Q2 2023 Amazon.com Inc Earnings Call
Thank you for standing by good day, everyone and welcome to the amazon.comquarter, two 2023 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 vice president of Investor.
<unk> Dave files. Thank you Sir Please go ahead.
Hello, and welcome to our Q2 2023 financial results conference call joining us today to answer your questions Sandy Jesse our CEO and Brian <unk> our CFO .
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 2020 to our comments and responses to your questions reflect management's views as of today August three 2020.
Three 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 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 SEC each of which is posted on our IR.
Our 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 fluctuations in foreign exchange rates changes in global economic and geopolitical conditions and customer demand and spending including the impact of recessionary fears inflate.
<unk> interest rates regional labor market 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.
Our guidance 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 services and therefore, our actual results could differ materially from our guidance and now I'll turn the call over to Andy.
Thank you Dave good afternoon, everyone and thanks for joining us.
Today, we are reporting a $134 4 billion in revenue and $7 7 billion and operating income both of which exceeded the top end of our guidance ranges.
We're encouraged by the progress, we're making on several key priorities, namely lowering our cost to serve in our stores business continuing to innovate on and improve our various customer experiences and building new customer experiences that can meaningfully change what's possible for customers and our business long term.
Starting with our ongoing effort to lower our cost to serve and our stores' fulfillment network Q2 saw another meaningful improvement in this area as we have steadily made progress the last several quarters central to our efforts has been the decision to transition our stores' fulfillment and transportation network from one National network in the United States to a series of eight separate regions serving.
Smaller geographic areas.
We keep a broad selection of inventory in each region, making it faster and less expensive to get those products to customers.
Utilization is working and has delivered a 20% reduction in number of touches for delivered package, a 19% reduction in miles traveled to deliver packages to customers and a more than 1000 basis point increase in deliveries fulfilled within region, which is now at 76%. This is a lot of progress sometimes I hear people.
Make the argument that Amazon's cheesing faster speed, while driving its costs higher and where it doesn't matter much customers. This argument is incorrect there are two things to note.
First customers care a lot about faster delivery, we have a lot of data that shows when we make faster delivery promises on a detail page customers purchase more often not just a little higher meaningfully higher.
Also true then when customers know they can get their items really quickly it changes their consideration of using us for future purchases to <unk>.
Second when shipments come from fulfillment centers that are closer to customers. They travel shorter distances, which cost less in transportation gets there faster and it's better for the environment. There's a lot of goodness in that equation. This ability to have shipments closer to customers. As the result of a lot of work and invention on the regionalization side placement logic.
And local in stock algorithms.
Also driven by our development and expansion of same day fulfillment facilities, which is our fastest fulfillment mechanism and one of our least expensive to our same day facilities are located in the largest metro areas around the U S. So our top moving 100000, Skus, but also cover millions of other skus from nearby fulfillment centers can inject selection into these.
Same date facilities have a design and streamlines getting items from order to being ready for delivery in as little as 11 minutes.
The experience has been so positive for customers and our business. There we're planning to double the number of these facilities. We believe that we are far from the law of diminishing returns and improving speed for customers. While we're seeing strong early results from this regionalization effort, we still see several ways in which we can be more efficient in this structure and we believe will <unk>.
<unk> productivity further.
We have also reevaluated virtually every part of our fulfillment network. This past year and see additional structural changes we can make that provide future upside. We're excited about this cost to serve improvement, but also remain maniacally focused on making customers' lives easier and better everyday and relentlessly inventing to make itself.
This means constantly trying to improve experiences that we deliver to customers short and long term.
His customer experience work is at the heart of what we do every day across every one of our businesses and I could spend an hour on this call detailing various examples across the teams for today I'll just focus a bit on our stores and AWS businesses.
For stores, our priorities continue to be providing customers with great selection low prices and convenience and as we've discussed we've been especially focused on providing even faster delivery speeds. Our speed of delivery has never been faster and this last quarter across the top 60 largest U S metro areas more than half of prime members orders.
<unk> the same day or next day, so far this year, we've delivered more than 1.8 billion units. The U S. Prime members the same or next day nearly four times, what we delivered those speeds by this point in 2019.
