Amazon Q422 conference call notes
Nuggets of intelligence and personal notes gathered during amazon conference call
Background: I have been in and out of Amazon in the past 23 years, but before April 2015, when Amazon reported AWS was profitable, with sales of $1.57 billion in the first quarter of the year and $265 million of operating income, I would sometime sell it after the stock would have performed well. After AWS “coming out”, AMZN became a long term position in the never sell bucket.
Disclosure: Amazon is currently my largest holding and is currently very attractive at the current price since it came down significantly in 2022. I will provide regular update on this holding.
Disclaimer: The article constitutes the authors’ personal views and is for entertainment purposes only. Please refer to the disclaimer at the end of this article for more details.
Foreign exchange headwind
Foreign exchange had a 360 BP headwind but it subsided a bit from 460 BP in Q3.
Brian Olsavsky: 360 basis points of unfavorable impact from changes in foreign exchange rates.
Brian Olsavsky in Q3-2022: 460 basis points of unfavorable impact from changes in foreign exchange rates
Customers are cautious
Brian Olsavsky: customers remain cautious about their spending behavior. We saw them spend less on discretionary categories and shift to lower-priced items and value brands in categories like electronics. We also saw them continue to spend on everyday essentials, such as consumables, beauty and softlines.
3P keeps growing
Brian Olsavsky: Third-party sellers remain a key contributor to that expanding selection. In Q4, sellers comprised a record 59% of overall unit sales.
in Q3-2022 3P was 58% and 56% in Q3-2021:
Brian Olsavsky - Q3-2022: Third-party sellers and the products they offer remain an important strength of our offering for consumers, representing 58% of total paid units sold in Q3, the highest percentage ever. It's up from 56% in Q3 of last year.
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Ads is growing fast (23%) although rate increase has decreased sequentially.
Brian Olsavsky: We saw good growth in advertising revenues in Q4, up 23% year-over-year, excluding the impact of foreign exchange.
Brian Olsavsky - Q3-2022: We also saw good growth in our advertising offerings where sales grew 30% year-over-year, excluding the impact of foreign exchange
Amazon’s Originals cost - ouch!
Brian Olsavsky: In aggregate, we invested approximately $7 billion in 2022 across Amazon Originals, live sports and licensed third-party video content included with Prime. That's up from about $5 billion in 2021. As a reminder, these digital video content costs are included in cost of sales on our income statement. We regularly evaluate the return on the spend and continue to be encouraged by what we see, as video has proven to be a strong driver of Prime member engagement and new Prime member acquisition.
AWS cost optimization headwind
Brian Olsavsky: Moving on to AWS. Net sales increased $21.4 billion in Q4, up 20% year-over-year and now representing an annualized sales run rate of more than $85 billion. Starting back in the middle of the third quarter of 2022, we saw our year-over-year growth rates slow as enterprises of all sizes evaluated ways to optimize their cloud spending in response to the tough macroeconomic conditions. As expected, these optimization efforts continued into the fourth quarter.
and this should continue in Q1-Q2 with mid-teens in January
Brian Olsavsky: As we look ahead, we expect these optimization efforts will continue to be a headwind to AWS growth in at least the next couple of quarters. So far in the first month of the year, AWS year-over-year revenue growth is in the mid-teens. That said, stepping back, our new customer pipeline remains healthy and robust, and there are many customers continuing to put plans in place to migrate to the cloud and commit to AWS over the long term.
what we're seeing at the customer level. So as I've mentioned, continuing -- it's across all industries. There are some points of weakness, things like financial services, like mortgage companies that do.
As mortgage volumes down, some of their compute challenges or compute volumes are down. Crypto is -- lower trading in crypto. And things tied to advertising, as there's lower advertising spend, there's less analytics and compute on advertising spend as well.
Brian Olsavsky: ..But -- so there's [ select of things ]. But by and large, what we're seeing is just an interest and a priority by our customers to get their spend down as they enter an economic downturn. We're doing the same thing at Amazon, questioning our infrastructure expenses as well as everything else. And we -- there's things you can do. You can defer -- you can switch to lower-cost products.
Andy Jassy: And we're the only ones that really break out our cloud numbers in a more specific way. So it's always a little bit hard to answer your question about what we see. But we, to our best estimations, when we look at the absolute dollar growth year-over-year, we still have significantly more absolute dollar growth than anybody else we see in this space. And I think some of that's a function of the fact that we just have a lot more capability by a large amount, with stronger security and operational performance and a larger partner ecosystem.
So I think it's also useful to remember that 90% to 95% of the global IT spend remains on-premises. And if you believe that, that equation is going to shift and flip, I don't think on-premises will ever go away, but I really do believe in the next 10 to 15 years that most of it will be in the cloud if we continue to have the best customer experience, which we have to work really hard at an event which we're working to do. It means we have a lot of growth in front of us in the AWS business.
Streamlining NA cost structure
Brian Olsavsky: The operating income was negatively impacted by 3 large items, which added approximately $2.7 billion of costs in the quarter. This was related to employee severance, impairments of property and equipment and operating leases and changes in estimates related to self-insurance liabilities. This cost primarily impacted our North America segment.
