Amazon.com, Inc. (NASDAQ:AMZN) Q1 2024 Earnings Call Transcript

Amazon.com, Inc. (NASDAQ:AMZN) Q1 2024 Earnings Call Transcript April 30, 2024

Amazon.com, Inc. beats earnings expectations. Reported EPS is $0.978, expectations were $0.82.

Operator: Thank you for standing by. Good day, everyone, and welcome to the Amazon.com First Quarter 2024 Financial Results Teleconference. At this time, all participants are in a listen-only mode. After a presentation, we’ll conduct a question-and-answer session. Today's call is being recorded. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Dave Fildes. Please go ahead.

Dave Fildes: Hello, and welcome to our Q1 2024 financial results conference call. Joining us today to answer your questions is Andy Jassy, our CEO; and Brian Olsavsky, 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 2023. Our comments and responses to your questions reflect management's views as of today, April 30, 2024, 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 website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services and new and emerging technologies, 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.

Andy Jassy: Thanks, Dave. Today, we're reporting $143.3 billion in revenue, up 13% year-over-year, excluding the impact from foreign exchange rates; $15.3 billion in operating income, up 221% year-over-year or $10.5 billion; and $48.8 billion in trailing 12-month free cash flow adjusted for equipment finance leases, up $53.2 billion year-over-year. We remain focused on driving better experiences for our customers while also delivering efficiency improvements. Our financial results are an encouraging reminder of the progress we're making. Starting with our stores business, despite having hundreds of millions of items and the broadest selection available, we remain intensely focused on adding even more selection. One way is to continue adding brands we know our customers want.

For instance, in the US, we recently welcomed Clinique and two Gen Z fashion favorites, Parade and Cider, and announced a collaboration with Hardly Ever Worn It in Europe to offer customers pre-owned items from luxury brands. Another way to drive selection is to make it easier for our third-party sellers to add their products to our store. We've recently launched a new generative AI tool that enables sellers to simply provide a URL to their own website, and we automatically create high-quality product detail pages on Amazon. Already, over 100,000 of our selling partners have used one or more of our GenAI tools. We remain focused on making sure we're offering everyday low prices, which we know is even more important to our customers in this uncertain economic environment.

As our results show, customers are shopping but remain cautious, trading down on price when they can and seeking out deals. In Q1, we helped customers save with shopping events worldwide, including our first big spring sale in Canada and the US. We also held spring deal days in Europe and our Ramadan event in Egypt, Saudi Arabia, and the UAE. Delivery speed really matters to customers, and we've continued to get faster while improving our safety performance. In this past Q1, we delivered to Prime members at our fastest speeds ever. In March, across our top 60 largest US metro areas, nearly 60% of Prime members orders arrived the same or next day. And globally, in cities like Toronto, London, and Tokyo, about three out of four items were delivered the same or next day.

Faster delivery times have another important effect. As we get items to customers this fast, customers choose Amazon to fulfill their shopping needs more frequently, and we can see the results in various areas, including how fast our Everyday Essentials business is growing and the continued increase in Prime member purchase frequency and total spend with us. Over the past year, we've talked about how our regionalization efforts have helped to lower our cost to serve. We've continued to inspect our fulfillment network for additional opportunities and are working on several areas where we believe we can lower costs even further while also improving customer experience. One example of this is our work to increase the consolidation of units into fewer boxes.

As we further optimize our network, we've seen an increase in the number of units delivered per box, an important driver for reducing our cost. When we're able to consolidate more units into a box, it results in fewer boxes and deliveries, a better customer experience, reduces our cost to serve, and lowers our carbon impact. Another prominent example is our efforts to revamp our US inbound fulfillment architecture to allow for better inventory placement closer to our customers. This will be an iterative process throughout the year as we work with sellers and retail partners, and teams are making good progress on their plans. Advertising performance remained strong with ad sales up 24% year-over-year, excluding the impact of foreign exchange.

The strength in advertising was primarily driven by sponsored products, supported by continued improvements in relevancy and measurement capabilities for advertisers. We still see significant opportunity ahead in our sponsored products as well as areas where we're just getting started like Prime Video ads. Prime Video ads offers brands value as we can better link the impact of streaming TV advertising to business outcomes like product sales or subscription sign-ups, whether the brands sell on Amazon or not. It's very early for streaming TV ads but we're encouraged by the early response. Moving to AWS. Year-over-year revenue growth accelerated to 17.2% in Q1, up from 13.2% in Q4. It's useful to remember that year-over-year percentages are only relevant relative to the total base from which you start.

