Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Second Quarter 2024 Financial Results Conference. 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. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead.

Andy Jassy :

Thanks, Dave. Today, we're reporting $148 billion in revenue, up 11% year-over-year, excluding the impact from foreign exchange rates. Operating income was $14.7 billion, up 91% year-over-year, and trailing 12-month free cash flow adjusted for equipment finance leases was $51.4 billion, up 664% or $44.7 billion year-over-year. As I think about what matters to customers long-term and, therefore, to Amazon, there's a lot to like about what we're seeing. Starting with AWS, year-over-year revenue growth accelerated again from 17.2% in Q1 to 18.8% in Q2. We're continuing to see three macro trends drive AWS growth. First, companies have completed the significant majority of their cost optimization efforts and are focused again on new efforts. Second, companies are spending their energy again on modernizing their infrastructure and moving from on-premises infrastructure to the cloud. This modernization enables builders to save money, innovate at a more rapid clip, and drive productivity in most companies' scarcest resources, developers. This is the flip I've talked about in the past, where the vast majority of global IT spend today is on-premises, and we expect that to keep inverting over time. With the broadest functionality, the strongest security and operational performance, and the deepest partner ecosystem, AWS continues to be customers' partner of choice and the biggest beneficiary of this flip from on-premises to the cloud. And third, builders and companies of all sizes are excited about leveraging AI. Our AI business continues to grow dramatically with a multi-billion dollar revenue run rate despite it being such early days, but we can see in our results and conversations with customers that our unique approach and offerings are resonating with customers. At the heart of this strategy is a firmly held belief, which we've had since the beginning of AWS, that there is not one tool to rule the world. People don't want just one database option or one analytics choice or one container type. Developers and companies not only reject it, but are suspicious of it. They want multiple options for flexibility and to use the best tool for each job to be done. The same is true in AI. You saw this several years ago when some companies tried to argue that TensorFlow would be the only machine learning framework that mattered, and then PyTorch and others overtook it. The same one model or one-chip approach dominated the earliest moments of the generative AI boom, but we have a lot of data to suggest this is not what customers want here either. And our AWS team is determined to deliver choice and options for customers. You can see this philosophy in the primitive building blocks we're building at all three layers of the Gen AI stack. At the bottom layer, which is for those building generative AI models themselves, the cost to compute for training and inference is critical, especially as models get to scale. We have a deep partnership with NVIDIA and the broadest selection of NVIDIA instances available, but we've heard loud and clear from customers that they relish better price performance. It's why we've invested in our own custom silicon in Trainium for training and Inferentia for inference. And the second versions of those chips, with Trainium coming later this year, are very compelling in price performance. We're seeing significant demand for these chips. These model builders also desire services that make it much easier to manage the data, construct the models, experiment, deploy to production, and achieve high-quality performance, all while saving considerable time and money. That's what Amazon SageMaker does so well, including its most recently launched feature called HyperPods that changes the game and networking performance for large models. And we're increasingly seeing model builders standardized on SageMaker. While many teams will build their own models, lots of others will leverage somebody else's frontier model, customize it with their own data and seek a service that provides broad model selection and great generative AI capabilities. This is what we think of as the middle layer, what Amazon Bedrock does and why Bedrock has tens of thousands of companies using it already. Bedrock has the largest selection of models, the best generative AI capabilities in critical areas like model evaluation, guardrails, RAG and agenting, and then makes it easy to switch between different model types and model sizes. Bedrock has recently added Anthropic's Claude 3.5 models, which are the best performing models on the planet. Meta's new Llama 3.1 models and Mistral's new Large two models. And Lama's and Mistral's impressive performance benchmarks in open nature are quite compelling to our customers as well. At the application or top layer, we're continuing to see strong adoption of Amazon Q, the most capable generative AI powered assistant for software development and to leverage your own data. Q has the highest known score and acceptance rate for code suggestions, but it does a lot more than provide code suggestions. It tests code, outperforms all other publicly benchmarkable competitors on catching security vulnerabilities and leads all software development assistants on connecting multiple steps together and applying automatic action. It also saves development teams time and money on the muck nobody likes to talk about. For instance, when companies decide to upgrade from one version of a framework to another, it takes development teams many months, sometimes years, burning valuable opportunity costs and churning developers who hate this tedious, though important work. With Q's code transformation capabilities, Amazon has migrated over 30,000 Java JDK applications in a few months, saving the company $260 million and 4,500 developer years compared to what it would have otherwise cost. That's a game changer. And think about how this Q transformation capability might evolve to address other elusive but highly desired migrations. During the past 18 months, AWS has launched more than twice as many machine learning and generative AI features into general availability than all the other major cloud providers combined. This team is cooking, but we're not close to being done adding capabilities for our customer's usage base. For perspective, we've added over $2 billion in advertising revenue year-over-year and generated more than $50 billion in revenue in the trailing 12 months. Sponsored ads drive the majority of our advertising revenue today and we see further opportunity there. Even with this growth, it's important to realize we're at the very beginning of what's possible in our video advertising. In May, we made our first appearance at the upfronts and were encouraged by the agency and advertiser feedback on the differentiated value we offer across our content, reach, signals, and ad tech. With ads and prime video, the exciting opportunity for brands is the ability to directly connect advertising that's traditionally been focused on driving awareness, as is the case for TV, to a business outcome, like product sales or subscription signups. We're able to do that through our measurement and ad tech, so brands can continually improve the relevance and performance of their ads. While ads have become the norm in streaming video, we aim to have meaningfully fewer ads than linear TV and other streaming TV providers. And of course, for customers preferring an ad-free experience, we offer that option for an additional $2.99 a month. In our stores business, we saw growth of 9% year-over-year in the North America segment and 10% year-over-year in the international segment. A few notes on our North America revenue growth rate. First, last quarter's leap day added about 100 basis points of year-over-year growth. Second, we're seeing lower average selling prices, or ASPs, right now because customers continue to trade down on price when they can. More discretionary higher ticket items, like computers or electronics or TVs, are growing faster for us than what we see elsewhere in the industry, but more slowly than we see in a more robust economy. And our continued faster delivery speed is earning us more of our customers' everyday essentials business. Third, our seller fees are a little lower than expected given the behavior changes we've seen from our latest fee changes. While some of these issues compress short-term revenue, we generally like these trends. While consumers are being careful on price, our North America unit growth is meaningfully outpacing our sales growth as our continued work on selection, low prices, and delivery is resonating. So far this year, our speed of delivery for prime customers has been faster than ever before, with more than 5 billion units arriving the same day or next day. As more customers experience our fast delivery, they look to Amazon for more of their shopping needs, and the continued acceleration of our everyday essentials business is an example of this phenomenon. On seller fees, lowering apparel fees has spurred substantial year-over-year unit growth in apparel. And the incentive we've given sellers to send their items to multiple Amazon inbound facilities so they can save money where they save us effort and money is getting more traction than we even hoped. These collective developments will benefit customers in the form of better selection, lower prices, and faster delivery speed. There's no shortage of ideas aimed in improving the experience for stores' customers. For instance, we're adding even more value to Prime, recently introducing free restaurant delivery in many of our geos, expanding Amazon's PharmacyRx pass to Medicare members. This is a benefit that gives subscribers all you can consume access to the most common generic medications for just $5 a month, and offering a grocery subscription to help save on grocery items when shopping our U.S. and UK fresh stores. As we pursue these initiatives, we remain focused on lowering our cost to serve. We have a number of opportunities to further reduce costs, including expanding our use of automation and robotics, further building out our same-day facility network, and regionalizing our inbound network. With more optimal inbound inventory placement, we expect to enable faster speeds, consolidate more orders in one box, and reduce inventory transfers once items reach a fulfillment center. These cost improvements won't happen in one quarter or one fell swoop. They take technology and process innovation with a lot of outstanding execution, but we see a path to continuing to lower our cost to serve, which as we've discussed in the past, has very meaningful value for customers in our business. As we lower our cost to serve, we can add more low ASP selection that we can support economically, which coupled with our fast delivery, puts Amazon in the consideration set for increasingly more shopping needs for customers. A few other comments about areas in which we're investing. We remain very bullish on the medium to long-term impact of AI in every business we know and can imagine. The progress may not be one straight line for companies. Generative AI especially is quite iterative, and companies have to build muscle around the best way to solve actual customer problems. But we see so much potential to change customer experiences. We see it in how our generative AI-powered shopping assistant Rufus is helping customers make better shopping decisions. We see it in how our AI features that allow customers to simulate trying apparel items or changing the buying experience. We see it in how our generative AI listing tool is enabling sellers to create new selection with a line or two of text versus the many forms previously required. We see it in our fulfillment centers across North America where we're rolling out Project Private Investigator, which uses a combination of generative AI and computer vision to uncover defects before products reach customers. We see it in how our generative AI is helping our customers discover new music and video. We see it in how it's making Alexa smarter. And we see it in how our custom silicon and services like SageMaker and Bedrock are helping both our internal teams and many thousands of external companies reinvent their customer experiences and businesses. We are investing a lot across the board in AI, and we'll keep doing so as we like what we're seeing and what we see ahead of us. We also continue to like the progress in Prime Video. Our storytelling is resonating with our hundreds of millions of monthly viewers worldwide, and the 62 Emmy nominations Amazon MGM Studios recently received is another supporting data point. We recently debuted titles like Fallout, the second most watched original title ever for Prime Video, The Idea of You, which attracted nearly 50 million viewers worldwide in the first two weeks on Prime Video, and Season 4, The Boys, which reached number one on Prime Video in 165 countries in its opening two weeks. And we continue to see momentum in live sports. We recently announced 11-year landmark deals with the NBA and the WNBA. When combined with our original films and shows, partner streaming services, licensed content, and rent or buy titles, Prime Video continues to evolve into the best destination for streaming video. And for Project Kuiper, our low-Earth orbit satellite constellation, we're accelerating satellite manufacturing at our facility in Kirkland, Washington. We've announced a distribution agreement with Vrio, who distributes direct TV Latin America and Sky Brazil to offer Project Kuiper's satellite broadband network to residential customers across seven countries in South America, and we continue to feel significant demand for the service from enterprise and government entities. We expect to start shipping production satellites late this year and continue to believe this could be a very large business for us. I could go on, but we'll stop here. There's a lot to feel optimistic about over the next several years and the team collectively remains focused on continuing to invent and deliver for our customers in the business. With that, I'll turn it over to Brian for a financial update.