Lowering our cost to serve allows us not only to invest in these speed improvements, but also add more selection of lower price points in particular, we're growing our selection in everyday essentials, enabling customers to avoid going out to get these items and both increasing our basket sizes, and the frequency with which customers choose to shop with us.
We now have more than 300 million items available with U S Prime free shipping, including tens of millions of items with free same day, and one day delivery.
We're continuing to focus on providing great value with tens of millions of deals that help customers stretch their dollar or more for instance in Q2 of 'twenty three we offered customers a 144% more deals and coupons than we did in Q2 of 2022 Prime.
Prime day with similar Amazon offered more deals than any past Prime day event with a wide selection across millions of products Prime members purchased more than 375 million items worldwide and save more than $2 $5 billion across the Amazon store, helping make it the biggest prime day ever.
Next a few words about AWS.
WNS remains the clear cloud infrastructure leader with a significant leadership position with respect to number of customers size of partner ecosystem breadth of functionality in the strongest operational performance.
These are important factors for why AWS has grown the way it has over the last several years and for why AWS is almost double the revenue of any other provider I've talked to many AWS customers over the years and continue to do so and while all of these factors I mentioned have been big drivers of the business's success AWS customers tell us that as importantly.
They care about the very different customer focus and orientation in AWS may see elsewhere.
As the economy has been uncertain over the last year AWS customers have needed assistance costs optimizing to withstand this challenging time and reallocate spend to newer initiatives to better drive growth. We've proactively help customers do this and while our customers have continued to optimize during the second quarter, we started seeing more customers shift their focus to.
We're driving innovation and bringing new workloads to the cloud.
As a result, we've seen aws's revenue growth rates stabilized during Q2, where we reported 12% year over year growth.
AWS team continues to innovate and change what's possible for customers at a rapid clip you can see it across the array of AWS product categories, where AWS leads and compute networking storage database data solutions and machine learning among other areas and the continued invention and delivery in these areas is pretty unusual for instance, a few years ago.
So we heard consistently from customers that they wanted to find more price perform in ways to do generalized compute and to enable that we realized that we needed to rethink things all the way down to the silicon and set out to design our own general purpose CPU chips today more than 50000 customers use aws's graviton shifts in AWS computing.
This is including 98 of our top 100, Amazon E C. Two customers and these chips have about 40% better price performance and other leading X 86 processors.
The same sort of re imagining is happening in generative AI right now generative AI has captured People's imagination, but most people are talking about the application layer, specifically would open AI has done with chat GPT.
It's important to remember that we're in the very early days of the adoption and success of generative AI and then consumer applications is only one way or the opportunity.
We think of large language models and generative AI as having three key layers all of which are very large in our opinion all of which AWS is investing heavily in at the lowest layer is the compute required to train foundational models do inference or make predictions customers are excited by Amazon E. P to P. Five instances powered by Nvidia.
<unk> hundred Gpus to train large models and develop general AI applications. However to date, there's only been one viable option in the market for everybody and supply has been scarce that along with the chip expertise. We've built over the last several years prompted us to start working several years ago on our own customer AI chips for training called training them.
And in France called <unk>.
In their second versions already and are a very appealing price performance option for customers building and running large language models.
We're optimistic that a lot of large language motto training and inference will be run on AWS as training them and inferential chips in the future.
We think of the middle layer as being large language models as a service.
Surfing back for a second to develop these large language models. It takes billions of dollars in multiple years to develop.
Most companies tell us that they don't want to consume that resource building themselves rather they want access to those large language models on a customize them with their own data without leaving their proprietary data into the general model have all the security privacy and platform features and AWS work with this new enhanced model and then have it all wrapped in a managed service.
This is what our service bedrock does and offers customers all of these aforementioned capabilities with not just one large language model, but with access demand from multiple leading large language model companies like anthropic stability AI AI 'twenty, one labs, cohere and Amazon's own developed large language models called Titan.
<unk>, including Bridgewater Associates Coda Lonely planet Omnicom, three am Ryan Air show patent travelers are using Amazon bedrock to create generative AI application and we just recently announced new capabilities from bedrock, including new models from Cohere and tropics caught too is the ability is stable diffusion X L. <unk>.
Oh as well as agents for Amazon bedrock that allow customers to create conversational agents to deliver personalized of today answers based on their proprietary data and to execute actions.
