Amazon Earnings Review
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Amazon Earnings Review
Dissecting the results of this cloud & logistics titan.
Today’s Article is Powered by my Favorite Brians Over at Long Term Mindset:
1. Demand
Beat revenue estimates by 1.1% & beat guidance by 1.9%. Its 14.2% 3-year revenue compounded annual growth rate (CAGR) compares to 14.8% Q/Q & 19.1% 2 quarters ago.
Roughly met AWS revenue estimates.
2. Margins
Beat EBIT estimates by 45% & beat EBIT guidance by 60%. EBIT grew by over 300% Y/Y. That rate of growth will not continue, but is still impressive and shows how much cost optimizing there is to do within Amazon.
Beat $0.58 GAAP EPS estimate by $0.36. $0.94 in EPS represents 235% Y/Y growth. Same EBIT growth note above applies here.
Rivian mark to market equity gains make GAAP net income very noisy for Amazon. Its stock price directly impacts Amazon’s net income. Free cash flow and EBIT are my preferred metrics here for this reason.
3. Guidance
Next quarter revenue guidance missed estimates by 2.0%. Conversely, next quarter EBIT guidance beat estimates by 6.5%.
It continues to expect $50 billion in 2023 capital expenditures (CapEx) vs. $59 billion last year.
4. Balance Sheet
$79B in cash & equivalents.
Inventory down slightly Y/Y.
$67B in debt.
Share count rose 2.2% Y/Y. I want this to slow as it’s expected to.
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5. Call & Presser Highlights
Fulfillment Localization:
As I’ve discussed in detail, Amazon is conducting a series of operational tweaks to make its fulfillment business more efficient. A key piece of this is converting its national fulfillment network into 8 regional centers to cut miles to fulfill. Per the team, the benefits of this change are “exceeding optimistic expectations.” Specifically, Amazon’s local in-stock inventory rate has surpassed what it initially expected. That means shorter delivery times and lower cost to serve. It’s ideal to see cost cutting coincide with better customer service. That’s what is happening here.
The regional overhaul’s impact has yet to be fully felt. Amazon sees more efficiency to be gained as it perfects inventory algorithms, invests in robotics, more effectively utilizes line hauls and further consolidates shipments. This candidly got me excited. North American (N.A.) EBIT margin is already nearing 5%. Just 2 quarters ago, Jassy had to try to convince analysts that N.A. EBIT margin could eventually reach 4%. Now? 5% seems like a positive step rather than a final destination. I love operating leverage.
“We have many more ideas to lower costs and raise speed.” — CEO Andy Jassy
Optimizing Capacity Usage:
Another key piece of marketplace leverage is embracing 3rd party merchants. One of the ways to do this is through Buy with Prime (white label fulfillment). Amazon routinely has excess capacity. By allowing 3rd party merchants to tap into this capacity, Amazon extracts more value from existing costs. To create a fully end to end supply chain service for merchants, it launched Supply Chain by Amazon (SCA). SCA extends its logistics help all the way to origin manufacturers. That reality makes Amazon an all encompassing partner for pushing goods from creation to end user… without the headache… and with lower costs.
On Amazon’s own marketplace, it continues to enjoy stable 18% Y/Y growth in 3rd party sellers. This revenue is higher margin vs. 1st party sales and represents yet another margin tailwind.
Same Day Delivery:
It’s no secret that shorter delivery windows raise conversion rates for shoppers. Amazon, however, enjoys another clear perk. As it increases the proportion of goods fulfilled within 24 hours, it has become a go-to for consumables and daily essentials. If I need a toothbrush right now, I’ll likely go to CVS. Amazon is working to a point where that CVS trip can be replaced with rapid e-commerce fulfillment.
AWS:
Per CEO Andy Jassy, AWS growth has “continued to stabilize.” This is wonderful news and keeps the 13.8% Y/Y Q4 AWS growth estimate on the table. He spooked investors in a CNBC interview right before the call when he wouldn’t commit to workload optimization being in the rearview. His commentary on the call, conversely, was miles upon miles more upbeat.
Elevated optimization trends continued to “attenuate” throughout the quarter and into Q4. He believes “most optimization happened in 2023” as most of the “low hanging fruit” has been devoured.
Now? He’s seeing companies turn attention to new workload growth with AWS. Not only that, but the pace of new client deal closings is normalizing. For months, deals were delayed and elongated due to economic fears. Migrations to the cloud were put on hold as companies were in survival mode amid chaotic times. Times are still chaotic, but the survivors are re-engaging in cloud spending anyway. You can’t just optimize forever.
That positive change culminated in Amazon signing more deals in September for Q4 vs. all of Q3. Great to hear. Jassy sees the backlog of migrations (via the delays to deal closures) as propping up AWS growth through 2025. This is not a one quarter event.