Operator:

At this time, we will now open the call up for questions. [Operator Instructions] And our first question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question.

Andy Jassy :

Thanks, Eric. I'll take them in order. I think on the question about investment in AWS and on the AI side, I think where I'd start is, I think one of the least understood parts about AWS over the last 18 years has been what a massive logistics challenge it is to run that business. If you think about the fact that we have about 35 regions and think of a region as multiple -- a cluster of multiple data centers and about 110 availability zones, which is roughly equivalent to a data center, sometimes it includes multiple. And then if you think about having to land thousands and thousands of SKUs across the 200 AWS services in each of those availability zones at the right quantities, it's quite difficult. And if you end up actually with too little capacity, then you have service disruptions, which really nobody does because it means companies can't scale their applications. So most companies deliver more capacity than they need. However, if you actually deliver too much capacity, the economics are pretty woeful and you don't like the returns of the operating income. And I think you can tell from having -- we disclosed both our revenue and our operating income in AWS that we've learned over time to manage this reasonably well. And we have built models over a long period of time that are algorithmic and sophisticated that land the right amount of capacity. And we've done the same thing on the AI side. Now AI is newer. And it's true that people take down clumps of capacity in AI that are different sometimes. I mean -- but it's also true that it's not like a company shows up to do a training cluster asking for a few hundred thousand chips the same day? Like you have a very significant advance signal when you have customers that want to take down a lot of capacity. So while the models are more fluent, it's also true that we've built, I think, a lot of muscle and skill over time in building these capacity signals and models. And we also are getting a lot of signal from customers on what they need. I think that it's -- the reality right now is that while we're investing a significant amount in the AI space and in infrastructure, we would like to have more capacity than we already have today. I mean we have a lot of demand right now. And I think it's going to be a very, very large business for us. On the custom silicon point, yeah, it's really interesting what's happened here. And it's also -- our strategy and approach here has been informed by running AWS for 18 years. When we started AWS, we had and still have a very deep partnership with Intel on the generalized CPU space. But what we found from customers is that they -- when you find a -- an offering that is really high value for you and high return, you don't actually spend less, even though you're spending less per unit, you spend less per unit, but it enables you and free you up to do so much more inventing and building for your customers. And then when you're spending more, you actually want better price performance than what you're getting. And a lot of times, it's hard to get that price performance from existing players unless you decide to optimize yourself for what you're learning from your customers and you push that envelope yourself. And so we built custom silicon in the generalized CPU space with Graviton, which we're on our fourth model right now. And that has been very successful for customers and for our AWS business is it saves customers about -- up to about 30% to 40% price performance versus the other leading x86 processors that they could use. And we saw the same trend happening about five years ago in the accelerator space in the GPU space, where the products are good, but there was really primarily one provider and supply was more scarce than what people wanted. And people -- our customers really want improved price performance all the time. And so that's why we went about building Trainium, which is our training chip and Inferentia, which is our inference chip, which we're on second versions of both of those, they will have very compelling relative price performance and in a world where it's hard to get GPUs today, the supply is scarce and all the schedules continue to move over time. Customers are quite excited and demanding at a high clip. Our custom silicon, and we're producing it as fast as we can. I think that's going to have very good return profile just like Graviton has and I think it will be another differentiating feature around AWS relative to others.

Brian Nowak :

Thanks for the questions. I have two. So the first one I wanted to ask about in the second quarter, the retail gross margins that we're trying to do the monkey math, look a little weaker than expected. Was there any extra pressure on retail gross margins because of discounting? Or is that where Kuiper is? Or sort of how do we think about some of the drivers of retail gross margins in the quarter at shipping? And the second one, Andy, in the past, you talked about cost to serve improvement and sort of getting the North America margins back to pre-pandemic levels. Can you just remind us again sort of the internal philosophy about executing on that? Is there a time line to deliver on that? Sort of how are you sort of balancing showing that profitability improvement over the next couple of years versus pressing on new investments like Kuiper and perhaps reinvesting some of those profits over the next couple of years?

Operator:

And our next question comes from the line of Mark Mahaney with Evercore. Please proceed with your question.

Andy Jassy :

On the AWS question, it's always hard to predict what the growth rates are going to be, and it's a relatively large business at $105 billion revenue run rate at this point. But I do think that we have seen the lion's share of the cost optimization happen. And I also do believe that pre-pandemic, we were on this March where most companies are trying to figure out how to modernize their infrastructure, which really means moving from on-premises to the cloud because they can save money and invent that more quickly and get better developer productivity. And then the pandemic happen and people were in survival mode and then a difficult economy came and people are trying to save money. And we just see people going back to asking themselves, why aren't we taking this low hanging fruit here. I mean it makes -- I don't want to run my own data centers. I can actually be more cost-effective and invent more quickly from my customers if I'm using the cloud. And AWS with just a lot more functionality, stronger operational performance and security, which really matters to customers as well and a deeper partner ecosystem continues to be the partner of choice as people are moving to the cloud. And I think the generative AI component is in its very early days. It's -- as I said, we kind of sometimes look at it and say that it's interesting that we have a multibillion-dollar revenue run rate already in AI, and it's so early. But if we look at the amount of demand that we have from customers right now, it's very significant. So I think all three of those things have a chance and will likely continue over time. And we'll see where that growth rate nets out over the next number of years. I think that -- the one other thing I would say about that, too, Mark, is that -- the business today, as I mentioned, it's a $105 billion revenue run rate business, about 90% of the global IT spend is still on premises. And if you believe that equation is going to flip, which I do, there's a lot of growth ahead of us in AWS as the leader in all those dimensions I mentioned. But I also think that generative AI itself and AI as a whole it's going to be really large. I mean it is not something that we originally factored when we were thinking about how large AWS could be and unlike the non-AI space, where you're basically taking all of this infrastructure that's been built on premises over a long period of time and working with customers to help them migrate it to the cloud, which is a lot of work, by the way. In the generative AI space, it's going to get big fast and it's largely all going to be built from the get-go in the cloud, which allows the opportunity for those businesses to continue to grow. On the pharmacy side, I think you're right that you're seeing that business continue to grow and to get more resonance with customers. And I think it was always a relatively natural extension for us to build a pharmacy offering from our retail business. But I think a lot of what you see in the business has grown really quickly, a lot of what you've seen is that the work that the team has done on the customer experience over the last 18 months has really paid off. Customers love the customer experience of Amazon Pharmacy. And especially, by the way, when you think about the experience and the speed and ease with which you can order versus walking into a pharmacy in a physical store, if you walk into pharmacies and -- in cities today, it's a pretty tough experience with how much is locked behind cabinets, where you have to press a button to get somebody to come out and open the cabinets for you and a lot of shop lifting going on in the stores. So the combination of what's happening in the physical world and how much improved we've made our pharmacy experience is driving a lot of customer resonance and buying behavior. I think also you see us continuing to expand there. We expanded our RxPass package and program to Medicare members, that program allows customers and members to be -- Prime members to be able to get up to 60 common medications for just $5 a month. And we continue to launch same-day delivery of medications to cities. We have them in 8 cities, including Los Angeles and New York today with plans to expand to more than a dozen cities by the end of the year. So we're seeing a lot of growth there, and we're very optimistic about it.

Brent Thill :

On AWS, I'm curious if you had a backlog number you could share for the quarter. And I guess, Andy, when you think about getting the data state ready, I know AI today is early, but when you see most of these companies are having to move to public cloud, are you seeing a step-up in return to workloads moving to get ready for this day to stay even if they're not ready to adopt AI? What are you seeing in those sales motions? Thank you.

Andy Jassy :

On the second part of your question, Brent, what I would say is that it's true in analytics, but it's even maybe more so true in AI, which is that it's quite difficult to be able to do AI effectively if your data is not organized in such a way that you can access that data and run the models on top of them and then build the application. So when we work with customers, and this is true both when we work directly with customers as well as when we work with systems integrator partners, everyone is in a hurry to get going on doing generative AI and one of the first questions that we ask is show us where your data is, show us what your data lake looks like, show us how you're going to access that data. And there's very often work associated with getting your data in the right shape and in the right spot to be able to do generative AI. Fortunately, because so many companies have done the work to move to the cloud, there's a number of companies who are ready to take advantage of AI, and that's where we've seen a lot of the growth. But also it's worth remembering that again, remember the 90% of the global IT spend being on premises, there are a lot of companies who have yet to move to a cloud, who will, and the ability to use AI more effectively is going to be one of the many drivers in doing so for them.

John Blackledge :

Great. Two questions. First, the AWS op income margins were strong, again, mid-30% area. Just kind of what were the key drivers? And how should we think about AWS margins in the back half of the year? And then the international op income margin stepped down a bit Q-over-Q. Just curious about that. Thank you.

John Blackledge :

International segment margin.

Operator:

And our final question will come from the line of Doug Anmuth with JPMorgan. Please proceed with your question.

Brian Olsavsky :

Yeah, sure. Thank you, Doug. The macro factors, if I step back, I think Andy discussed it earlier as well. We're seeing a lot of the same consumer trends that we have been talking about for the last year. Consumers being careful with their spend, trading down, looking for lower ASP products, looking for deals. That continued into Q2, and we expect it to continue into Q3. We're seeing signs of it continuing in Q3. The difference in Q2 was that, again, we had very strong unit volume growth. We actually slightly accelerated when you adjust for leap year in North America unit growth in Q2. So the drop in revenue sequentially -- revenue growth sequentially was tied to ASP and both continuation of existing trends, but also as we talked about growth in our everyday essentials business and categories. So while we think we are selling a number of higher ticket items, certainly and holding up well in the market itself, certainly not as strong as it's been in a normalized economy. And -- so it's -- lower ASP products are more of the mix right now. And we like that because, again, our speed allows us to deliver, especially everyday essentials, quickly, and we'd like to be in the consideration set for consumers on those items. We're not going to quantify Kuiper today, but thank you for your question.

Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com First Quarter 2024 Financial Results Teleconference. [Operator Instructions] Today's call is being recorded.

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.

We remain focused on the inputs that matter most to our customers:

selection, price, and convenience. During the quarter, around the world, we helped 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.

Operator:

[Operator Instructions] Our first question comes from the line of Doug Anmuth with JPMorgan.

Brian Olsavsky:

Doug, yes, we have historically always mentioned that. You have seen like a pendulum shift sometimes between profitability and investment. I think we're at the stage now where we're doing both at the same time continually, so we are more apt to talk about the specific investments that we're making and how that might impact our short-term outlook. So if you look at the progress we've made on operating income and free cash flow over really the last 18 months, a lot of it's driven by improvements in our stores business, lower cost to serve. We've talked about regionalization efforts and how that's moving into inbound areas now.

Operator:

And our next question comes from the line of Ross Sandler with Barclays.

Andrew Jassy:

Well, Ross, I would tell you that we have seen kind of 3, I'll call it, macro trends that I think are contributing to AWS' performance, at least in the last quarter. I think first of all, I think the lion's share of cost optimization is behind us. So I think companies will be smart and have learned a lot over the last number of months in how they run their infrastructure in the cloud. But I think the lion's share of the cost optimization is behind us. And I think people have moved to newer initiatives that I would, at a macro level, describe as modernizing their infrastructure and then trying to drive value at a generative AI.

Brian Nowak:

I have 2. The first one is on cost to serve. I appreciate all the color in the shareholder letter and even tonight on cost to serve. Andy, maybe could you just help us quantify a little more how to think about some of your North Star cost to serve goals over the next couple of years? And what could that mean for potential accompanying reasonable ranges of outcomes for North America retail margins through all of that?

Brian Olsavsky:

Brian, this is Brian. I will start with your second question. So as far as dividends or buybacks or any other capital structure moves, we don't have anything to share with you on that today. But I'll reacquaint you with our general philosophy. So our first priority is to invest in -- to support the growth opportunities and long-term investments within our businesses. And generally, we still have many opportunities to put that capital to use that would generate meaningful returns, especially as you heard in generative AI.

Operator:

And the next question comes from the line of Youssef Squali with Truist Securities.

Andrew Jassy:

Yes. Thanks for the question, Youssef. I think that it's interesting what's happening with our -- the business we're building in third-party logistics. And it really kind of, in some ways, mirrors some of the other businesses we've gotten involved in, AWS being an example of it, even though it's -- they're very different businesses in that we realized that we had our own internal need to build a bunch of these capabilities.

Operator:

And our next question comes from the line of Justin Post with Bank of America.

Andrew Jassy:

Yes. I'll take them in opposite order just on Prime Video ads. Very early days, just launched a few months ago. It's off to a really good start. I think advertisers are excited about being able to expand their ability to advertise with us in video beyond Twitch and Freevee to Prime Video shows and movies. I think they also find that the relevancy and the measurability of that type of advertising and Prime Video ads is unique for them. So it's off to a very good start, it's early days, but we're optimistic there.

Ronald Josey:

Maybe, Andy, I wanted to ask on international profitability, just after 1Q's 2.8% margin. Talk just about where we are in terms of international getting or to consistent profitability. We're following a similar trajectory as North America in terms of benefiting from regionalization shift, and we saw what average distance of each package traveled actually came down by 25 kilometers and whatnot. And if you could provide any insights on maybe how inbound fulfillment architecture might add to just continued benefits on faster shipping, same-day, next day, et cetera.

Operator:

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

Operator:

Thank you for standing by. Good day everyone and welcome to the Amazon.com Fourth Quarter 2023 Financial Results Teleconference. [Operator Instructions] Today's call is being recorded. For opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Dave Fildes. Thank you, sir. Please go ahead.

Andrew Jassy:

Thanks, Dave. Today we’re reporting $170 billion in revenue, up 13% year-over-year excluding the impact of foreign exchange rates, $13.2 billion in operating income, up 383% year-over-year, or $10.5 billion and $35.5 billion in trailing 12-month free cash flow adjusted for equipment finance leases, up $48.3 billion year-over-year. While we've made meaningful progress in our financial measures, what we're most pleased about is the continued customer experience improvements across our businesses. These results represent a lot of invention, collaboration, discipline, execution, adjusting and reimagining from teams across Amazon. Looking back at Q4, I'll start with our stores business where customers responded to our continued focus on selection price and convenience. We continue to have the broadest retail selection with hundreds and millions of products available and added tens of millions of new items last year alone, including fashion selection from Coach, Victoria's Secrets Fashion, Pit Viper, and Beyonce’s Renaissance to our Merge to cosmetics from Lancome, Urban Decay, cosmetics and No Beauty by Vanessa Hudgens, to consumer technology and services from Boost, Infinite, and Woop to homewares for Martha Stewart. Being sharp on price is always important. But particularly in an uncertain economy where customers are careful about how much they're spending. We kicked off the holiday season with Prime Big Deal Days, an exclusive event for Prime members to provide an early start on holiday shopping. This was followed by our extended Black Friday and Cyber Monday holiday shopping event, which was open to all customers and ended up being our largest event ever. These events also helped attract new customers and Prime members. Throughout the quarter customers saved nearly $10 billion across millions of deals and coupons almost 70% more than last year. In addition to offering great deals, we continue to improve delivery speeds. In 2023, Amazon delivered to Prime members at the fastest speeds ever, with more than 7 billion items arriving same or next day including more than 4 billion in the U.S and more than 2 billion in Europe. In the U.S this result is the combination of two things, one is the benefit of regionalization, where we’ve architected the network to store items closer to customers. The other is the expansion of same day facilities, where in the U.S in the fourth quarter, we increase the number of items delivered the same day or overnight by more than 65% year-over-year. As we're able to get customers items this fast. It increases the number of occasions that customers choose Amazon to fulfill their shopping needs. And we can see that in all sorts of areas including how fast or everyday essentials business is growing. Our regionalization efforts have also brought transportation distances down which has helped lower our cost to serve. In 2023, for the first time since 2018, we've reduced our cost-to-serve on a per unit basis globally. In the U.S alone, cost-to-serve was down by more than $0.45 per unit compared to the prior year. Lowering cost-to-serve allows us not only to invest in speed improvements, but also afford adding more selection at lower average selling prices or ASPs and profitably. We have a saying, that it's not hard to lower prices, it's hard to be able to afford lowering prices. The same is true with adding selection, it's not hard to add lower ASPs selection, it's hard to be able to afford offering lower ASPs selection and still like the economics. Like improving speed, adding selection puts us in the consideration set for more purchases. As we look toward 2024 and beyond, we're not done lowering our cost to serve. We've challenged every closely held belief for our fulfillment network and reevaluated every part of it, and found several areas where we believe we can lower costs while also delivering faster for customers. Our inbound fulfillment architecture and resulting inventory placement are areas of focus in 2024, and we have optimism there's more upside for us. Alongside our stores business, our advertising growth remains strong, up 26% year-over-year, which is primarily driven by our sponsored ads. We've recently added Sponsored TV to this offering in the U.S. a self-service solution for brands to create streaming TV campaigns with no minimum spend, putting this advertising within reach of any business. While still early days, streaming TV advertising continues to grow quickly. Brands are using our capabilities to reach engage viewers on Twitch, Freevee, Fire TV and Prime Video shows and movies, which just launched in the U.S., as well as Thursday Night Football. Shifting to AWS. Revenue in the quarter grew 13% year-over-year in Q4 versus 12% year-over-year in Q3. And we're now approaching an annualized revenue run rate of $100 billion. We watched the incremental revenue added each quarter and in Q4 AWS added more than $1.1 billion an incremental quarter-over-quarter revenue, which on an FX neutral basis is more than any other cloud provider as far as we can tell. While cost optimization continued to attenuate larger new deals also accelerated, evidenced by recently inked agreements with Salesforce, BMW, NVIDIA, LG, Hyundai, Merck, MUFG, Axiata, Cafe, BYD, Arcore, Amgen, and SAIC. Our customer pipeline remains strong, as existing customers are renewing larger commitments over longer periods and migrations are growing. 2023 also was a very significant year of delivery and customer trial for generative AI or Gen AI in AWS. You may remember that we've explained our vision of three distinct layers in the Gen AI stack, each of which is gigantic, and each of which were deeply investing. At the bottom layer, where customers who are building their own models run training and inference on compute with a chip is the key component in that compute, we offer the most expansive collection of compute instances with NVIDIA chips. We also have customers who would like us to push the price performance envelope on AI chips, just as we have with Graviton for generalized CPU chips, which are 40% more price performance than other X86 alternatives. And as a result, we built custom AI training chips, named Trainium, and inference chips, name Inferentia. At re:Invent we announced Trainium2, which offers four times faster training performance and three times more memory capacity versus the first generation of Trainium, enabling advantageous price performance versus alternatives. We already have several customers using our AI chips including Anthropic, Airbnb, Hugging Face, Qualtrics, Ricoh and Snap. In the middle layer where companies seek to leverage an existing large language model, customize it with their own data, and leverage AWS’ security and other features all as a managed service. We've launched Bedrock which is off to a very strong start with many 1,000s of customers using the service after just a few months. The team continues to rapidly iterate on Bedrock, recently delivering capabilities including guardrails to safeguard what questions applications will answer, knowledge bases to expand models knowledge base with retrieval augmented generation or RAG and real time queries, agents to complete multi step tasks and fine tuning to keep teaching and refining models. All which will help customers applications be higher quality and have better customer experiences. We also added new models from Anthropic, Cohere, Meta with Llama2, Stability AI and our own Amazon Titan family of LLMs. What customers have learned at this early stage of Gen AI, is it there's meaningful iteration required in building a production Gen AI application with the requisite enterprise quality at the cost and latency needed. Customers don't want only one model, they want different models for different types of applications, and different size models for different applications. Customers want a service that makes this experimenting and iterating simple and this is what Bedrock does, which is why so many customers are excited about it. And to top layer of the stack is the application layer, one of the very best early gen AI applications is a coded companion. At Reinvent, we launched Amazon Q, which is an expert on AWS, writes code, debugs code, tests code, does translations like moving from an old version of Java to a new one and can also query customer’s various data repositories, like Internet, Wickes or from over 40 different popular connectors to data in Salesforce, Amazon S3, ServiceNow, Slack, Elastin or Zendesk, among others. And answer questions, summarize this data, carry on a coherent conversation and take action. It was designed with security and privacy in mind from the start, making it easier for organizations to use generative AI safely. Q is the most capable work assistant and another service that customers are very excited about. By the way, don't underestimate the point about Bedrock and Q inheriting the same security and access control as customers get with AWS. Security is a big deal, an important differentiator between cloud providers. The data in these models is some of the company's most sensitive and critical assets. With AWS' advantaged security capabilities and track record relative to other providers, we continue to see momentum around customers wanting to do their long-term Gen AI work with AWS. We're building dozens of Gen AI apps across Amazon's businesses, several of which have launched and others of which are in development. This morning, we launched Rufus, an expert shopping assistant trained on our product and customer data that represents a significant customer experience improvement for Discovery. Rufus lets customers ask shopping journey questions like what is the best golf ball to use for better spin control or which are the best cold weather rain jackets and get thoughtful explanations for what matters and recommendations on products. You can carry on a conversation with Rufus on other related or unrelated questions and retains context coherently. You can sift through our rich product pages by asking Rufus questions on any product features and will return answers quickly. We're at the start of what Rufus will do with further personalization and expansion coming, but we're excited about how it will make discovery even easier on Amazon. Gen AI is and will continue to be an area of pervasive focus and investment across Amazon, primarily because there are a few initiatives, if any, that give us the chance to reinvent so many of our customer experiences and processes, and we believe it will ultimately drive tens of billions of dollars of revenue for Amazon over the next several years. In addition to our stores and AWS businesses, we continue to make progress on newer business investments that have the potential to be important to customers and Amazon long term. Touching on two of them. In October, we had a major milestone in our journey to commercialize Project Kuiper, which is our low earth orbit satellite initiative that aims to provide broadband connectivity to the 400 million to 500 million households who don't have it today. We launched two end-to-end prototype satellites into space and successfully validated all key systems and subsystems, made a 2-way video call, streamed a Prime Video movie in Ultra HD 4K and made an Amazon purchase over our end-to-end communication network. It's rare to be able to exercise all these elements in an initial launch like this. We're on track to launch our first production satellite in the first half of 2024 and started beta testing in the second half of the year. We've still got a long way to go, but are encouraged by our progress. During the quarter, we also completed our second season of Thursday Night Football, which was a rousing success by all accounts. The customer experience continued to improve as our talent, production, streaming quality, analytics, unique AI features like Prime Vision and defensive alerts, all took big leaps forward on top of the very good start last year. We launched a new NFL tradition with the inaugural Black Friday football game and our continuous innovation resonated with viewers as the number of people watching increased 24% year-over-year and with advertisers as we made dramatic year-over-year gains in ad sales. We have increasing conviction that Prime Video can be a large and profitable business on its own, and we'll continue to invest in compelling exclusive content for Prime members like Thursday Night Football, Go To The Rings, Reacher, Mr. & Mrs. Smith, Citadel and more. And with the ads in Prime Video, we'll be able to continue investing meaningfully in content over time. I'll close by reiterating that 2023 was a really good year. I'm grateful to all of our teams who delivered on behalf of customers. Yet I think every one of us at Amazon believes this is just the start of what's possible. We have a long way to go in every one of our businesses before we exhaust how we can make customers' lives better and easier, and there is considerable upside in each of the businesses in which we're investing. With that, I'll turn it over to Brian.

