Amazon.com (NASDAQ:AMZN) Q2 2023 Earnings Call Transcript

Amazon.com (NASDAQ:AMZN) Company Management

Analysts

Operator

[Operator Instructions]. And our first question comes from the line of Colin Sebastian with Baird.

Colin Sebastian

I guess first on the fulfillment efficiency. Would be curious if you could give us a sense for how much of that optimization in the network with unit economics may have already been achieved in these numbers versus how much more you think is 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 that be limited to the stores and the specialized automated facilities you’re building out?

Brian Olsavsky

I’ll take that first one. So on fulfillment efficiency, we’re encouraged again by what we’re seeing with regionalization and also the efforts to control our cost structure and the — some of the inflationary pressures coming down. We’re still in that journey, though, to reclaim the cost structure that we had previously and we consider this as a point along the road. So encouraged by some of the margin improvements we’re seeing, particularly over the last 3 to 5 quarters but we’re still underway. There’s still a lot to be regained in our fulfillment area, and the teams are working very hard on it.

On the question of grocery, as Andy explained at different points, our grocery business has a lot of dimensions to it. Obviously, there’s consumables, there’s fresh goods, there’s Whole Foods. The same — sub-same-day is probably mostly impacting the first — that pocket of the consumables and everyday essentials. And as Andy mentioned, we’re able to expand our selection in those areas because our cost structure can, quite frankly, afford it when the distances of customers are shorter and the transportation costs are more fixed.

Andrew Jassy

I’ll just add to that, this is Andy, that I do think there’s some optimization and some leverage we get from our fulfillment network. And particularly in the case of being able to inject a 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 that they can get same day. And I think that you see some of that already and 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 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 infrastructure build-out in our grocery business that’s different and optimized for the grocery business, too.

Operator

Our next question comes from the line of Mark Mahaney with Evercore ISI.

Mark Mahaney

I’ll limit myself to one question for each of you. Amazon Business has 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, 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 $100 billion?

And then on the — Brian, on AWS, in the last 2 quarters, you provided a little bit of a look ahead into the quarter in terms of the AWS growth, given some of the commentary about moving beyond optimization and into new workloads without — if you don’t give a specific number, at least talk about the trends that you’re seeing versus what you had in the second quarter.

Brian Olsavsky

Yes, sure. Thanks, Mark. Let me start with that second question. So again, if we rewind to our last conference call, we had seen 16% AWS revenue growth in Q1, and the growth rates have been dropping during the quarter. And what I mentioned was that April was running about 500 basis points lower than Q1. What we’ve seen in the quarter is stabilization and you see the final 12% growth.

I will stop for a moment and just put that in perspective. So again, last Q2 last year, we had close to $20 billion of revenue and we grew that $2.4 billion. So that’s — while that is 12%, there’s a lot of cost optimization dollars that came out and a lot of new workloads and new customers that went in. So there was — on our base, it’s very large numbers. And when customers start to — that cost optimization work, they can take some of their spend down for a while as they do that, and we help them do that and been 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 maybe behind us in some of our large customers. And now we’re seeing more progression into new workloads, new business. So those balanced out in Q2. We’re not going to give segment guidance for Q3. But what I would add is that we saw Q2 trends continue into July. So generally feel the business has stabilized, and we’re looking forward to the back end of the year in the future because, as Andy said, there’s 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 generative AI and large language models as well as machine learning solutions that we’ve always had for customers. So optimistic and starting to see some good traction with our customers’ new volumes.

Andrew Jassy

Yes. I’ll just underline one point Brian made and then quickly get to the Amazon Business point. Just if you think about the AWS business being an $88 billion revenue run rate business, to grow double digits on a business that size with the amount of cost optimizing that’s 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.

So when I talked about last quarter how I liked a lot of the fundamentals that we were seeing in the business with respect to customer pipeline, the new workloads, the migrations happening, what the team is rolling out functionality-wise, that’s kind of what I’m talking about. And as we start to see cost optimization attenuate and more of the workloads, new workloads that people took those cost optimizations and actually started to plan come to fruition, not to mention what’s coming with generative AI, there’s a lot of growth in front of us on AWS.

Just on your Amazon Business question, Mark, $35 billion annual run rate for gross sales is pretty strong growth. And if you look at it year-over-year, it continues to be very strong. But I like the way you’re thinking, Mark, and it’s almost like you’re in some of the meetings that we’re in where I asked the very same question. The team is working hard to build $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 of 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 them much easier in the way that companies are used to buying in those big procurements.

And so we have a lot of features that we’re adding. We have a number of service pieces that we need to add really around helping on big buys, do some of the service substantiations. And so we have a lot of functionality that we’re very quickly adding to mix here. But I don’t think we’re 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.

Operator

And our next question comes from the line of Brent Thill with Jefferies.