And given our much larger infrastructure cloud computing base, at this growth rate, we see more absolute dollar growth again quarter-over-quarter in AWS than we can see elsewhere. We're seeing a few trends right now. First, companies have largely completed the lion's share of their cost optimization and turned their attention to newer initiatives. Before the pandemic, companies were marching to modernize their infrastructure, moving from on-premises infrastructure to the cloud to save money, innovated at a more rapid rate, and to drive more developer productivity. The pandemic and uncertain economy that followed distracted from that momentum, but it's picking up again. Companies are pursuing this relatively low-hanging fruit in modernizing their infrastructure.

And with the broadest functionality by a fair bit, deepest partner ecosystem and strong security and operational performance, AWS continues to be their strong partner of choice. Our AWS customers are also quite excited about leveraging gen AI to change the customer experiences and businesses. We see considerable momentum on the AI front where we've accumulated a multibillion-dollar revenue run rate already. You heard me talk about our approach before, and we continue to add capabilities at all three layers of the Gen AI stack. At the bottom layer, which is for developers and companies building models themselves, we see excitement about our offerings. We have the broadest selection of NVIDIA compute instances around, but demand for our custom silicon, training, and inference is quite high, given its favorable price performance benefits relative to available alternatives.

Larger quantities of our latest generation, Trainium 2 is coming in the second half of 2024 and early 2025. Companies are also starting to talk about the eye-opening results they're getting using SageMaker, our managed end-to-end service has been a game changer for developers in preparing their data for AI, managing experiments, training models faster, lowering inference latency, and improving developer productivity. Perplexity AI trains models 40% faster than SageMaker, Workday reduces inference latency by 80% with SageMaker, and NatWest reduces its time to value for AI from 12 to 18 months to under seven months using SageMaker. This change is how challenging it is to build your own models, and we see an increasing number of model builders standardizing on SageMaker.

The middle layer of the stack is for developers and companies who prefer not to build models from scratch, but rather seek to leverage an existing large language model, or LLM, customize it with their own data, and have the easiest and best features available to deploy secure high-quality, low-latency, cost-effective production Gen AI apps. This is why we built Amazon Bedrock, which not only has the broadest selection of LLMs available to customers but also unusually compelling model evaluation, retrieval augmented generation, or RAG, to expand model's knowledge base, guardrails to safeguard what questions applications will answer, agents to complete multistep tasks, and fine-tuning to keep teaching and refining models. Bedrock already has tens of thousands of customers, including Adidas, New York Stock Exchange, Pfizer, Ryanair, and Toyota.

In the last few months, Bedrock's added Anthropic's Claude 3 models, the best-performing models in the planet right now; Meta's Llama 3 models; Mistral's Various models, Cohere's newest models, and new first-party Amazon Titan models. A week ago, Bedrock launched a series of other features, but perhaps most importantly, Custom Model Import. Custom Model Import is a sneaky big launch as it satisfies a customer request we've heard frequently and that nobody has yet met. As increasingly more customers are using SageMaker to build their models, they're wanting to take advantage of all the Bedrock features I mentioned earlier that make it so much easier to build high-quality production-grade Gen AI apps. Bedrock Custom Model Import makes it simple to import models from SageMaker or elsewhere into Bedrock before deploying their applications.

Customers are excited about this, and as more companies find they're employing a mix of custom-built models along with leveraging existing LLMs, the prospect of these two linchpins services in SageMaker and Bedrock working well together is quite appealing. The top of the stack are the Gen AI applications being built. And today, we announced the general availability of Amazon Q, the most capable generative AI-powered assistant for software development and leveraging company's internal data. On the software development side, Q doesn't just generate code, it also tests code, debugs coding conflicts, and transforms code from one form to another. Today, developers can save months using Q to move from older versions of Java to newer, more secure and capable ones.

In the near future, Q will help developers transform their dotNET code as well, helping them move from Windows to Linux. Q also has a unique capability called Agents, which can autonomously perform a range of tasks, everything from implementing features, documenting, and refactoring code to performing software upgrades. Developers can simply ask Amazon Q to implement an application feature such as asking it to create an add to favorites feature in a social sharing app, and the agent will analyze their existing application code and generate a step-by-step implementation plan, including code changes across multiple files and suggested new functions. Developers can collaborate with the agent to review and iterate on the plan, and then the agent implements it, connecting multiple steps together and applying updates across multiple files, code blocks and test suites.

A customer entering an internet retail store, illustrating the convenience of online shopping.