Operator:

[Operator Instructions] Our first question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question.

Dave Fildes:

Yes, that's right. This is Dave. Just to give you that -- the balance was $155.7 billion as of 12/31. So that's up more than $45 billion year-over-year and $20 billion quarter-over-quarter.

Andrew Jassy:

I’ll add a few things to what Brian said. I think just as it relates to the first part of the question, just the way to think about backlog conversion is just these are deals that we've signed that are long-term deals typically with customers. And then there's some amount of time it takes where we work with those customers to migrate those workloads. And so some of the trends that we have seen over the last quarter. First of all, I think that the lion's share of cost optimization has happened. It's not that there won't be any more or that we don't see anymore, but it's just attenuated very significantly. And at the same time, what we've seen is that migrations and this speaks to some of the backlog, migrations that were proceeding, but maybe not at the pace that we saw before, have started to pick up again. We've also seen that a number of the deals that typically signed more quickly, but were signing more slowly in more uncertain environments. A lot of those got done in the last quarter, and you heard in my opening remarks some of the examples, but that was some of several, and we're continuing to see that trend. And then on the Gen AI side, it's -- if you look at the Gen AI revenue we have, in absolute numbers, it's a pretty big number, but in the scheme of a $100 billion annual revenue run rate business, it's still relatively small, much smaller than what it will be in the future, where we really believe we're going to drive tens of billions of dollars of revenue over the next several years. But it's encouraging how fast it's growing and our offering is really resonating with customers.

Brian Nowak :

Thanks for taking my questions. I have two. Andy, the first one is sort of on the cost to serve comments coming down for the first time since 2018. As you sort of look into '24 and '25, can you just sort of walk us through some of the key operational blocking and tackling this to happen to continue to drive down that cost of serve back to 2018 levels? Or however you're thinking about your North Star from that perspective? And then the second one is on sort of philosophical about capital returns. It looks like the cash balance could start building pretty nicely here. How do you think about the idea of buybacks, share repurchases or some type of capital return programs to sort of help shareholders out?

Brian Olsavsky:

Yes, I'd just add a couple of other items there. We've gotten a lot better at fixed cost controls, as we scale. And I think you're seeing that as part of our ability to lower cost per serve not only in operations, it's actually throughout the company. And we're seeing a reduction in some of the inflationary factors that hit us in -- especially hard in 2021 and 2022, things like transportation services, fuel and others. So not totally out of the woods there, but coming down, and we still see some more upside. On your share repurchase question, first of all, just really excited to actually have that question. No one's asked me that in three years and appreciate it. But we have come through a tumultuous period where, as Andy just said, we doubled the size of our logistics footprint and invested heavily in -- we saw that negative free cash flow, at least on our all two calculation for the period 2021 to 2022. So we're glad to see the improvement in the bounce back in free cash flow. A lot of -- and we do debate and discuss capital structure policies annually or more often. And I have nothing to announce today, but again, we primarily think we have a lot of strong investments in front of us. We're good -- we're glad to have the liquidity -- better liquidity at the end of 2023, and we're going to try to continue to build that.

Doug Anmuth :

Thanks for taking the questions. Brian, you've seen very good improvement in International profitability over the last several quarters. Can you just talk about some of the levers here that you're thinking about just as you look to move into positive operating income and then how International could potentially approach North America levels over time? And then just a follow-up there. Are you seeing any shipping disruptions currently related to the Red Sea and does that factor into your outlook at all for 1Q? Thanks.

Operator:

And the next question comes from the line of Mark Mahaney with Evercore ISI. Please proceed with your question.

Brian Olsavsky:

Sure, Mark. Thank you. I think Andy laid it out pretty well a few minutes ago on the cost structure, the regionalization, the -- growing into the assets that we added during the pandemic, great efficiency and work with productivity across really all of our operations network fixed -- attention to fixed cost and lowering costs where we can, maintaining costs where we can, the increase in advertising, success in advertising revenue growth that's outpaced our traffic growth rates. So all of those trends we expect to continue, and we're going to work hard to make sure they continue. And as we said, we have one guidepost is maybe pre-pandemic profitability, but we are working to -- we're not putting a limit on our improvement. We're going to continue to look for ways to lower the cost to serve. And I might add, at the same time, increase the customer experience because we did that -- we had that cost improvement at the same time when we at first got back to our shipping speeds from pre-pandemic and then exceeded them. So we're happy with that, and we'll continue to do both to improve the customer experience and also to lower our costs and leverage our cost structure. Yes, your second question on ads. I can't scale it right now. I mean what I would say for ads in videos is that advertisers are excited to access our Prime customer base. We are looking for ways to increase our advertising in our streaming properties, including Fire TV, but also -- and Prime Video, but also things like Freevee and Twitch. And it's an important part of the total business model, and we expect it will allow us to have a healthy business to continue to invest in content and to continue to grow that. And we feel good about it, and the way we anticipate the ads progressing, we will not have heavy ad loads relative to see other network TV and other things. And like all of our advertising, we're trying to be useful for customers.

Scott Devitt :

Thanks. I have one on grocery and one on healthcare. First, on grocery, I was wondering if you could talk a bit about the progress that you're making in unifying the offering between Dotcom, Fresh and Whole Foods. And as it relates to reverse logistics and using the grocery facilities, how that's lowering the cost of logistics and whether there is a significant opportunity there in terms of driving traffic and revenue in the grocery business? Then secondly, on health care, in such a poor -- notoriously poor customer experience industry, you've made significant efforts now within acquisition and offering primary care. Just be curious if you could talk a little bit more about the longer-term vision in healthcare. Thank you.

Operator:

And our final question will come from the line of Colin Sebastian with Baird. Please proceed with your question.