Brent Thill

Andy, just on AI monetization. Can you just talk to when you think you’ll start to see that flow into the AWS business? Is that 2024? Do you feel like the back half, you’ll start to see that as a bigger impact for the business?

Andrew Jassy

Yes. Good question, Brent. 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 as customers have been doing a lot of machine learning training and then running their models and 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 you’re talking about the big potential explosion in generative AI, which everybody is excited about, including us, I think we’re in the very early stages there. We’re a few steps into a marathon in my opinion. I think it’s going to be transformative, and I think it’s going to transform virtually every customer experience that we know. But I think it’s really early. I think most companies are still figuring out how they want to approach it. They’re figuring how to train models. They want to — they don’t want to build their own very large language models. They want 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.

Operator

And the next question comes from the line of Eric Sheridan with Goldman Sachs.

Eric Sheridan

Thanks for all the detail in the prepared remarks around framing some of those key issues. Andy, maybe coming back to grocery. There’s 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 it an element of things you need to build and the application of capital versus elements of executing on what’s already in place and sort of aligning the assets in place against the Amazon — the scale of the Amazon Prime household in your customer base?

Andrew Jassy

Yes, it’s a good question. It’s a little bit of both. I mean if I just step back and think about how we think about grocery, we continue to have this very big business in nonperishables, which is where a lot of the mass merchandisers started in grocery several years ago. So these are areas like consumables and canned goods and pet food and beauty and health. And as I said, it’s a big business that’s continuing to grow. But if you want 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.

We started 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 its profitability trajectory over the last year. And we really like where that’s headed and we’re expanding that meaningfully. But 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 input, and 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 and better. And I think that team has 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 stores shortly thereafter. And you see added selection. You see added private brands. You see added well-known third-party brands like Krispy Kreme and coffee in the stores.

You’ve seen a refined decor in the stores. You see refined dash cards that keep a running tally for people so they understand where they are at the moment wherever they’re shopping, as well as refined self-service checkouts. And all those things, to me, are part of an effort we’re trying to pursue to have a format in our mass Amazon Fresh stores that resonate more with customers. And we’re hopeful that we will find that format and that it gives us the type of results that give us confidence to want to expand more broadly.

But we won’t expand unless we see that type of resonance. We’re not just going to be on discipline. We’re going to be thoughtful and disciplined about it. I do think also, you’re 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.

We’re continuing to extend delivery to non-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 resonant with customers.

Operator

And our next question comes from the line of Brian Nowak with Morgan Stanley.

Brian Nowak

I have two. The first one, Andy, on the last call last quarter, you talked about how you sort of talked about North America retail margins potentially getting to at or above pre-COVID levels. I think you said a margin around 4% and you’re 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 and sort of invest in some of these new initiatives in the retail business?

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 investments, potentially through logistics or AI-based agents, et cetera? How large is that in the overall investment priority list?

Andrew Jassy

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 and 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 won’t 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. It is — as I mentioned in my 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, they’re smaller facilities. They’re big enough obviously to hold, in steady state, 100,000 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 1-day fashion.

But they’re smaller — in general, they’re smaller facilities with less conveyance and with more streamlined pick directly to pack and to get out to the dock to ship. And 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. And I continue to believe what I said last quarter, Brian, which is I do believe that we’ll get back to margins like what we had pre COVID. And I don’t think that’s the end of what’s possible for us there.

On 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 to the absolute heart of every customer experience in which we offer. And so it’s true in our stores business. It’s 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 Alexa there. It’s true in our entertainment businesses, every single one. It is going to be at the heart of what we do. It’s a significant investment and focus for us.

Operator

Our final question comes from the line of Doug Anmuth with JPMorgan.

Douglas Anmuth

Just on AWS, as you lap 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 in a better macro environment? And then secondly, helpful to get the just over $50 billion CapEx number for this year. Just curious how generative AI changes or could change your CapEx trajectory going forward.

Andrew Jassy

Well, it’s a good question. And I would say that while I expect there will continue to be cost optimization, I think that the balance of cost optimizations to actually new workloads and new migrations as we saw a shift in that in Q2, I expect that we’ll continue to see that shift over time. And as I said, I mean, everybody has to make their own conclusions on what percentage revenue growth they believe it means.

But to grow double digits on an $88 billion revenue run rate business, when you’re seeing that amount of cost optimization as every company in the world is trying to save as much money as they can in the last year, to still grow double digits on a base that size means that we’re acquiring a lot of new customers and a lot of new workloads. And so I’m very bullish on the growth of AWS over the next several years. And any 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 the 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 in AWS, in general, one of the interesting things in AWS, and this has been true from the very earliest days, which 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 in generative AI because it will mean that customers are having success and they’re having success on top of our services and — but I think that, that’s our best estimate right now on that capital expense, and we’ll update it if we find it’s different.

Dave Fildes

Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations website for at least 3 months. We appreciate your interest in Amazon, and look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, that does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.