If you think about these first two layers I've talked about who were doing is democratizing access to generative AI lowering the cost of trading and running models, enabling access to large language model choice instead of their only being one option, making it simple for companies of all sizes and technical acumen to customize their own large language model and build.
Generative AI applications in a secure an enterprise grade fashion.
Are all part of making generative AI accessible to everybody and very much what AWS has been doing for technology infrastructure over the last 17 years.
Then that top layer, that's where a lot of publicity and attention or focus and these are the actual applications that run on top of these large language models as I mentioned chat G. P. T. As an example, we believe one of the early compelling generative AI applications as a coding companion, hence why we built Amazon code Whisper and AI powered coating companion wish you.
Recommends code snippets directly in the coated or accelerating developer productivity as they could talk to a very strong start and changes the game with respect to developer productivity.
Inside Amazon every one of our teams is working on building generative AI applications that reinvent and enhance their customers' experience.
But while we will build a number of these applications ourselves most will be built by other companies and we're optimistic that the largest number of these will be built on AWS remember.
Core of AI is data people want to bring generative AI models to the data not the other way around.
AWS not only has the broadest array of storage database analytics and data management services for customers. It also adds more customers and data stored than anybody else.
Coupled with providing customers with unmatched choices at these three layers in degenerative AI stack as well as bedrock enterprise grade security that's required for enterprises to feel comfortable putting generative AI applications into production. We think AWS is poised to be customers long term partner of choice in January of AI.
We're also continuing to make meaningful progress in building new customer experiences that can meaningfully change what's possible for customers and our business long term.
Amazon business is one of our fastest growing offerings with a $35 billion annual gross sales run rate and the team is working hard to further build out the selection value convenience and features that business customers need.
By with Prime is continuing to show a lot of progress merchants in early trials, who used by with prime saw their shopper conversion increased by 25% on average, which makes a real difference to their business.
Also merchants, who participated in prime day activities in aggregate experienced a 10 X increase in daily by with Prime orders during the sales event period versus a month before we announce prime day.
It's frankly only been a short amount of time that we've decided to invest significantly in the health care market segment, a lot of we tried before where smaller experiments, but we're pleased with Amazon pharmacy doubling its active customers in the past year and we're pleased with the response to our ex pass which enables prime members to receive all of their eligible generic medications for just five.
Dollars, a month and have them delivered free to their door.
Medical has been part of Amazon for just a few months now and we're encouraged by what we're seeing there too.
Our grocery business continues to grow we already have a very large business in non temperature controlled areas like consumables pet food beauty and canned goods that continues to grow as we keep increasing speed and lowering our cost to serve which allows us to sell more items more cost effectively.
Whole foods continues to lead the organic grocery space is growing at a healthy clip and has meaningfully improved its profitability in the last year. We're pleased with what we're seeing with whole foods and as I shared before we're working on new formats in our mass physical store offering Amazon fresh having significantly improved the number of the key business inputs and gesture.
Rolled out new concepts in stores.
We also see substantial innovation and progress in other areas like Kuyper, Zooks and of Axa <unk>.
We're still relatively early in many of our investments with technology inventions that are changing what's possible to deliver for customers in these areas, but they are big long term opportunities that we remain optimistic about.
Finally, I want to recognize our teams and being named number one in Lincoln's top companies to grow your career in the United States. It's a testament to our work to be a great employer with leading compensation benefits and upscaling opportunities.
With that I'll turn it over to Brian .
Thank you Andy as Andy mentioned, we saw worldwide revenue of $134 4 billion.
An increase of 11% year over year and above the top end of our guidance range. We are encouraged by the strength in our reported revenue, which is another proof point that our focus on price selection and convenience continues to resonate with customers. We continue to see healthy demand across everyday essentials and in categories like beauty and health and personal care.
I have seen a positive customer response to improvements in personalization enhancements to our website and mobile app.
During the quarter. We also saw improvements in macroeconomic indicators across our North America and international segments, but continue to see customers trading down and seeking value in their purchases delivery speed has been a key area of focus over the last several quarters and we reached record levels. During Q2 prime members loved the faster.
Chip speeds and are shopping more often.
Advertising revenue remained strong up 22% year over year, our performance based advertising offerings continue to be the largest contributor to our growth.
Our teams worked to increase the relevancy of the ads, we show to our customers by leveraging machine learning and improve our ability to measure the return on advertising spend for brands.