Andrew Jassy:

Yes. So Colin, I would say a few things on -- first on generative AI. It's -- when we talk to customers, particularly at enterprises as they're thinking about generative AI, many are still thinking through at which layers of those 3 layers of the stack, I laid out that they want to operate in. And we predict that most companies will operate in at least 2 of them. But I also think even though it may not be the case early on, I think many of the technically capable companies will operate at all 3. They will build their own models. They will leverage existing models from us, and then they're going to build the apps. And I know one of the other interesting things that we see early on right now in generative AI is that -- it's a very iterative process and real work to go from posing a question into a chat bot and getting an answer to turning that into a production quality application at the quality you need for your customer experience and your reputation and then also getting that application to work at the latency and cost characteristics that you need. And so what we see is that customers want choice. They don't want just 1 model to rule the world. They want different models for different applications. And they want to experiment with all different sized models because they yield different cost structures and different latency characteristics. And so Bedrock is really resonating with customers. They just -- they know they want to change all these variables and try and experiment and they have something that manages all those different transitions and changes so they can figure out what works best for them, especially in the first couple of years where they're learning how to build successful generative applications is incredibly important for them. So it's part of why we see Bedrock resonating so much. In the same way, what's attractive to enterprises when they think about coding companions like Q, is just if you can get 30%, 40% better productivity for your developers, which in many cases, for companies is their most scarce resource, it's a game changer. And they won't roll out every bit of code that comes from a coding companion. But if it can assist them to get 80% plus the way there quickly, that's a big deal. And one of the things that's unique about Q is it's not just a coding companion, yes, it's an expert on AWS. It will help you -- it helps you write the code, but it also helps you debug the code and it helps you test the code, helps you do transformations and it helps you figure out how a multistep implement features. There's a lot of -- helps you troubleshoot. If there's something in your application that's you write, you can find it and help you fix it. And so -- and then it also lets you look at all your data repositories, whether it's Internet or Wickes or the 40-plus data connectors like Salesforce, Alassian, and Zendesk and Slack. And let you have an intelligent conversation to get answers and take action. So it's a pretty differentiated capability there. And when enterprises are looking at how they might best make their developers more productive, they're looking at what's the array of capabilities in these different coding companion options they have. And so we're spending a lot of time -- our enterprises are quite excited about it. It created a meaningful stir at reinvent. And what you see typically is that these companies experiment with different options they have and they make decisions for their employee base, and we're seeing very good momentum there. The question about how we're thinking about Gen AI in our consumer businesses. We're building dozens of generative AI applications across the company. It's every business that we have has multiple generative AI applications that we are building. And they're all in different stages, many of which have launched and others of which are in development. So if you just look at our -- some of our consumer businesses, on the retail side, we built a generative AI application that allowed customers to look at summary of customer review, so that they didn't have to read hundreds and sometimes thousands of reviews to get a sense for what people like or dislike about a product. We launched a generative AI application that allows customers to quickly be able to predict what kind of fit they'd have for different apparel items. We built a generative AI application that in our fulfillment centers, that forecasts how much inventory we need in each particular fulfillment center. And so the start of the rollout of Rufus today is really just another step, but we think one that's pretty meaningful in being a generative AI powered shopping assistant and it's trained on our very expansive product catalog as well as our community Q&A and customer reviews and the broader web. But it lets customers discover items in a very different way than they have been able to on e-commerce websites. So if you want buying advice, like what should I look for in a pair of headphones or if you are doing purpose buying, like what should I buy for cold weather golf or comparisons, what's difference in lip-gloss or lip oil or you want recommendations of the best Valentine's Day gifts or you're on a detailed page with bridge product info, where you don't want to go through the whole page, you want to ask is this pickle ball rack that's good for beginners. All those questions you can pull in and get really good answers. And then it's seamlessly integrated in the Amazon experience that customers are used to and love to be able to take action. So I think that that's just the next iteration. I think it's going to meaningfully change what discovery looks like for our shopping experience and for our customers. And I could kind of step through every one of those consumer businesses. Our advertising business is building capabilities where people can submit a picture and ad copy is written and the other way around. And you kind of think about Alexa, where we're building a very large -- expansive large language model is going to make Alexa even more productive and helpful for customer. Every one of our consumer businesses has a significant number of generative AI applications that they either have built and delivered or they're in the process of building. And I don't see that changing for many years. We have a lot of ideas.

Operator:

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

Operator:

Thank you for standing by. Good day everyone and welcome to the Amazon.com Third Quarter 2023 Financial Results Teleconference. [Operator Instructions] Today's call is being recorded. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead.

Andrew Jassy:

Thanks, Dave. Today, we're reporting $143.1 billion in revenue, up 11% year-over-year; $11.2 billion in operating income, up 343% year-over-year or $8.7 billion; and $20.2 billion in trailing 12-month free cash flow adjusted for equipment finance leases which is up $41.7 billion versus the comparable period last year. We continue to be encouraged by the progress we're making in lowering our cost to serve, improving our customer experiences and investing for future growth. I'll start with our stores business. Our move earlier this year from a single national fulfillment network in the U.S. to 8 distinct regions represented one of the most significant changes to our fulfillment network in our history. This change has gone more smoothly and made more impact than we optimistically expected. And you can see the benefits in many forms. Regional fulfillment clusters with higher local in-stock levels and optimized connections between fulfillment centers and delivery stations mean shorter distances and fewer touches to get items to customers. Shorter travel distances and fewer touches mean lower cost to serve. But perhaps most importantly, shorter distances and fewer touches mean that customers are getting their shipments faster. We remain on pace to deliver the fastest delivery speeds for Prime customers in our 29-year history. And as I talked about last quarter, we know how important speed of delivery is to customer satisfaction and buying behavior. A good example is the significant growth we're seeing in consumables and everyday essentials. When customers are getting items as quickly and conveniently as they are now from Amazon, they're going to consider us more frequently for more of their shopping needs. As we've shared the last few quarters, we've re-evaluated every part of our fulfillment network over the last year. The first substantial rearchitecture centered on the regionalization change. We obviously like the results but don't think we fully realize all the benefits yet and we continue to make steady improvements in fine-tuning the placement algorithms to enable even more in-region fulfillment and to further increase consolidation into fewer shipments. We've also identified several substantial changes to our inbound processes that we believe could have a significant impact on our cost to serve and speed of delivery. We have a long way before being out of ideas to improve cost and speed. The team is really humming on this and I'm proud of the way they're inventing and executing together. Moving to AWS and our investments in generative AI. AWS revenue grew 12% year-over-year in Q3, with $919 million of incremental quarter-over-quarter revenue and now has the annualized revenue run rate of $92 billion. AWS' year-over-year growth rate continued to stabilize in Q3. And while we still saw elevated cost optimization relative to a year ago, it's continued to attenuate as more companies transition to deploying net new workloads. Companies have moved more slowly in an uncertain economy in 2023 to complete deals. But we're seeing the pace and volume of closed deals pick up and we're encouraged by the strong last couple of months of new deals signed. For perspective, we signed several new deals in September with an effective date in October that won't show up in any GAAP reported number for Q3 but the collection of which is higher than our total reported deal volume for all of Q3. Deal signings are always lumpy and the revenue happens over several years but we like the recent deal momentum we're seeing. Top of mind for most companies continues to be generative AI. As I mentioned last quarter, we think about generative AI as having 3 macro layers, each of which is very large in each of which we're investing. A few updates there. At the lowest layer is the compute to train large language models, or LLMs and produce inferences or predictions. The key to this compute is the chip inside it. As we've shared, we've been working on custom silicon for training and inference with our Trainium and Inferentia chips, respectively. Recently, we announced that leading LLM maker Anthropic chose AWS as its primary cloud provider and will use Trainium and Inferentia to build, train and deploy its future LLMs. As part of this partnership, AWS and Anthropic will collaborate on the future development of Trainium and Inferentia technology. We believe this collaboration will be helpful in continuing to accelerate the price performance advantages that Trainium and Inferentia deliver for customers. In the middle layer which we think of as large language models as a service, we recently introduced general availability for Amazon Bedrock which offers customers access to leading LLMs from third-party providers like Anthropic, Stability AI, coherent AI 21 as well as from Amazon's own LLMs called Titan, where customers can take those models, customize them using their own data but without leaking that data back into the generalized LLM, have access to the same security, access control and features that they run the rest of their applications within AWS all through a managed service. In the last couple of months, we've announced the imminent addition of Meta's Llama 2 model to Bedrock, the first time it's being made available through a fully managed service. Also through our expanded collaboration with Anthropic, customers will gain access to future Anthropic models through Bedrock with exclusive early access to unique features, model customization and the ability to fine-tune the models. And Bedrock has added several new compelling features, including the ability to create agents which can be programmed to accomplish tasks like answering questions or automating workflows. In these early days of generative AI, companies are still learning which models they want to use which models they use for what purposes and which model sizes they should use to get the latency and cost characteristics they desire. In our opinion, the only certainty is that there will continue to be a high rate of change. Bedrock helps customers with this fluidity, allowing them to rapidly experiment with move between model types and sizes and enabling them to pick the right tool for the right job. The customer reaction to Bedrock has been very positive and the general availability is buoyed that further. Bedrock is the easiest way to build and scale enterprise-ready generative AI applications and a real game changer for developers and companies trying to get value out of this new technology. And the top layer which are the applications that run the LLMs, our generative AI coding companion Amazon CodeWhisperer has gotten a lot of early traction and got a lot more powerful recently with the launch of its new customization capability. The number one enterprise request for coding companions has been wanting these companions to be familiar with customers' proprietary code bases. It's not just having code companions trained in open source code, companies want the equivalent of a long-time senior engineer who knows their code base well. That's what CodeWhisperer just launched, another first of its kind out there in its current form and customers are excited about it. A few last comments on AWS's generative AI work. As you can tell, we're focused on doing what we've always done for customers, taking technology that can transform customer experiences and businesses but they can be complex and expensive and democratizing it for customers of all sizes and technical abilities. It's also worth remembering that customers want to bring the models to their data, not the other way around. And much of that data resides in AWS as the clear market segment leader in cloud infrastructure. We're innovating and delivering at a rapid rate and our approach is resonating with customers. The number of companies building generative AI apps in AWS is substantial and growing very quickly, including Adidas, Booking.com, Bridgewater, Clariant, GoDaddy, LexisNexis, Merck, Royal Philips and United Airlines, to name a few. We are also seeing success with generative AI start-ups like Perplexity.ai who chose to go all in with AWS, including running future models in Trainium and Inferentia. And the AWS team has a lot of new capabilities to share with its customers at its upcoming AWS re:Invent conference. Beyond AWS, all of our significant businesses are working on generative AI applications to transform their customer experiences. There are too many for me to name on this call but a few examples include, in our stores business, we're using generative AI to help people better discover products they want to more easily access the information needed to make decisions. We use generative AI models to forecast inventory we need in our various locations and to derive optimal last mile transportation routes for drivers to employ. We're also making it much easier for our third-party sellers to create new product pages by entering much less information and letting the models to the rest. In advertising, we just launched a generative AI image generation tool, where all brands need to do is upload a product photo and description to quickly create unique lifestyle images that will help customers discover products they love. And in Alexa, we built a much more expansive LLM and previewed the early version of this. Apart from being a more intelligent version of herself, Alexa's new conversational AI capabilities include the ability to make multiple requests at once as well as more natural and conversational requests without having to use specific phrases. We continue to be convicted that the vision of being the world's best personal assistant is a compelling and viable one and that Alexa has a good chance to be one of the long-term winners in this arena. Every one of our businesses is building generative AI applications to change what's possible for customers and we have a lot more to come. We're also encouraged by the progress we're making in our newer initiatives. Just to name a few, we're pleased with what we're seeing in Prime Video. Prime Video continues to be an integral part of the Prime value proposition where it's often one of the top 2 drivers of customers signing up for Prime. We also have increasing conviction that Prime Video can be a large and profitable business in its own right as we continue to invest in compelling exclusive content for prime members but also offer the best selection of premium streaming video content anywhere with our marketplace offering, including channels for customers who can subscribe to channels like Max, Paramount+, BET Plus and MGM+, as well as our broad transaction video-on-demand selection. As we continue to invest in compelling content, beginning in early 2024, Prime Video shows and movies will include limited advertisements. We aim to have meaningfully fewer ads than linear TV and other streaming TV providers. If customers prefer and add free option, we plan to offer that for an additional $2.99 per month for U.S. members. There is still a lot of work to be done in innovation ahead but we're excited about our future on Prime Video. We're seeing progress on a number of our investments that expand our ability to serve more consumers and sellers in their e-commerce missions. Our emerging international stores continue to improve their customer experiences and profitability and are on a strong trajectory. Both consumers and sellers are excited about Buy with Prime which enables third-party sellers with direct-to-consumer websites to offer Amazon Prime members the same fast payments and delivery options they receive on Amazon.com. We recently announced the capability for sellers to integrate Buy with Prime with their Shopify account, making it easier for Shopify merchants to manage their businesses with inventory pricing and promotions automatically synced in one place. And we're seeing very positive early response from sellers to Supply Chain by Amazon, a fully automated set of supply chain services where Amazon can pick up inventory from manufacturing facilities around the world, ship it across borders, handle customs clearance and ground transportation, store inventory in bulk, manage replenishment across Amazon and other sales channels and deliver directly to customers, all without sellers having to worry about managing their supply chain. Our health care team is continuing to make health care easier for people to access. The Amazon Pharmacy customer experience has significantly evolved this year and customers are responding that both in their purchasing behavior and qualitative feedback. We built RXPass for customers to get unlimited supply of eligible medications for $5 per month, meaningfully reduce the cost for customers to get insulin and diabetes products and partnered with Blue Shield of California to offer a first-of-its-kind model to provide more affordable pharmacy care to its 4.8 million members, providing fast and free delivery of prescription medications and 24/7 access to pharmacists. We remain convinced that we can be part of the solution of making health care a better customer experience. And our low Earth orbit satellite initiative Project Kuiper which aims to bring fast, affordable broadband to underserved communities around the world, took a meaningful step forward in the last few weeks with the successful launch of 2 prototype satellites. We will use this multi-month mission to test our satellites and network from space and collect data ahead of the planned start of satellite production later this year. I'd like to close by thanking our teams around the world who are gearing up for 2 of our most significant events across the company. First, our annual AWS re:Invent conference that begins on November 27. The team is excited to share a lot of new capabilities with customers and provide an array of opportunities for builders to learn and connect with one another. And on the stores side, we've already kicked off what will be our 29th holiday shopping season. Prime Big Deal Days held earlier this month was our most successful October holiday kick-off event ever, with Prime members saving more than $1 billion across hundreds and millions of items sold. Just as we do all year long, we aim to make our customers' lives easier and better every day and there's no time where it's more important to us that we deliver on this mission than during the busy holiday shopping season. With that, I'll turn it over to Brian.

