Q3 2022 Amazon.com Inc Earnings Call
Our CFO .
As you listen to today's conference call. We encourage you to have our press release in front of you, 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 2021.
Our comments and responses to your questions reflect management's view as of today October 27, 2022, 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 SEC, including our most.
<unk> 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 SEC 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 maybe materially affected by many factors, including uncertainty regarding the impacts of the COVID-19 pandemic fluctuations in foreign exchange rates changes in global economic and geopolitical conditions and customer.
Demand in spending, including the impact of recessionary fears inflation interest rates regional labor market and global supply chain constraints world events the rate of growth of the Internet online commerce and cloud services and the various factors detailed in our filings with the SEC.
This guidance also reflects our estimates to date regarding the impacts of the COVID-19 pandemic on our operations, including those discussed in our filings with the SEC. Our guidance also assumes among other things that we don't conclude any additional business acquisitions restructurings or legal settlements, it's not possible to accurately predict demand for our goods and.
Offices, and therefore, our actual results could differ materially from our guidance.
And now I'll turn the call over to Brian .
Thank you for joining today's call before we move to questions I would say it makes some comments about our Q3 performance and the outlook for Q4 for the third quarter worldwide net sales were $127 $1 billion.
Representing an increase of 19% year over year, excluding approximately 460 basis points of unfavorable impact from changes in foreign exchange rates as the dollar continued to strengthen during the quarter. The foreign exchange impact was higher than the 390 basis point impact we had incorporated into our Q3 guidance is represents a headwind of <unk>.
Approximately $900 million.
More than we initially guided to.
About the quarter our worldwide stores business continued to stay highly focused on our customers and driving inputs that matter, most which helped to accelerate sales growth in the quarter.
Now offer a wider selection ever we've taken actions that has driven strong recovery of in stock rates and we continue to work on improving delivery speeds, all while ensuring our pricing remains sharp for our customers.
Third party sellers and the products. They offer remain an important strength of our offering for consumers representing 58% of total paid units sold in Q3, the highest percentage ever that's up from 56% in Q3 of last year.
And we're working with these partners most of whom are small and medium sized businesses to build an even stronger offering with.
We recently hosted Amazon accelerate our U S conference for selling partners, where we introduced new tools, including new email marketing capabilities freely.
Are you shipping software that offers discounted shipping rates and new features and the analytics to help sellers better understand and act on conversion driving content.
This was a big quarter for Prime members, we celebrated our <unk> Prime day in July which contributed approximately 400 basis points to our Q3 year over year sales growth rate Prime members purchased more than $300 million items worldwide, making it the biggest prime day net sales event in Amazon's history as a reminder, prime day occurred in the.
Second quarter of 2021.
Also debuted the two largest prime video releases ever.
Lord of the range the reins of power attracted more than 25 million global viewers on its first day.
In the first two months since its launch rings of power is driven more prime sign ups globally than any other Amazon original and.
NFL Thursday night football also premier and September averaging more than 15 million viewers. During its first broadcast and driving the three biggest hours of use prime sign ups in the history of Amazon. Our next broadcast seventh of the 15 games schedule kicks off in a few hours with the Ravens visiting the Buccaneers.
We also saw good growth in our advertising offerings, where sales grew 30% year over year, excluding the impact of foreign exchange as vendors and sellers have embraced our portfolio of products, which allow advertisers to build general awareness <unk> drive sales of specific product in.
And AWS net sales increased to $25 billion in Q3 up 28% year over year, excluding the impact of foreign exchange and now representing an annualized sales run rate of $82 billion.
With the ongoing macroeconomic uncertainties, we've seen an uptick in AWS customers focused on controlling costs and.
We are proactively working to help customers cost optimize just as we've done throughout aws's history, especially in periods of economic uncertainty.
The breadth and depth of our service offerings enable us to help them do things like move storage to lower priced tiers options and shift workloads to a graviton chips gravitas three processors delivered 40% better price performance than comparable X 86, based instances and our teams across AWS continue to work relentlessly.
To expand that breadth and depth, including recent launches of new <unk> machine learning training instances and AWS Iot fleet wise.
And we've continued to expand the AWS infrastructure footprint to support customers with the launch of the AWS Middle East region in August and the recent announcement to launch AWS Asia Pacific region in Thailand.
Now, let's shift to operating income during the quarter, we reported $2 5 billion and operating income.