Third party unit mix increased to 60% during the quarter the highest level, we've ever seen and we're continuing to see good growth in the number of sellers and the units sold per seller.
Making steady progress on improving our worldwide stores profitability.
North America segment operating margins bottomed out in Q1 of 2022, we've seen five consecutive quarters of improvement with second quarter operating margin of three 9%.
This is an improvement of 620 basis points over these past five quarters.
Were the largest drivers of this operating income improvement in the stores business has been reducing our cost to serve with shipping cost and fulfillment costs continuing to grow at a slower pace than our unit growth.
Most recently regionalization is an important contributor faster delivery speed from better network connectivity and better inventory placement means less miles traveled and fewer touches resulting in less cost.
While we are pleased with the progress we have made we see more opportunity to drive improved cost efficiencies going forward move.
Moving to the international segment since our operating margin loss bottomed out in Q3 of last year, we have seen three consecutive quarters of improvement for the second quarter margin loss of negative 3%.
This is an improvement of 590 basis points over the last three quarters.
This segment also includes our emerging countries is important to remember how early we are in sort of these marketplaces, we've launched more than 10 countries in the past six years and are always evaluating our customer experience as well as our path to profitability and we like the path we're on.
As a reminder, it took us nine years to reach profitability in the United States.
In addition across our North America and international results inflation headwinds also continued to ease most notably in fuel prices line haul rates Ocean and rail rates.
Moving to AWS year over year revenue growth was 12% with growth rates stabilizing. During Q2, we are encouraged by the strength of our customer pipeline and believe having a large diverse customer base is mostly cost optimized sets us up well for future growth.
On a trailing 12 month basis free cash flow was positive and improved for the fourth sequential quarter.
Our financial focus remains on driving long term sustainable free cash flows to the largest driver of the recent improvement in free cash flow as our increased operating income most notably in the North America and international segments, whereas I said, we've made meaningful improvement in our fulfillment network productivity and operating leverage and benefited from moderating inflationary pressures.
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We've also seen improvements in our working capital contributions to free cash flow.
Over the past couple of years working capital hasn't been as efficient as we felt higher weeks of cover of inventory in the face of supply chain disruptions.
Certainly as these disruptions continue to ease we're improving our inventory efficiency, resulting in improvements to our working capital.
We will remain focused on continued free cash flow improvement moving forward.
Next let's turn to our capital investments, we define our capital investments is a combination of capital expenditures plus equipment finance leases.
Investments were $54 billion for the trailing 12 month period ended June 30th down from $61 billion in the comparable prior year period.
Looking ahead to the full year 2023, we expect capital investments to be slightly more than $50 billion <unk>.
Compared to $59 billion in 2022.
We expect fulfillment and transportation capex to be down year over year, partially offset by increased infrastructure capex to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.
With that let's move on to your questions.
At this time, we will now open the call 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. Thank you.
And our first question comes from the line of Colin Sebastian with Baird. Please proceed with your question.
Great. Thanks, good afternoon.
I guess first on the fulfillment efficiency.
Would be curious if you could give us a sense for how much of that optimization of the network.
The unit economics may have already been achieved in these numbers versus versus how much more you think is left to left to go and related to that I'm curious if you can leverage this reformulated network to help out with the grocery expansion.
Or will not be limited to the stores and the specialized automated facilities Youre building out. Thank you.
Thanks, Colin I'll take that first one.
So on fulfillment efficiency.
We're encouraged again by what we're seeing with the regionalization and also the.
Efforts too.
While our cost structure and see some of the inflationary pressures coming down.
Phil.
In that journey.
Claim.
The cost structure, the strict cost structure that we have previously and we consider this as a.
Point, along the road.
Courage by some of the margin improvements, we're seeing particularly over the last.
Three to five quarters.
With still underway there's still.
A lot to be regained helmet area and the teams are working very hard on it.
On the question of grocery.
As Andy.
Plant at different points.
In our grocery business has a lot of.
Entrance to it obviously it is consumables.
There is a fresh.
Fresh goods there is whole foods.
The.
Same sub same days probably mostly.
Impacting the first bucket the symbols everyday essentials.
We mentioned, we're able to expand our selection as areas because our cost structure.
And quite frankly afford it.
