q2 and expect to.
Keep pressing on that in the second half of the year, but.
Strengthen the seller results in Q2, as we mentioned on the percentage mix.
So I think sellers are solid business remains strong and an integral part of our customer offering.
Use of this.
This is Dave on your buy with Prime question, Yes, I mean, it's right now, it's allowing U S based.
Prime members to shop directly from merchants.
Online stores and its what the experience they expect that kind of come to expect with Amazon that's the fast food delivery.
Seamless checkout and free returns on orders that are eligible it is.
Right now the program is available as you mentioned invitation only for merchants.
Are you using FBA and it will expand throughout this year as will extend more merchants to invite participate in the program.
We are interested in learning and.
And working with FBA sellers that we've known and had good trust with but also expanding it and I think as you think about it our merchants obviously.
A lot of choices on where theyre going to sell products and we have a long history of empowering and helping merchants, we've invested a lot in tools and capabilities and of course, the delivery capabilities and all the things that go along with that but.
It's an opportunity for us to support merchants, who may or may not be FBA sellers with the tools and the opportunity to just sell their products online and scale their business and build their brand and so.
Really excited about of course getting to be able to launch this program over the last few months and timing.
Dialing it up for more sellers as the year progresses.
Our final question comes from Stephen Ju with Credit Suisse. Please proceed with your question.
Okay. Thank you so Brian I think you just reported a quarter over quarter decline in head count, which was by design after what happened last quarter, but.
It won't be too long before you're gearing up for the holidays. So how do you think the environment.
It's kind of a fair for you to be adding head count.
Also stock based compensation came in below where you had guided for the second quarter. So is this a matter of not hitting the hiring goals you were hoping for or do you think the environment for.
The hiring of technical engineering talent excuse me a little bit thanks.
Sure Stephen Thank you on the head count.
Yes, I think it was more as we mentioned last quarter.
Last year in excuse me in <unk>.
Q1, we added.
To give you a flavor for we added 14000 workers in Q1.
Prior year, we had.
Reduced.
Net head count by 27000 so.
We were pretty transparent about the fact that we had hired a lot of people in Q1 for the coverage or the omicron variant Luckily that.
Varian subsided and.
We were left with a.
Higher head count position.
<unk>.
That has come down through adjusting our hiring levels and normal attrition and it's pretty it was pretty much resolved by the end of April or early part of May So.
That is dominating the quarter over quarter reduction in head count I would note that we're still up.
180000 year over year and new.
Nearly double.
The head count will be had heading into the pandemic in early 2020, so you're right there will be adjustments to that as we move forward into.
More holiday level demand right now, we see a stabilization in the workforce and we see.
Good hiring rates and.
So.
I think with.
As you remember there was a very difficult labor periods in the second half of last year and it didn't.
Arrived kind of quickly out of nowhere. So we're certainly diligent on that and.
Making sure we.
Have a good workplace and an environment that will attract employees.
And Steven on your just to your question on stock based comp as you mentioned.
We do utilize restricted stock units or <unk> uses our.
Primary motive equity compensation.
As we always remind you employee annual RSC grants to occur in the second quarter and as a result, we typically see a step up in the SBC expense from Q1 to Q2 and of course you saw it this time around the growth in line is impacted.
Overall also step up by continued head count.
Growing our workforce over the last few years.
Brian talked about hiring in number.
A number of areas of the business, including engineers.
Engineers, either tech workers and there is some component of wage inflation as we look to continue to hire and retain employees there in terms of the.
Coming in at a five little over 5 billion for stock based comp. The main drivers there was primarily driven by fewer employees stock Awards vest.
It could be fewer employee stock awards vesting in Q2 than we expected.
Thanks for joining us on our call today and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon and we look forward to talking with you again next quarter.
This concludes today's conference call. Thank you all for your participation.
Yeah.
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