Circling back to the 3 large charges during the quarter. Let me share some additional color, starting with the job eliminations we initiated during the fourth quarter. As we consider the ongoing uncertainties of the macroeconomic environment, this led us to the difficult decision to eliminate just over 18,000 roles, primarily impacting our stores and device businesses as well as our human resources teams. As a result, we recorded estimated severance cost of $640 million. These charges were recorded primarily in technology and content, fulfillment and general administration on our income statement.
Next, we recorded impairments of property and equipment and operating leases, primarily related to our Amazon Fresh and Amazon Go physical stores. We're continuously refining our store formats to find the ones that will resonate with customers, will build our grocery brand and will allow us to scale meaningfully over time. As such, we periodically access our portfolio of stores and decided to exit certain stores with low growth potential. We'll also take an impairment on capitalized costs and associated values of our leased buildings. The impairment charge in Q4 was $720 million and is included in other operating expense on our income statement.
we increased our reserves for general product and automobile self-insurance liabilities, driven by changes in our estimates about the cost of asserted and unasserted claims, resulting in additional expense of $1.3 billion. This impact is primarily recorded in cost of sales on our income statement.
On NA retails margin - #1 priority
Q1…staying on the North America retail side, how do you think about the potential margin potential of that business over the next few years as you sort of grow into the warehouse?
Brian Olsavsky: We made good headway in 2022. We always want to make more, and we're going to be working on this definitely through 2023 and beyond. But we have to make and expect to make big improvements in 2023.
Andrew Jassy: ..North American stores questions, I think our -- probably the #1 priority that I spent time with the team on is reducing our cost to serve in our operations network. And as Brian touched on, it's important to remember that over the last few years, we've -- we took a fulfillment center footprint that we've built over 25 years and doubled it in just a couple of years. And then we, at the same time, built out a transportation network for last mile roughly the size of UPS in a couple of years. And so when you do both of those things to meet the huge surge in demand, you're going to -- just to get those functional, it took everything we had. And so there's a lot to figure out how to optimize and how to make more efficient and more productive.
the same time, if you think about doubling the number of fulfillment centers you have and then adding a very large transportation network and you realize that all of those facilities have to link together to get products to customers, that's a pretty big expansion in the number of nodes in the network. It becomes a little bit different network. And so to figure out how to be really efficient across all those links and have them be highly utilized and to get the flows in those facilities working the right way, it takes time. So we're working very hard on it. I'm pleased with the progress we made in Q4, and you can see that in some of the results.
But that work will extend into '23. So that's first.
Author’s interpretation: We should get some major margin inprovement in 2023 from NA retail. #1 priority for both CFO (he is on the hook) and Jassy.
The other priority was on speed… But lets focus on cost Andrew..
International e-commerce
GS question: …I’d love to get your view on the international e-commerce businesses. Obviously, you're in a range of geographies with a wide variance of maturity and different investment cycles. Can you give us your perspective on how you see Amazon's global e-commerce footprint today? And how investors should be thinking about the mix of growth and margin evolution in those international businesses in the years ahead?
Andrew Jassy:.. And on the question about international e-commerce, we're very enthusiastic about the business we're building there. I think just perspective, if you look at the compounded annual growth rate from 2019 to '21, in the U.K., it was over 30%; in Germany, it was 26%; in Japan, it was 21%. And the fact that we haven't given back that growth, and these are all net of FX, but if you look at even the last couple of quarters where we're continuing to grow and we haven't given back some of that growth, a meaningful amount of market segment share has shifted to our global established e-commerce territories, and we're excited about that.
and then you look at our emerging countries, and these are -- they're all a little bit different in all -- in a little bit different stage as you recognize in the question. But if you look at countries like India and Brazil and the Middle East and Africa and Turkey, Mexico and Australia and a number of those types of countries, we like what we're seeing. They take a certain amount of time. There's a certain amount of fixed investment you have to make when you enter a new geography, and then you have to drive a certain amount of revenue to be able to cover that fixed investment. But they're all on the right trajectory and following trajectories that roughly look like what we saw in North America and our established international geographies, and we think it's the right investment and believe we're going to have a large profitable international e-commerce business.
Amazon is not planning to cut cost there.. still in expansion mode.
Conclusion
AWS will grow at around 15% in 2023
Big improvement on NA retail margin in 2023
Not much improvement from international e-commerce margin - growth phase
Most of the write-off from 18 000 employees layoff were taken in Q4
Originals spending in 2022 was $7 Billion - from $5 Billion in 2021 - not sure if content cost will keep raising …
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Disclaimer: The above article constitutes the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. The information provided in this article is not making promises, or guarantees regarding the accuracy of information supplied, nor that you guarantee for the completeness of the information here. The information in this article is opinion-based and that these opinions do not reflect the ideas, ideologies, or points of view of any organization the authors may be potentially affiliated with. The authors reserve the right to change the content of this blog or the above article. The performance represented is historical" and that "past performance is not a reliable indicator of future results and investors may not recover the full amount invested
Disclaimer: The above article constitutes my or the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. I / The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. The information provided in this article is not making promises, or guarantees regarding the accuracy of information supplied, nor that you guarantee for the completeness of the information here. The information in this article is opinion-based and that these opinions do not reflect the ideas, ideologies, or points of view of any organization the authors may be potentially affiliated with. The authors reserve the right to change the content of this blog or the above article. The performance represented is historical" and that "past performance is not a reliable indicator of future results and investors may not recover the full amount invested.