This consists of customer shorter and the transportation costs are more fixed.
I'll, just add to that as Andy debt.
Yes, I do think.
There is some optimization and some leverage we get from our fulfillment network and particularly in the case of being able to enjoy.
Jack the number of items into our same day facilities to increase the number of items that people can add at the last minute even grocery items.
You can get same day. Thank you.
You see some of that already you'll see more of that moving forward and I also think that you'll see over time that we're going to be able to leverage being able to have.
People will be able to pick up different items from different grocery like options that are different grocery formats, but it's also true that we have the infrastructure to build out in our grocery business is different and optimized for the grocery business too.
Our next question comes from the line of Mark Mahaney with Evercore ISI. Please proceed with your question Great I'll limit myself to one question for each of you Amazon business. It's been a couple of years since you've talked about that.
It would seem like there'd be a lot more opportunities frankly, a lot higher level of.
Sales bookings whatever that you get out of that so Andy can you just talk about like how big of a priority is that for you.
And what's the growth strategy like how do you take that to a 100 billion and then.
Brian on AWS you. The last two quarters, you provide a little bit of a look ahead into the into the quarter in terms of the AWS growth given some of the commentary about moving beyond optimization and into new workloads without it. If you don't give a specific number at least talk about the trends that youre seeing versus what you had in the second quarter. Thanks a lot.
Yes sure. Thanks, Mark let me start with that second question. So.
Okay.
We wanted to our last conference call.
<unk>.
Has seen 16% AWS revenue growth in Q1, and the growth rate would have been.
Dropping during the quarter and what I mentioned was that April was running about 500 basis points lower than Q.
Q1.
What we've seen in the quarter is stabilization and yes, you'll see the final 12% growth.
I will stop for a moment just to put that in perspective, So again last Q2.
Last year, we had close to $20 billion in revenue and it grew at two 4 billion. So that's what.
That is 12%.
There's a lot of <unk>.
Cost optimization.
Dollars that came out in a lot of new workloads and new customers that went in so there was.
On our base.
Yes, it's a very large numbers.
When customers start to.
Cost optimization optimization work.
They can take.
Take some of their spend down for a while as they do that and we help them do that.
And part of our DNA ever since we started AWS. So that's all good what we're seeing in the quarter is that.
Those cost optimizations, while still going on are moderating and.
Many may be behind us and some of our large customers and now we're seeing more progression into new workloads new business.
This balanced out in Q2, we're not going to give segment guidance for Q3, but.
But I would add is that we saw Q2 trends continuing into July so.
Generally feel.
The business has stabilized and were.
Looking forward to.
To the back end of the year in the future because as Andy said Theres a lot of new.
Functionality coming out with and there's a lot of spend that will be in this area for all the great solutions that are out there for generous AI and large language models as well as machine learning solutions that we always have for customers. So.
Optimistic and starting to see some good traction with our customers on new volumes.
Yes, I'll just underline one point, Brian made and then quickly get to the Amazon business point just.
If you think about.
But the AWS business being in $88 billion revenue run rate business.
To grow double digits on a business that size with the amount of cost optimizing thats been happening.
To grow double digits, you have to be adding a lot of new customers and a lot of new workloads just to grow double digits.
When I talked about last quarter, how I liked a lot of the fundamentals that we're seeing in the business with respect to our customer pipeline, the new workloads and migrations happening.
What the team was rolling out functionality wise.
Kind of what I'm talking about and as we start to see cost optimization.
The optimization attenuate.
And more of the workloads, new workloads that people took those cost optimizations and actually starting to plan come to fruition.
Not to mention what's gone with generally high there's a lot of growth in front of us AWS just on your Amazon business question Mark.
$35 billion.
The annual run rate for gross sales is pretty strong growth and if you look at it year over year continues to be very strong, but I like the way youre thinking mark and.
It's almost like you are in some of the meetings that we're in where I asked the very same question on the team is working hard to build a $100 billion plus business over time, and I think that the.
Business has grown to be pretty large already and I still think we only have a fraction.
The features that we need to address more of the enterprise at this point, there's all sorts of companies ordering obviously from Amazon business, but the bigger procurement workloads. There are certain features that you need to make that much easier in the way that companies are used to buying in those big procurements and so we have a lot of feet.