Operator:

[Operator Instructions] And the first question comes from the line of Justin Post with Bank of America. Justin, your line is live.

Andrew Jassy:

Yes, Justin. Sure. This is Andy. I think if you look at AWS, we grew 12% year-over-year. And I think that you saw a continued stabilization of our year-over-year growth rate. And included $919 million of incremental quarter-over-quarter revenue which it's hard to compare and do the math across different players because not everyone discloses them clearly. But as far as we can tell, that also looks like the most absolute growth of any of the players out there. We're still seeing elevated customer optimization levels than we've seen in the last year or year before this, I should say. So if you look at the optimization, it's more than a year ago but it's meaningfully attenuating from where we've seen in the last few quarters. And if you look at the optimization too, what's interesting is it's not all customers deciding to shut down workloads. A very significant portion of the optimization are customers taking advantage of enhanced price performance capabilities in AWS and making use of it. So for example, if you look at the growth of customers using EC2 instances that are Graviton based which is our custom chip that we built for generalized CPUs, the number of people and the percentage of instances launched their Graviton base as opposed to Intel or AMD base is very substantially higher than it was before. And one of the things that customers love about Graviton is that it provides 40% better price performance than the other leading x86 processors. So you see a lot of growth in Graviton. You also see a lot of customers who are moving from the hourly on demand rates for significant portions of their workloads to 1- to 3-year commitments which we call savings plans. So those are just good examples of some of the cost optimization that customers are making in less certain economies where it's really good for customers short and long term and I think it's also good for us. But we're starting to see -- as I said, we're seeing that optimization attenuate. I expect that to continue over time. I remain very optimistic about AWS in the medium to long term. And it's because we have the most functionality by a large amount. We have a much larger partner ecosystem than you'll find elsewhere. We have stronger security and operational performance than you can find elsewhere. I think we're the most customer-focused. Even if you look during optimization times in this difficult economy, customers have really noticed how AWS leaned in with them for the long term. And I think that matters to customers. And then we have a $92 billion revenue run rate business where 90% of the global IT spend still resides on premises. And if you believe like we do, that equation is going to flip. There's a lot more there for us. And then you look at the very substantial gigantic new generative AI opportunity which I believe will be tens of billions of dollars of revenue for AWS over the next several years, I think we have a unique and broad approach that's really resonating with customers. And you can see it with the array of customers I mentioned that are using us and starting to build workloads for generative AI who have already on top of us. I could see it also. Just the growth rate for us in generative AI is very fast. Again, I have seen a lot of different numbers publicly. It's real hard to measure an apples-to-apples. But in our best estimation, our -- the amount of growth we're seeing and the absolute amount of generative AI business we're seeing compares very favorably with anything else I've seen externally. So I think that you can see that in the deals that we're doing, too. I spoke about the significant number of deals that we've closed over the last couple of months. A lot of those conversations, it's -- a big piece of it is what I mentioned earlier, the functionality, the ecosystem, the operational performance, the security, how you take care of customers but also whether or not they like your vision and set of products that you're building in this brand-new technology space, generative AI which I think has been very effective so far. So to me, I think there's a lot of growth in front of AWS. I'm very optimistic about it.

Operator:

Our next question is from Doug Anmuth with JPMorgan.

Brian Olsavsky:

Well, I'll start. The -- on regionalization, I think it was such a significant change for us in the network. It's hard to really appreciate with a big change across so many dimensions it was that first to make such a change has all sorts of risk. And I think the team did a great job planning around it being very thorough. I think that we were able, with our placement algorithms, to get more regional local in-stock levels than we anticipated. And then I think until you actually put all the connections together, we changed a lot of the connections from a lot of these middle connections going from fulfillment centers to sortation centers and then to delivery stations to connecting the fulfillment centers and delivery stations more directly which, of course, is easier to do when you have more local in stock in a region. But I think that we were able -- the connections that we made and the optimization that we made there allowed us to get shorter transportation distances than we even anticipated in items to people a lot quicker. And then always one of the issues you got to worry about when you make a change that big is whether or not you end up splitting shipments and having more -- fewer items per box and per shipment. And that was also something that we really had to work through in the design and in the early stages and we've gotten a lot better on. So we're just across the board, we're seeing shorter transportation distances and much faster delivery to customers. And when you deliver faster delivery to customers, they actually start to consider you for a lot more items than they otherwise would. I think it's part of what -- if you look at our very significant growth rates right now in everyday essentials and consumables, a lot of it is when you -- if you're going to order something which you need in the same day or next day, you're not going to consider it if it's coming in 3 or 4 days. But when you're consistently getting it in same day or the next day, just changes what you're willing to do. I think the second question was on gen AI and the timing of monetization. What I would tell you is that we have been surprised at the pace of growth in generative AI. Our generative AI business is growing very, very quickly, as I mentioned earlier. And almost by any measure, it's a pretty significant business for us already. And yet I would also say that companies are still in the relatively early stages. I mean now you have to get perspective. My perspective is that the cloud is still in the early stages. If you think about 90% plus of the global IT spend being on-premises, where I think that equation is going to flip in 10 years. I think cloud is early. So if you -- with that lens on, I still think we're very early in generative AI. And what's interesting, too, around generative AI because we have so many companies who are doing all sorts of prototypes and it's really accelerating very rapidly on the training side with Trainium and Inferentia and then on the application building and running side with Bedrock, is that companies are still trying to sort out for themselves what they're going to run at large-scale production in all of these areas. Because what happens is you try a model, you test the model, you like the results of the model and then you plug it into your application. And what a lot of companies figure out quickly is that using the really large -- the large models and the large sizes ends up often being more expensive than what they anticipated and what they want to spend on that application. And sometimes too much latency in getting the answers as it shovels through the really large models. And so customers are experimenting with lots of different types of models and then different model sizes to get the cost and latency characteristics that they need for different use cases. And it's one of the things that I think is so useful about Bedrock is that customers are trying so many variants right now but to have a service that not only lets you leverage lots of third party as well as Amazon large language miles but also lots of different sizes and then makes the transition of moving those workloads easy between them is very advantageous.