It's quite handy. On the internal data side, most companies have large troves of internally relevant data that resides in wikis, Internet pages, Salesforce, storage repositories like Amazon S3 and a bevy of other data stores and SaaS apps that are hard to access. It makes answering straightforward questions about company policies, products, business results, code, people, and many other topics hard and frustrating. Q makes this much simpler. You can point Q at all of your enterprise data repositories. And it will search all this data, summarize logically, analyze trends, engage in dialogue with customers about this data. We also introduced today a powerful new capability called Q Apps, which lets employees describe a natural language what apps they want to build on top of this internal data and Q Apps will quickly generate that app.

This is going to make it so much easier for internal teams to build useful apps from their own data. Q is not only the most functionally capable AI-powered assistant for software development and data, but also setting the standard for performance. Q has the highest-known score and acceptance rate for code suggestions, outperforms all other publicly benchmarkable competitors and catching security vulnerabilities, and leads all software development assistants on connecting multiple steps together and applying automatic actions. Customers are gravitating to Q, and we already see companies like Brightcove, Bridge Telecom, Datadog, GitLab, GoDaddy, National Australia Bank, NCS, Netsmart, Slam, Smartsheet, Sun Life, Tata Consultancy Services, Toyota, and Wiz using Q, and we've only been in beta until today.

I'd also caution folks not to overlook the security and operational performance elements of these gen AI services. It's less sexy, but critically important. Most companies care deeply about the privacy of the data in their AI applications and the reliability of their training and production apps. If you've been paying attention to what's been happening in the last year or so, you can see there are big differences between providers on these dimensions. AWS has a meaningful edge, which is adding to the number of companies moving their AI focus to AWS. We expect the combination of AWS' reaccelerating growth and high demand for gen AI to meaningfully increase year-over-year capital expenditures in 2024, which given the way the AWS business model works is a positive sign of the future growth.

The more demand AWS has, the more we have to procure new data centers, power and hardware. And as a reminder, we spend most of the capital upfront. But as you've seen over the last several years, we make that up in operating margin and free cash flow down the road as demand steadies out. And we don't spend the capital without very clear signals that we can monetize it this way. We remain very bullish on AWS. We're at $100 billion-plus annualized revenue run rate, yet 85% or more of the global IT spend remains on-premises. And this is before you even calculate gen AI, most of which will be created over the next 10 to 20 years from scratch and on the cloud. There is a very large opportunity in front of us. We also continue to make strong progress on our newer investments.

Our emerging international stores are growing and moving towards profitability. Our third-party logistics business offering services like Buy with Prime, Amazon shipping and multichannel fulfillment continues to grow well. We just launched a Prime delivery grocery benefit that lets customers receive free unlimited grocery delivery for just $9.99 a month, which is great value and customers are responding accordingly. Later this year in Manhattan, we're launching a new smaller Whole Foods market concept called Whole Foods Market Daily Shop. Prime Video continues to produce compelling content with Fallout being our latest big hit on the heels of a very successful Roadhouse movie, with strong customer engagement in our original and partner content.

Our health services business is growing robustly as customers are loving our pharmacy customer experience, and we've launched same-day delivery of prescription medications to customers in eight cities, including Los Angeles and New York City, with plans to expand to more than a dozen cities by the end of the year with customers now getting first fill medications 75% faster year-over-year nationwide. And Kuiper is getting closer to having its production satellites in space and entering our commercial data. There's a lot of invention happening across our business, and I'm super grateful to all our employees for their hard work and ingenuity. I'll close by sharing that I'm enthusiastic about how we started this year. We have a lot of opportunity in front of us in every one of our businesses to make our customers' lives better and easier.

With that, I'll turn it over to Brian for a financial update.

Brian Olsavsky: Thanks, Andy. Starting with our top line financial results. Worldwide revenue was $143.3 billion, representing a 13% increase year-over-year, excluding the impact of foreign exchange and near the top end of our guidance range. I'd like to highlight a couple of points to help you interpret our growth rates. First, we saw an impact from leap year in Q1, which added approximately 120 basis points to the year-over-year quarterly revenue growth rate. Second, while I typically talk about growth rates, excluding the impact of year-over-year changes in foreign exchange, we did see an unfavorable impact from global currencies weakening against the US dollar, more than we had planned in Q1. This led to a $700 million or 50 basis point headwind to revenue relative to what we guided.

Excluding this FX headwind, we would have exceeded the top end of our guidance range. Worldwide operating income was $15.3 billion, which was our highest quarterly income ever, and it was $3.3 billion above the high end of our guidance range. This was driven by strong operational performance across all three reportable segments and better-than-expected operating leverage, including lower cost to serve. The impact on operating income from our Q1 FX rate headwind was negligible. I'll speak more to our profitability trends in a moment. In the North America segment, first quarter revenue was $86.3 billion, an increase of 12% year-over-year. In the international segment, revenue was $31.9 billion, an increase of 11% year-over-year, excluding the impact of foreign exchange.