<unk> that we're adding we have a number of service pieces that we need to add.
Really around helping on big buys to some of the services <unk> and so we have a lot of functionality that we're very quickly adding to the mix here, but I don't think we are close to being done growing there and that is a very strong area of focus for our stores team and for our senior leadership team as well.
And our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Thank you Andy just on AWS three AI monetization can you just talk to when you think you'll start to see that flow into the AWS business is at 2024 do you feel like the back half you'll start to see that as a bigger impact of the business.
Yeah. Good question, Brian what I would say is that we have had a very significant amount of business in AWS driven by machine learning and AI for several years.
And you've seen that largely in the form of compute.
Customers have been doing a lot of machine learning training and then running their models in production on top of AWS and our compute instances, but you've also seen it in the form of the 20 plus machine learning services that we've had out there for a few years I think.
When youre talking about the big potential explosion in generative AI, which everybody is excited about including us.
We're in the very early stages, there were a few steps into marathon in my opinion, I think it's going to be transformative and I think it is going to transform virtually every customer experience that we know.
I think it's really early I think most companies are still figuring out how they want to approach. It they are figuring out a train models.
We want it they don't want to build their own very large language models. They wanted to take other models and customize it and services like bedrock enable them to do so, but it's very early and so I expect that will be very large, but it will be in the future.
And the next question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question. Thanks.
Thanks, so much for taking the question and thanks for all the detail in the prepared remarks around framing some of those key issues and.
Maybe coming back to grocery theres been a lot of coverage in the press around your grocery initiative in the last couple of days when you take a step back how much do you think about solving the grocery dynamic in the business to capitalize on it. The way you want is an element of things you need to build and the application of capital versus elements of <unk>.
Executing on what's already in place and sort of aligning the assets in place against the Amazon the scale of the Amazon Prime households in your customer base. Thanks, so much.
Yes. Good question, it's a little bit of both.
If I just step back and think about how.
How do we think about grocery we continue to have this very big business and non perishables, which is where a lot of the mass merchandisers started in grocery.
Several years ago. So these are areas like consumables and can't good.
Food beauty and health and as I said, it's a big business is continuing to grow but if you wanted to be able to serve more customers, which we do and there are a whole number of reasons for that and customers want. It you have to have a strong physical presence.
Starting with whole foods, which is the pioneer in organic grocery it continues to be and we really like the way whole foods is growing we've made a number of really important adjustments in the business has changed as profitability trajectory over the last year, and we really like where that's headed and we're expanding that meaningfully.
If you want to be really broad you have to have a mass physical format.
We have been working on that for several years with Amazon fresh.
And I would say that.
We weren't pleased with the inputs the progress on the inputs there and the team has worked very hard over the last year to first start on the quality of the inputs that goes towards the quality of what we already had in place and these are things like the right in stock levels.
The right cost structure, the right figures on things like obsolescence, just a number of the core inputs. There. We just felt like we could be sharper better and I think that team is made up a lot of improvements.
We have.
Spent a lot of time thinking and rethinking how we want the formats to look and we've just started rolling out some of those new formats, starting in our Chicago stores, and then moving to our southern California store. Shortly thereafter, and you see added selection you see added private brands you see added well known third party brands like Crispy creams.
In coffee in the stores you've seen.
Fine.
The core in the stores.
You see refined dash card to keep a running tally for people. So they understand where they are at the moment wherever they're shopping as well as refine self service checkouts.
All of those things to me are.
A part of an effort, we're trying to pursue to have a format our mass.
Amazon fresh tours that resonate more with customers.
And we're hopeful that we will find that format and then it gives us the type of results that give us confidence to want to expand more broadly, but we will expand unless we see that type of residents were not just going to be on disciplined we're going to be thoughtful and disciplined about it I do think also.
Starting to see across the team pulling some of the efforts together. So we have a number of different grocery offerings that I just talked about just having a converged shopping cart for customers, which they have.
Obviously wanted that I think will help them quite a bit.
Continuing to extend.
<unk> to <unk>.
On prime customers as well.
And so I think there are a number of opportunities for us over time to grow the business. We're optimistic that we'll be able to do so but we're also being disciplined about not expanding the physical fresh stores until we have a format that we think is more resident with customers.
And our next question comes from the line of Brian Nowak with Morgan Stanley . Please proceed with your question.