Brian Nowak:

Thanks for taking my question, I have two, one on AWS, one on the retail business. On AWS AI Andy, I recognize you have a pretty multipronged AI approach. But just could you talk us through sort of one or two of the early generative AI products where you're seeing the most early demand and interest? And as you talk to customers, are there still hurdles or pain points that you're not quite serving in your product suite you look to solve and innovate on over the next couple of years in AI? And then the second one, you made a lot of steps on the regionalization of warehouses and making it more efficient. Where are you on robotics in the warehouses? And how should we think about the potential impact of that to drive profitability even higher?

Operator:

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

Andrew Jassy:

On the AWS side, my perspective, we'll obviously all have to wait and see to some extent. But my perspective is that in 2024, you're going to -- I think a lot of the relatively low-hanging fruit on optimization has happened in 2023. It's not to say there won't be any more optimization. It's just that there's more low-hanging fruit when you have very large footprints and you've built a lot of applications on a platform for you to go decide to optimize if that's what you want to go do. And so I think 2020 -- we're already seeing it now with the attenuation of optimization over the last several months. But I think you'll continue to see the attenuation continue and we're already seeing more and more companies that are turning their attention to newer initiatives. And I think what you will see in '24 and '25 as well, I think -- I don't think it's a 1-year deal, I think that's going to be a several-year trajectory, is that you're going to just see a lot of companies not just looking at the new generative AI workloads but also there was a significant number of new customer transformations where companies were going to largely move from being on-premises to being in the cloud. That got stalled in 2023 because companies were being more conservative with their spend and wary of an uncertain economy. And so I think that what you'll see increasingly is that companies will both go back to those transformations they were planning on making and working with a lot of systems integrator partners as well as ourselves as well as start to see the production in large scale of the generative AI applications that they're all working on and prototyping and starting to deploy into production. I think on the ad front, well, there's a lot I'm excited about on the ad side as well. I think that it's interesting what's happened in our ads business as if you look around the industry, most advertising-heavy companies have struggled growth-wise as the economy has been difficult. And while we see companies being more cautious on the ad side and the top-of-funnel products, things like display and a little bit of video, we're still seeing a lot of strength in the lower-funnel ad products like sponsored products. And I think in these types of economies, we have fared pretty well in part because we have a number of owned and operated properties that have very large volumes that advertisers and brands want to get in front of. Even in a harder economy, there's going to be a lot of e-commerce purchasing. So people want to be in front of our customers in our marketplace. Or take Thursday Night Football which is we're in our second season of Thursday Night Football and off to a great start, the ratings are 25% higher than they were a year ago through 6 weeks. But also, we're doing much better on the advertising side than we did in our first year and that's a property that's really valuable. It's the one game that week and advertisers want to be in front of customers because there's 13 million customers a week watching. So I think part of it is because we have owned and operated properties that have a lot of volume. And then I think the other piece is that most of our resource in the advertising side is spent on machine learning expert practitioners who are owning algorithms to make sure that the sponsor results people get when they search on something are relevant. And because of that, those ads perform better for advertisers. So when they have to think about budget decisions, they're going to choose the ones that have large volume and perform better. I think both of those are real advantages in our advertising area right now. In terms of additional things we're excited about. I think that we have barely scraped the surface with respect to figuring out how to intelligently integrate advertising into video, into audio and into grocery. So I think we're early days in that. I think that we also started externalizing some of our products like sponsored products to third-party websites. And you see that with what we've done with Pinterest, Hearst Newspapers and BuzzFeed, so I think there's -- again, we're still pretty early in that area but it's growing well and we're very focused on continuing to in a great customer experience.

Mark Mahaney:

Okay. On those AWS deals Andy, that you talked about in the September quarter, was there something different about those deals, different industry, different verticals, different geographic markets? Or is it just kind of a resumption of kind of the deal flow that you've had in years past? So that's the first question. And secondly, Brian, international. Is international finally at a point where it can be sustainably profitable going forwards, maybe except for the seasonally challenged March quarter? Have you wrung out enough efficiencies and gotten enough scales? And the oldest markets there are big enough and scalable enough and profitable enough that it offsets the newer countries? Have you finally reached that point?

Andrew Jassy:

On the AWS deals, it's a really broad mix of industries and geographies. So it's not comped up in one. Some are kind of first really big deals from customers. Some of them are very large expansions of existing agreements where they've gone from call it, 20% of their workloads to 50% of their workloads moving to AWS in the cloud. It's also -- I'm not even really including in that number, a number of really big public sector deals that we've done over the last chunk of time that won't hit for a period of time; and so all these deals don't hit in a month. They happen over a period of time as you help those customers safely transition and migrate their workloads to AWS. But it hasn't been any one piece. And I wish I could tell you we knew exactly why they're starting to happen in faster numbers. I do think, in general, historically, deal volume tends to be lumpy and it doesn't perfectly distribute over a calendar year. I do think though that we've seen this in '23, for sure, that the time to close deals lengthened. And I think it's all reflective of what most companies in the world have been thinking about the last year which is just in the face of uncertain economy, you're going to be more conservative. There are going to be more people involved. You're going to spend more time on how you can save on your existing cost instead of migrating new workloads or thinking about signing new deals. And so I think what you're just starting to see along with some of the optimization attenuation is that companies are starting to look forward again. And so we've just seen a collection of those the last couple of months that had been -- being discussed for several months where I think, frankly, both sides thought they would close faster but just went slower than they did. So I just think you're starting to see companies look forward more.

Operator:

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

Operator:

Good day, everyone, and welcome to the Amazon.com Quarter Two 2023 Financial Results Teleconference. [Operator Instructions]. For opening remarks, I will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead.

Andrew Jassy:

Thank you, Dave. Good afternoon, everyone, and thanks for joining us. Today, we are reporting $134.4 billion in revenue and $7.7 billion in 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

Operator:

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

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.

Operator:

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

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.

Operator:

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

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.

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 scale of the Amazon Prime household in your customer base?

Operator:

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

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.

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.

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:

Good day, everyone, and welcome to the Amazon.com First Quarter 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 will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead.

Brian Olsavsky:

Thank you for joining today’s call. As Dave mentioned earlier, I’m joined today by Andy Jassy, our CEO. Before we move on to take your questions, I’ll make some comments regarding our Q1 results. Let’s begin with revenue. For the first quarter, our worldwide net sales were $127.4 billion, up 9% year-over-year, or 11% excluding approximately 210 basis points of unfavorable impact from changes in foreign exchange rates. This was above the top end of our guidance range. Overall, we are pleased with the growth that we’re seeing in worldwide stores businesses, including quarter-over-quarter revenue acceleration in the International segment, which is helped by easing macroeconomic pressures in Europe. Across the geographies we serve, customers appreciate our focus on staying sharp on pricing, having strong selection and easier convenience, including delivery speeds, which continued to improve throughout the first quarter. That said, the uncertain economic environment and ongoing inflationary pressures continue to be a factor, and we believe it’s continuing to drive cautious spending across consumers. This means our customers are looking to stretch their budgets further and are focused on value. We saw moderated spending on discretionary categories as well as shifts to lower-priced items and healthy demand in everyday essentials, such as consumables and beauty. Third-party sellers, including businesses who elect to utilize Fulfillment by Amazon for their storage and shipping services are a key contributor to the selection offered to customers. We also continued to invest meaningfully in brand protection efforts, including industry-leading technology, so that sellers can trust we will provide a great selling experience free from bad actors. Sellers comprised 59% of overall unit sales in Q1, up from 55% one year ago. We also saw strong engagement in our advertising services with revenue up 23% year-over-year, excluding the impact from changes in foreign exchange rates. In particular, our sponsored product and brand offerings remain a key driver of growth as we work with advertisers to help customers make more informed purchase decisions. Our teams remain focused on delivering performance through our comprehensive and flexible measurement capabilities along with insights that allow advertisers the ability to measure the return on their advertising spend and help them grow their business. In AWS, net sales were $21.4 billion in the first quarter, up 16% year-over-year and representing an annualized sales run rate of more than $85 billion. Given the ongoing economic uncertainty, customers of all sizes in all industries continue to look for cost savings across their businesses, similar to what you’ve seen us doing at Amazon. As expected, customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter. And we are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1. As a reminder, we’re not trying to optimize for any one quarter or year. We’re working to build customer relationships and a business that will outlast all of us. Therefore, our AWS sales and support teams continue to spend much of their time helping customers optimize their AWS spend so that they can better weather this uncertain economy. This customer orientation is built into our DNA and how we think about our customer relationships and business over the long term. Now, let’s shift to worldwide operating income. For the first quarter, we reported $4.8 billion in operating income, above the top end of our guidance range. This operating income was negatively impacted by an estimated employee severance charge of approximately $470 million in Q1, including $270 million related to AWS. As we finalized our annual planning process and considered the ongoing economic environment, we made the difficult decision to eliminate 9,000 roles, impacting our AWS business as well as Twitch, devices, advertising and our human resources teams. In Q1, our year-over-year growth in stores revenue and unit sales outpaced growth in both our fulfillment expense and our outbound shipping costs. Inflationary pressures continued to ease quarter-over-quarter, primarily driven by reductions in linehaul shipping rates as well as lower diesel fuel and electricity costs. We also built on the progress we made throughout 2022 in improving productivity in our fulfillment network through continued process and tech improvements. We exited Q4 with a good balance of labor throughout the network and leveraged that throughout Q1 with customer demand patterns remaining more stable compared to Q1 of last year. As labor availability has stabilized and inventory supply chain challenges have moderated, we’re able to implement some significant structural changes to transition our U.S. fulfillment network to a regionalized model. We believe these improvements put us in a good position to improve both delivery speed and our cost to serve customers over time. We reported overall net income of $3.2 billion in the first quarter. While we primarily focus our comments on operating income, I’d point out that this net income includes a pretax valuation loss of $467 million included in non-operating expense from our common stock investment in Rivian Automotive. As we’ve noted in recent quarters, this activity is not related to Amazon’s ongoing operations but rather to quarter-to-quarter fluctuations in Rivian’s stock price. Turning to cash flows. We remain focused on building long-term sustainable growth in free cash flow, including our efforts towards a strong cash flow accretive working capital cycle. Our operating cash flow for the trailing 12 months ended March 31st increased to $54.3 billion, up 38% versus the comparable period year-over-year. Besides the cash benefit of improved profitability year-over-year, we’ve also seen supply chains easing up and made progress to improve our inventory purchasing and payment cycles, which in turn has a positive impact on working capital. Now, let’s turn to our capital investments. We define our capital investments as the combination of CapEx plus equipment finance leases. For the full year 2023, we expect capital investments to be lower than our $59 billion investment level in 2022, primarily driven by an expected year-over-year decrease in fulfillment network investments. We’re continuing to invest in infrastructure to support AWS customer needs, including investments to support Large Language Models and generative AI. Before we open the call up for your questions, I’ll hand it over to Andy to share some high-level perspectives on the first quarter.