Turning first to our North America and international segments during the quarter, we generated over $1 billion in operations cost improvements driven by higher leverage of our fixed cost base and continued productivity improvements in our fulfillment and transportation networks. This represents a solid improvement in productivity quarter over quarter, so not quite as.
Much as we had planned we are encouraged by the progress made during the quarter, but we recognize there is still a lot of opportunity to continue to improve productivity and drive cost efficiencies throughout our networks. We have identified initiatives that the teams continue to work hard on and we expect to see further improvement in the quarters ahead.
Another impact to operating income was the step up in prime video content and marketing costs in Q3, primarily driven by the global premiere of the rings of power and the launch of the NFL Thursday night football packages in the United States.
Our results were also negatively impacted by nonrecurring charges related to the closure of certain businesses and products such as Amazon care fabric dot com and Amazon explore.
We continue to ramp up our investments in AWS, adding product builders in sales and professional services headcount to help customers save money and get more quickly in their businesses and transition to the cloud. We're also continuing to invest in new infrastructure to meet capacity needs expanding to new geographic regions developing new services.
<unk> and iterating quickly to enhance existing services.
Overall stock based compensation expense was $5 6 billion in Q3 up from $5 2 billion in the second quarter. This increase was primarily driven by a reduction in the estimated forfeiture rate uncertain on vested stock awards.
We reported overall net income of $2 9 billion in the third quarter, while we primarily focus our comments on operating income I would point out that this net income includes a pretax valuation gain of $1 1 billion included in non operating income from the common stock investment in maybe in automotive.
As we've noted in recent quarters the impact of this investment to our income statement is driven by quarter to quarter fluctuations in <unk> stock price.
Now, let's discuss capital investments, which is the combination of Capex plus equipment finance leases for the full year 2022, we expect to incur approximately $60 billion in capital investments, which is broadly in line with what we spent in 2021. This represents an estimated reduction in fulfillment and transportation cap.
<unk> investments of approximately $10 billion compared to last year as we've continued to moderate our build expectations to better align with demand.
And this is offset by an approximately $10 billion a year over year increase in technology infrastructure, primarily to support the rapid growth innovation and continued expansion of our AWS footprint. We also provided our fourth quarter financial guidance as part of our earnings release.
While we are encouraged by our progress across the business macroeconomic environment remains challenging worldwide.
The continuing impacts of broad scale inflation heightened fuel prices and rising energy costs have impacted our sales growth as consumers' assess their purchasing power in organizations of all sizes evaluate their technology and advertising spend.
As the third quarter progressed, we saw moderating sales growth across many of our businesses as well as the increased foreign currency headwinds I mentioned earlier and we expect these impacts to persist throughout the fourth quarter as we've done at similar times in our history. We're also taking actions to tighten our belt.
Including pausing hiring in certain businesses and winding down products and services. We believe our resources are better spent elsewhere.
We aim to strike the right balance between investing for our customers for the long term, while driving operational efficiency improvements and accomplishing more with less.
When faced with an uncertain economy or some kind of discontinuous event.
Customers tend to double down on companies that they believe have the best customer experience and then take care of them. The best and that is where our efforts remain focused as we head into the fourth quarter. We are ready to make this a great holiday season for our customers.
Kicked off the season, a few weeks ago with our first ever Prime early access sales event, where tens of millions of prime members shopped and ordered more than 100 million items from Amazon selling partners. We remain heads down focused on driving fantastic customer experience and we believe putting customers first is the only reliable way to create lasting value for shareholders.
Thanks, and with that let's move on to your questions.
Thank you 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 would 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 Touchtone telephone at this time.
Please hold while we poll for questions.
Yes.
Our first question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question.
Thanks for taking the question, Brian maybe I'll just ask a true partner with respect to the revenue guide for Q4 can you help us better understand some of the comments you made around the exit velocity, specifically with respect to the U S e-commerce business or the AWS business and how that might inform some of the.
Lower than seasonal trends that seem to be implied in the Q4 guide specifically with respect to either optimizations on the AWS side or changes in consumption behavior on the U S e-commerce side. Thanks, so much.
Sure thing Eric Thanks for your question.
As I look ahead to guidance for Q4, I think the biggest individual factor is still going to be foreign exchange we had.
This guidance includes 460 basis points of unfavorable impact year over year.
FX is a bigger issue for us on our on.
On a revenue growth in dollars than it is on our income actually has a slight favorability due to the investments, we're making internationally but.
Put that aside for a moment.