“We’re encouraged by the pace of deals over the last few weeks. We like the recent momentum.” — CEO Andy Jassy
Notably, not all optimization means cutting workloads. A lot of it is shifting to longer term subscriptions and utilizing Amazon’s chipsets. The former benefits visibility of revenue over time while the latter creates a new opportunity to bolster client revenue and retention.
AWS released Entity Resolution to enhance the quality of data querying and insight building across multiple disparate data lakes.
New QuickSight upgrade to use natural language for data analysts to “ask why questions."
Generative AI:
Jassy again went through the three key layers of Amazon’s GenAI initiatives. I’ve covered them a few times, so will summarize here. Layer one encompasses algorithm training and inference. This is where Amazon’s chipsets come into play. Graviton is one of these chipsets which Amazon believes performs 40% more effectively than direct competition from AMD and Intel. It will use this as a complement to Nvidia’s H100 chips while selling Graviton to customers such as Anthropic. Perpexity.AI is another popular GenAI model builder that will exclusively use Amazon’s chipsets.
Model creation as a service is another layer where Amazon’s foundational model (called Bedrock) is key. Bedrock allows developers to build custom use cases on top of it while offering a plethora of 3rd party models such as Meta’s Llama 2. Per Jassy, GenAI is in a rapid experimentation phase at the moment. Considering how new this field is, developers are actively toying with different models to see which work the best for what they need. Bedrock’s large partner integration roster allows these developers to freely move between model templates in a safe, secure, fully-managed cloud environment.
The final layer is the consumer app component. Amazon’s CodeWhisperer (automated source code creation) is its first release within this Generative AI niche. CodeWhisperer just debuted an upgrade allowing clients to customize workflows with their own data and code. This will lead to more relevant use cases on a per client basis. Adidas, BMW, Travelers, Booking.com, United Airlines and Merck are among the early users of Amazon CodeWhisperer and its other GenAI apps.
Amazon is not directly monetizing these products. Still, it is enjoying significant up-sell opportunities from them which is already materially bolstering revenue. And eventually, GenAI will touch everything Amazon does. It will lead to:
Better product discovery.
Aggregated and summarized product reviews.
Automated ad campaign creation.
Better inventory forecasting and routing
Etc.
New and updated GenAI products from Amazon this quarter include:
A new GenAI assistant in India helps merchants more efficiently scale.
A new GenAI tool to automate sponsored product listings.
Beta testing a new large language model (LLM) for Alexa to make it more naturally conversational for clients like BMW.
Ads:
As reported, Amazon will infuse ads into Prime Video next year. It continues to outperform industry benchmarks in terms of return on ad spend for clients. That, paired with it being early on in boosting ad load, is a promising recipe. Ad revenue growth accelerated to 26% Y/Y vs. 22% Y/Y growth last quarter and 21% Y/Y growth the quarter before that.
Sponsored listings are a big piece of its ad business. Interestingly, those listings aren’t solely within Amazon’s marketplace. It added Pinterest and Buzzfeed this quarter as external partners to further boost ad impressions.
Macro:
Amazon didn’t comment on macro forecasts. It did tell us that consumers continue to trade down and more aggressively seek out deals. Consumer discretionary spend remained somewhat challenged by this, which contradicts what Visa told us this week.
Margins:
Amazon is rapidly approaching EBIT positive outside of North America. Its North American marketplace took 9 years to become profitable while international is on a similar path. It’s already profitable in core markets like Germany and Japan, but launched in 10 new markets since 2018. These will take time to scale to profitability. Regardless, the pace of EBIT leverage here (especially this quarter) is much better than I expected. International EBIT margin was -0.3% vs. -9% Y/Y.
As an important note, AWS EBIT margin was helped by headcount reductions.
Other Products & Projects:
Within Healthcare, Amazon Clinic expanded across the U.S. It offers care for 35 conditions and 60 minute delivery of meds as part of a new drone experiment in Texas. Amazon also inked a new partnership with Blue Cross Blue Shield to offer home deliveries to its nearly 5 million members. That will start in 2025.
Amazon successfully launched 2 satellites into space under Project Kuiper for broadband internet. It also partnered with Vodafone as part of this project to extend its 4G and 5G networks to more pieces of the globe.
6. Take
I’m very pleased. Everything I’ve been talking about in terms of profit upside came to fruition this quarter. Things were actually a bit better than even I expected. The small miss on next quarter revenue is far outweighed by the quarterly highlights and the forward EBIT guidance.
It was fantastic to hear upbeat forward commentary from AWS. It was arguably even more encouraging to hear how a 4.9% North American EBIT margin is not even close to Amazon’s ceiling. This quarter confirms yet again that profit growth will be explosive in the years to come. The headwinds holding back its two secular growth stories (cloud and e-commerce) also seem to be showing signs of abating. The stars are aligning. Great quarter.