We remain focused on the inputs that matter most to our customers: selection, price, and convenience. During the quarter, around the world, we help customers save with our shopping events. We added selection, including premium and luxury brands, and we delivered our fastest speeds ever for Prime members. Third-party sellers continue to be an important part of our offering. Third-party seller services revenue increased 16% year-over-year, excluding the impact of foreign exchange. We saw strong 3P unit growth, coupled with increased adoption of our optional services, such as fulfillment and global logistics. For the quarter, third-party seller unit mix was 61%, up 200 basis points year-over-year. Shifting to profitability, North America segment operating income was $5 billion, an increase of $4.1 billion year-over-year.

Operating margin was 5.8%, up 460 basis points year-over-year. We saw improvements in our cost to serve, including continued benefit from our work to regionalize our operations, savings from more consolidated customer shipments, and improved leverage driven by strong unit growth and lower transportation rates. In our international segment, operating income was $903 million, an improvement of $2.2 billion year-over-year. Operating margin was 2.8%, up 710 basis points year-over-year. This is primarily driven by our established countries as we improve cost efficiencies through network design enhancements and improved volume leverage. Additionally, we saw good progress in our emerging countries as they expand their customer offerings and make strides on their respective journeys to profitability.

Looking ahead, we see several opportunities to further lower cost to serve and improved profitability in our worldwide stores business while still investing to improve the customer experience. Within our fulfillment network, we are focused on investing in our inbound network, streamlining and standardizing process paths, and adding robotics and automation. These improvement opportunities will take time. However, we have a solid plan in place and we like the path we're on. Advertising remains an important contributor to profitability in North America and international segments. We see many opportunities to grow our offerings, both in the areas that are driving growth today like sponsored products and in areas that are newer, like streaming TV ads.

Moving to AWS. Revenue was $25 billion, an increase of 17% year-over-year, and AWS is now a $100 billion annualized revenue run rate business. Excluding the impact from leap year, AWS revenue increased approximately 16% year-over-year. During the first quarter, we saw growth in both generative AI and non-generative AI workloads across a diverse group of customers and across industries as companies are shifting their focus towards driving innovation and bringing new workloads to the cloud. Additionally, we continue to see the impact of cost optimizations diminish. While there always be a level of ongoing optimization, we think the majority of the recent cycle is behind us, and we're likely closer to a steady state of these optimization efforts.

AWS operating income was $9.4 billion, an increase of $4.3 billion year-over-year. As a reminder, these results include the impact from the change in the estimated useful life of our servers, which primarily benefits the AWS segment. We made progress in managing our infrastructure and fixed costs while still growing at a healthy rate, which has resulted in improved leverage. As we've said in the past, over time, we expect the AWS operating margins to fluctuate, driven in part by the level of investments we are making in the business. We remain focused on driving efficiencies across the business, which enables us to invest to support the strong growth we're seeing in AWS, including generative AI, which brings us to capital investments. As a reminder, we define these as the combination of CapEx plus equipment finance leases.

In 2023, overall capital investments were $48.4 billion. As I mentioned, we're seeing strong AWS demand in both generative AI and our non-generative AI workloads, with customers signing up for longer deals, making bigger commitments. Still relatively early days in generative AI and more broadly, the cloud space, and we see sizable opportunity for growth. We anticipate our overall capital expenditures to meaningfully increase year-over-year in 2024, primarily driven by higher infrastructure CapEx to support growth in AWS, including generative AI. Turning to our revenue guidance for Q2. Net sales are expected to be between $144 billion and $149 billion or to grow between 7% and 11%, compared with the second quarter of 2023. We saw an unfavorable impact from year-over-year changes in foreign exchange in our Q1 results, and we expect that headwind to grow in the second quarter.

Our Q2 net sales guidance anticipates an unfavorable foreign exchange impact of approximately 60 basis points. As part of our guidance considerations, we also continue to keep an eye on consumer spending and macro level trends, specifically in Europe, where it appears to be a bit weaker relative to the US. Operating income is expected to be between $10 billion and $14 billion in Q2. This estimate includes the impact of our seasonal step-up in stock-based compensation expense, driven by the timing of our annual compensation cycle. I want to thank our customers, our partners, and our teammates around the world for a very strong start to the year, and we're excited to build on this momentum. We'll remain focused on streamlining and prioritizing projects in a way that allows us to continue inventing for customers in a cost-effective way.

With that, let's move on to your questions.

See also

20 Biggest Natural Gas Companies in Australia, 2024 and

13 Most Popular Retail Investor Stocks in 2024.

To continue reading the Q&A session, please click here.