What we're seeing what we saw in Q3 was a really strong July with <unk>.
Great.
Reaction to Prime day globally.
And.
Yes.
The resumption of things like in stock rates are starting to come back and delivery rate.
<unk> coming back.
That continued through the quarter, but growth rate start to slow a bit and.
Primarily in the consumer storage business it was in international.
North America obviously.
So it was strong but it started to slow a bit but it was mostly in international we saw the biggest impact and we think that is tied to.
Tougher recessionary environment, there even if.
If you compare to the U S. It's worse in Europe right now.
The create more in the energy price issues have really.
Sure.
Compounded in that geography.
Yes.
But.
When I talk about enterprise customers in AWS.
Yes.
<unk> been working with consumer customers to lower their bills.
Like all companies they wanted to lower their spend.
Faced uncertain with uncertainty in the market.
I would say this is one of them.
Real valuable points about cloud computing is that it's turning fixed costs into variable for many of our customers and we help them save money.
Either through.
Alternative services or <unk>.
Chips is many ways that we have to help them lower their spending and still get great cost per performance ratios. So while we're really excited about the business.
It wasn't a long term and even in the short run.
So we've added $4 5 billion to the $16 billion base. We had of revenue last Q3. So the business is growing in absolute dollars.
Good clip.
We do we do see some of the consumers are.
Cutting their budgets and.
Trying to save money in the short run I would say that although we had a 28% growth rate for the quarter for AWS. The back end of the quarter, where we are more in the mid 20% growth range. So carry that forecast through to the fourth quarter were not sure how it's going to play out but that's.
Generally our assumption we're excited about the re:Invent Conference is coming up in late November we expect to have over 40000 people in Las Vegas in May.
More tuning in virtually so.
Continue to drive value for customers with new products New services.
And lately also additional ways for them to manage their budgets and optimizing.
Shaping up as a tough economy.
Thank you. Our next question is from Doug Anmuth with J P. Morgan. Please proceed with your question.
Great. Thanks for taking the question.
Free cash flow generation has always been Amazon is focused in the past, but that went negative last year and likely this year as well could you just talk about the path to restoring meaningful free cash flow and do you think the capex tied to data centers and the AWS ramps and ultimately step back similar to what we've seen recently.
Fulfillment and transport.
Yes, I think.
If you look at our free cash flow is multiple factors here one is that drop off in income for the.
12 months versus the 12 months before it and a lot of that is driven to our things.
Things that we've talked about on these calls ops cost.
Still not in a.
Alright.
Network doubled over the last two and a half years.
While we're making strides in productivity.
Network optimization, we still have work to do there. So we have to get our cost structure are back to pre pandemic levels in a lot of areas of the company and mostly in operations.
A unique thing going on with inventory right now because we have a lot of.
Weeks of cover mainly.
Mainly due to supply chain issues coming out of.
Asia, primarily and staying with our sellers to just have additional weeks of cover.
We think our model reacts quickly to customer demand. This is more about the other side of equation the supply chain and.
Having worn stock so.
What the issue there is that we.
Generally have a favorable working capital impact from accounts payable that does.
More days than our inventory that's been flipping in the last year, and we expect that to normalize as we move into 2023.
And then Capex is a big driver we had again.
Doubling of the network had very high Capex. The last two years, you'll see that we've lowered capex year over year, we probably cut about a third of our budget from what we originally thought for 2022.
I'll still.
Focusing our capital dollars really on the AWS business.
And increase in customer demand.
Chassis for increasing customer demand in our stores business.
<unk>.
We're working hard on all those dimensions and.
We expect.
As we see a recovery in income generation.
A normalization of the inventory versus accounts payable cycle.
And efficiency in our Capex spend.
Yes.
We intend to flip those numbers around.
And our next question comes from the line of Mark Mahaney with Evercore. Please proceed with your question.
Let me ask two profit questions AWS margins were a little lower than we would have thought is that just the reflection of a full quarter impact of that kind of stock base.
Compensation granted to those employees earlier in the years any any any commentary on that.
The new normal for AWS margins, and then international losses also were a little bit heavier than we thought just talk about.
What drove those losses is that or is that also the new normal for that segment. Thank you.
Sure, let me start with AWS so.
We did see a deceleration of our drop in op margin sequentially quarter over quarter.
The broad.
Disclaimer on AWS margins is that they will they.
They will fluctuate over time, as we balance investments versus.
Renegotiated pricing with long term custom.