Great. Thanks for taking my questions I have two.
The first one Andy on the last call last quarter, you talked about how you sort of talked about north American retail margins potentially getting to at or above pre COVID-19 levels. I think you hit a margin around 4% and youre sort of talking now about investing more in grocery and expanding same day and expanding that footprint.
How should we think about sort of the forward slope of North America retail margins sort of invest in some of these new initiatives in the retail business and then the second one on AI how high of an investment priority is it for you to improve your own retail and device network through more AI investment.
Alright, potentially through logistics or AI based agents et cetera.
Is that in the overall investment priority list.
Well I'll start on the North America retail piece, which is again I'll just remind that.
We're not going to expand the number of fresh stores in a very significant way until we believe we have something that is resonant with customers that we're going to like the return on invested capital. So that to me I'm hopeful we're going to find that but we want until we do.
I think as it relates to.
Same day facilities, we actually think that's going to be very positive for the business as I mentioned in my <unk>.
Opening remarks, it is one of our most cost effective mechanisms and.
Fulfillment vehicles.
With respect not just to getting it there to customers quickly, but being fast in part because those facilities.
Smaller facilities, they're big enough, obviously to hold it.
In steady state of 100000, Skus and then also to have all of our nearby fulfillment centers be able to inject lots of different selection in there. So we can cover.
Several million Skus in that same day, or one day fashion, but but they're smaller in general they're smaller facilities with less conveyance and with more streamlined pick directly to to pack and too.
To get out to the dock ship, so they're just much more efficient as well. So we actually think that the expansion of those is going to not just help with speed and with demand, but we're going to also like the cost structure associated with that.
I continue to believe what I said last quarter, Brian , which I do believe that.
We will get back to margins like what we had.
Pre COVID-19 and I don't think Thats the end of what's possible for us there.
On the.
Yes.
The AI question.
What I would tell you.
Every single one of our businesses inside of Amazon every single one has.
Multiple generative AI initiatives going right now and they range from things that help us be more cost effective and streamlined in how we run operations in various businesses.
Two the absolute heart of every customer experience in which we offer and so it's true in our stores business is true in our AWS business. It's true in our advertising business. It's true in all our devices and you can just imagine what we're working on with respect to Alexia there. It is true in our entertainment businesses every.
Single one it is going to be at the heart of what we deal with the significant investment and focus for it.
Our final question comes from the line of Doug Anmuth with Jpmorgan. Please proceed with your question.
Thanks for taking the questions.
AWS as you.
GAAP optimizations, and the macro driven slowdown and you start to get the new workload deployment. How do you think about what normalized growth could look like for AWS and a better macro environment and then secondly, hopefully get the just over $50 billion Capex number for this year.
Just curious how generative AI changes could change your capex trajectory going forward. Thanks.
Well, it's a good question and.
Yeah.
I would say that.
Yeah.
I expect there will continue to be cost optimization.
I think that.
The balance of cost optimizations to actually new work with new migration.
We saw a shift in that in Q2, and I expect that we'll continue to see that shift over time and as I said.
Everybody has to make their own conclusions on.
What percentage revenue growth they believe it means but yes.
Yes grow double digits on an $88 billion revenue run rate business, when youre seeing that amount of cost optimization in every company in the world is trying to save as much money as they can the last year to still grow double digits on a base that size means that we're acquiring a lot of new customers and then took a lot of new workloads and so.
Yes.
I'm very bullish on the growth of AWS over the next several years.
One quarter, it's hard for me to predict but I am bullish about it in the medium to long term for sure.
I think that on the.
How much generative AI may impact capital expense spend.
Included in that number is a pretty significant amount of capital expense in the AWS business for large language models and for generative AI.
And we have.
Quite a bit of demand right now and so.
It's like.
Like in AWS in general one of the interesting things in AWS and this was this has been true from the very earliest days.
Is the more demand that you have the more capital you need to spend.
Because you invest in data centers and hardware upfront and then you monetize that over a long period of time so.
I would like to have the challenge of having to spend a lot more in capital generative AI because it will mean that.
Customers are having success and they're having success on top of our services.
Yes.
I think that that's our best estimate right now on that capital expense.
We will update it if we find it's different.
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Hum.
Yeah.
Okay.