Customer commitments.
Paul.
As headwinds to the business offset by increasing productivity and efficiencies in our data center switch drive profitability. So there's there's moving parts there I'd say, what's happening lately is yes, the stock based comp there as we have.
Seen inflation in our wages this year and particularly our check employees, it's heavily concentrated in AWS.
So that's one element of it.
We're also seeing energy cost that are.
Materially higher than they had been pre pandemic.
Electricity and the impact of natural gas pricing, so those prices up.
More than two X over the last couple of years.
And contribute to about 200 basis point degradation versus two years ago. So we're fighting through some of that.
As well, which is new thing for the consumer for the AWS business, but.
We will continue to look for ways to optimize our operations to use less.
Energy and.
As we scale.
Kind of run into that.
We will outrun that growth trajectory.
On International International is always a mix of.
Profitability in our established countries of Europe , and Japan offset by emerging countries.
Investments in <unk>.
Prime benefits I.
I think the biggest issue quarter over quarter that.
Greece and losses versus Q2 was tied to some additional operating costs in.
In Europe .
We've seen higher fuel costs there.
Even more certainly in the United States.
And Prime day is always a bit of.
Lesser profitability, because a lot of deals.
It's.
Better margin.
From Prime day in both North America and international so.
We also had a big.
A big part of those device sales and again, we sell a lot of devices during our prime day events.
We don't make money on the device, we make money on the use of the device so that always.
Can end up hurting profitability in the quarter. So there is some contributing thanks as far as the new normal.
We're working very hard to make sure that.
Current profitability is not the new normal and.
We'll see how quickly we can make improvements a lot of improvements that I talked about on a macro level capital efficiency operations.
Improvements are as important internationally as they are in North America.
And our next question comes from the line of Brent <unk> with Jefferies. Please proceed with your question.
Brian on AWS I'm, just curious when you talk about optimizing inefficiency can you talk to what Youre seeing from your customers why perhaps you're seeing such a big pullback in terms of near term demand how would you characterize those conversations.
I think the other question is related to backlog backlog has been running 60 plus percent some diversions between revenue and backlog is.
The large everyone's asking how do you describe that that diversion.
Let me have Dave.
To answer the backlog question first yes.
Steve here, so I think our.
Current backlog balance for Q3s 104 billion.
With less than 60% of about 57% up year over year.
The new customer pipeline is healthy.
With.
A lot of enterprises customers, they're continuing to put plans in place Brian .
Brian I'll talk a little bit about some of the cost optimization in a second.
Backlog growth has figured it can fluctuate quarter to quarter because it is dependent on.
The commitments that you do sign in the period and.
How those adjusted but yes.
$104 3 billion for the end of Q3.
Yes, and your first question about cost optimization.
Sure.
Some industries that have lower demand that are showing up in our volumes just probably makes other companies as well things like.
Financial services, the mortgage business being down crypto currencies has been down there as you know we're very strong in some of those industries and Thats.
That's part of it but basically what we see is customers are looking to save money versus their committed spend.
We have options for them to do that they can manage workloads better they can.
Switch to lower cost products that have different performance profiles. They can switch to graviton chips that have higher cost performance ratio. So all really good things for the customer and for Amazon long term.
It's.
Again, we think the benefit of cloud computing is really showing up right now because we allow customers to turn would normally be a fixed expense into a variable expense.
And they can let us manage the.
Highs and lows of inflation.
Other cost of electricity and everything else and they can they can get about to do their business using our services in a very highly secure way so.
I think this is just like in 2020.
These time periods are good for long term adoption on cloud.
Computing.
But the offset in the short run is that some companies.
Have demand the drops I think what was different in 2020 was there was.
Yes, there are companies that went down and there is companies that went up quite a bit that were.
Servicing high really high volumes during the pandemic so.
That dynamic is not in place right now and I think everyone's just cautious and they want to again watch their spend.
CFO I appreciate that and we're doing the same thing here at Amazon.
And our next question comes from the line of John Blackledge with Cowen. Please proceed with your question.
Great. Thanks, two questions first could you provide some more details on the cost structure initiatives and when we could see those initiatives hitting the P&L and then second on the holiday season.
Implicit in your guidance remarks, thus far but just curious are your expectations for consumer demand this holiday season versus last year.
Sure, let me start with the holiday so.
We're ready to roll we have got.
Best in selection, we've ever had in stock levels are really high <unk>.
Delivery speeds are getting very close to where we want them to be and we're ready to have a really good holiday season with our consumers this year.
Piece or the excuse me the primarily access sale I think create great value for consumers that allowed them to get a jump on some of their purchases for the.
Holiday and also just find some great deals so we're happy with.
That effort and the teams have put that together worked very hard this year to hold two large prime events within four months.
So we're very optimistic about the holiday and but we are realistic that there is very.
Various factors weighing on People's Wallets.
<unk>.
We're not quite sure how.
Strong holiday spending will be versus last year, and we are ready for a variety of outcomes, but.
We know the consumers.
When.
They are looking for good deals and.
That positions us well.
Advertisers looking for effective advertising and our advertising is at the point, where consumers are ready to spend so we have a lot of advantages.
We feel that will help both consumers and also our.
Our partners like sellers and advertisers so.
The seller and stock is very high.
Ed.
Great demand are great.
In stocks from R F.
<unk> sellers and so we're ready to go and we're very optimistic that the fourth quarter, just realistic about whether we wait.
We may have a range of outcomes that we just have to be ready for when we are.
On the cost structure initiatives.
I think youre, primarily talking about.
The operations World.
You've made.
There's three large buckets there as I've said in the past productivity fixed cost leverage and inflation and productivity made good strides.
But theres still a lot of work to do there and we know the job ahead of our target it's hard to improve productivity much in the fourth quarter, because it's just a period like maximum stress on the operations and we're trying to fulfill every order and a very quick way, but where our goal is to leave ourselves in a really good strong condition for a fast start.
On the <unk> initiatives in Q1 of next year.
On fixed cost leverage we've taken steps to.
Altra, our forward plan and take Capex out a lot of the Capex, we spend in any given years feeding future years capability and we've tightened that up I feel good about the arc of demand versus supply that we have in our fulfillment and transportation area Inflation's a wildcard.
We do as much as we can too.
Save money in an inflationary environment, we've looked at to make sure that our trucks are fully utilized.
Best we can.
Preventing lung zoned shipments things that like you use a lot of fuel or use a lot of trucking or use a lot of.
Shipments from.
Other parts of the world So.
We are working under the umbrella of not having it impact the customer we're working very hard to say that those challenges will.
Be there through the end of the year and we'll be working on them.
And definitely in the first half of next year as well so.
We'll keep you posted as we have these quarterly calls on our progress and where we see opportunities.
And our final question will come from the line of Ross Sandler with Barclays. Please proceed with your question.
Hey, guys just two clarifications on what.
Were you just said so first on retail you did see some good efficiency gains in <unk>. When you had talked about $1 billion.
As we move forward.
If those three areas you just mentioned.
Do turn favorable how quickly you think you could get back to kind of historical North America regional operating margins is that one year or two years any timeframe on that and then on AWS. You said the back half of <unk> was a mid <unk> run rate.
One of your.
Prominent peers was talking about incremental macro weakness in the <unk>. So could you just talk about are you expecting the same thing in <unk> or are some of the price concessions you already made in <unk> to kind of.
Getting in front of that thank you.
Was that second question on AWS, Ross, Yes, AWS trajectory exactly Okay, let me start with the efficiency.
<unk> outlined a lot of it in the prior answer but just to clarify.
We're aiming for about $1 billion in half improvements sequentially versus Q2 in Q3, we feel like we came up about a <unk> 5 billion short on that.
Marilee in.
Mostly in our productivity.
<unk> had a lot of.
With the Prime day, and the preparations for the primarily access to them, we have been running with very high inventory levels in our warehouses, but our inventory and our sellers.
Get ready for those events paid off in the events themselves and stocks then.
Yes.
Really high levels so.
But in that in that environment.
Harder to work on.
Theres blockages to making.
Improvement in productivity, there's a lot of extra work space.
Space constraints, but.
We're.
We will.
Continue that fight.
While I can't.
Forecast into 2023, yet.
It really only talking about Q4.
Messages that we have work to do in 2023 that we.
Mark.
Aware of and working on today.
David I'll take that.
On AWS.
Yes. This is David Ross you were just asking around AWS, just doesn't really add to what Brian has already set other than you'd spoken about we've seen.
Year over year growth rate come down third quarter.
Progress and exited sort of in the mid <unk>.
<unk> growth rate. So that's informed how we are thinking about the guidance range is heading into the fourth quarter.
But nothing else to add on that.
Thanks for joining us on the 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.
Thank you everyone that does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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