Operator:

[Operator Instructions] Our first question comes from the line of Doug Anmuth with JPMorgan.

Brian Olsavsky:

This is Brian. I’ll take the first -- the second part of that question first. On CapEx, we spent $59 million -- $59 billion, excuse me, last year. And we -- on our core fulfillment and transportation areas, we actually are spending less year-over-year, and those estimates are going down. The GAAP or the increases in AWS and infrastructure and we are adding more dollars to the -- for Large Language Models and generative AI. So, we’re creating some space in our fulfillment and transportation number that has been repurposed over to AWS. We still think the combined CapEx will be lower year-over-year.

Operator:

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

Brian Olsavsky:

Eric, this is Brian. Let me start on the financial part of that question. So I think we would describe ourselves as like along on the journey and making solid progress on recovering our cost structure and getting it back to pre-pandemic levels. Andy’s talked about the efforts in operations and the regionalization of our operations. We’ve obviously taken a hard look at all of our businesses that we’re in over the last 6 to 9 months and have made adjustments there. But there’s still a lot ahead of us, especially on the operational side that if you look at our operating margin in North America, for example North America segment, it was 1.2% this quarter, pre-pandemic that number was in the 4% to 6% range broadly. So, it’s a bit of marker on how much upside. But there’s a lot of moving parts in that number. Obviously, there’s the advertising, there’s investments going on for future growth, and there’s the core profitability and cost structure that our operations are achieving. So, making progress, working hard at it, but it’s a longer road than bouncing back in one or two quarters.

Operator:

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

Andy Jassy:

Yes. I’ll try and answer those together because they’re somewhat related. I think when you think about machine learning, it’s useful to remember that we have had a pretty substantial investment in machine learning for 25-plus years in Amazon. It’s deeply ingrained in virtually everything we do. It fuels our personalized e-commerce recommendations. It drives the Pick Pass in our fulfillment centers. We have it in our Go stores. We have it in our Prime Air, our drones. It’s obviously in Alexa. And then AWS, we have 25-plus machine learning services where we have the broadest machine learning functionality and customer base by a fair bit. And so, it is deeply ingrained in our heritage. I think if you look at what’s happened over the last 9 months or so is that these Large Language Models and generative AI capabilities, they’ve been around for a while, but frankly, the models were not that compelling before about 6, 9 months ago. And they have gotten so much bigger and so much better, much more quickly that it really presents a remarkable opportunity to transform virtually every customer experience that exists and many that don’t exist that weren’t really that easily made possible before. And so, it’s very early days in that space, but probably not surprisingly, we’ve been investing in building in our own Large Language Models for several years, and we have a very large investment across the Company. And the way I would break it out, Brian, is I would say that there’s three macro areas in this space. If you think about maybe the bottom layer here, is that all of the Large Language Models are going to run on compute. And the key to that compute is going to be the chip that’s in that compute. And to date, I think a lot of the chips there, particularly GPUs, which are optimized for this type of workload, they’re expensive and they’re scarce. It’s hard to find enough capacity. And so, in AWS, we’ve been working for several years on building customized machine learning chips, and we built a chip that’s specialized for training -- machine learning training, which we call Trainium, a chip that’s specialized for inference or the predictions that come from the model called Inferentia. The reality, by the way, is that most people are spending most of their time and money on the training. But as these models graduate to production, where they’re in the apps, all the spend is going to be in inference. So, they both matter a lot. And if you look at -- we just released our second versions of both Trainium and Inferentia. And the combination of price and performance that you can get from those chips is pretty differentiated and very significant. So we think that a lot of that machine learning training, inference will run on AWS. Then if you think about -- so you have to train the models, you have to run the inference, then you got to -- but you have to build the models. And if you look at the really significant leading Large Language Models, they take many years to build and many billions of dollars to build. And there will be a small number of companies that want to invest that time and money, and we’ll be one of them at Amazon, but most companies don’t. And so what most companies really want and what they tell AWS is that they’d like to use one of those foundational models and then have the ability to customize it for their own proprietary data and their own needs and customer experience. And they want to do it in a way where they don’t leak their unique IP to the broader generalized model. And that’s what Bedrock is, which we just announced a week ago or so. It’s a managed foundational model service where people can run foundational models from Amazon, which we’re exposing ourselves, which we call Titan. Or they can run it from leading Large Language Models providers like AI21 and Anthropic and Stability AI. And they can run those models, take the baseline, customize them for their own purposes and then be able to run it with the same security and privacy and all the features they use for the rest of their applications in AWS. That’s very compelling for customers. And then that third layer are really the applications that are going to be built on top of those Large Language Models. So, ChatGPT is a good example of an application that’s being built. We’ll build some of those applications ourselves. So for instance, we think one of the most compelling applications that are going to be built in generative AI have to do with making developers much more effective with coding assistance. And so, we built something called CodeWhisperer, which we just announced the general availability for, where developers can plug in a natural language, something like -- I want to build a video hosting website. And CodeWhisperer will bring up the code you need and the developer needs to employ and put that in production, which is really compelling. If you think about how much more productive a developer is going to be and what they’re going to spend their time on instead of rewriting code that as [Indiscernible] takes time, I think it’s a big deal. Now, to your second question, and it’s related to this top layer I was just talking about, we’re going to build a very -- every single one of our businesses inside Amazon are building on top of Large Language Models to reinvent our customer experiences, and you’ll see it in every single one of our businesses, stores, advertising, devices, entertainment. And devices, which was your specific question, is a good example of that. I think when people often ask us about Alexa, what we often share is that if we were just building a smart speaker, it would be a much smaller investment. But we have a vision, which we have conviction about that we want to build the world’s best personal assistant. And to do that, it’s difficult. It’s across a lot of domains and it’s a very broad surface area. However, if you think about the advent of Large Language Models and generative AI, it makes the underlying models that much more effective such that I think it really accelerates the possibility of building that world’s best personal assistant. And I think we start from a pretty good spot with Alexa because we have a couple of hundred million endpoints being used across entertainment and shopping and smart home and information and a lot of involvement from third-party ecosystem partners. And we’ve had a large language model underneath it, but we’re building one that’s much larger and much more generalized and capable. And I think that’s going to really rapidly accelerate our vision of becoming the world’s best personal assistant. I think there’s a significant business model underneath it.

Colin Sebastian:

I guess, first off, on the International segment, I mean, not only an acceleration in our top line, but also on the margin side. If you could maybe add a little more color on some of the initiatives and improvements there. And then secondly, on the physical stores, including the grocery strategy, maybe any be worth kind of going through any updated thoughts you have there around the strategy of optimizing stores across categories. And if there are any changes to the footprint plans for those businesses? Thank you.

Operator:

And the next question comes from the line of Justin Post with Bank of America.

Brian Olsavsky:

Yes. Hi Justin. Thank you. On AWS, I think Andy did a good job of laying out the dynamics we’re seeing in -- among customers right now and where they’re cutting workloads and continued strength that we see in customers hitting their contractual limits and extending them and planning for the future. So, we feel really strongly about the outlook for the business and understand the short-term work that we’re doing to help customers save money. So, I would say Q2 versus Q1, there’s not an obvious year-over-year comp differential. It’s just, again, understanding which customers are cutting in some areas and growing in others and helping them get on hopefully to the new initiatives that they are planning as well.

Dave Fildes:

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

Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Quarter 4 2022 Financial Results Teleconference. [Operator Instructions]. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead.

Brian Olsavsky:

Thank you for joining today's call. As Dave mentioned earlier, I'm joined today by Andy Jassy, our CEO. Before we move on to take your questions, I will make some comments about our Q4 results. Let's start with revenue. For the fourth quarter, worldwide net sales were $149.2 billion, representing an increase of 12% year-over-year, excluding approximately 360 basis points of unfavorable impact from changes in foreign exchange rates and above the top end of our Q4 guidance range. We've seen that during periods of economic uncertainty, consumers are very careful about how they allocate their resources and where they choose to spend their money. Throughout Amazon's history, we have found that our focus on the customer helps to set us apart in times like these. This past holiday season, customers came to Amazon for great deals, fast delivery and our widest-ever selection, bolstered by nearly 2 million third-party seller partners who sell on Amazon. Enterprise customers continued their multi-decade shift to the cloud while working closely with our AWS teams to thoughtfully identify opportunities to reduce costs and optimize their work. In our worldwide stores business, with the ongoing economic uncertainty, coupled with the continuation of inflationary pressures, 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. Our teams worked hard to offer low prices and secure millions of deals for customers in Q4, including our first-ever Prime Early Access Sale in October and the more traditional Thanksgiving to Cyber Monday holiday weekend. These global sales events outperformed our expectations as customers responded to millions of deals across our growing selection. Third-party sellers remain a key contributor to that expanding selection. In Q4, sellers comprised a record 59% of overall unit sales. Sellers, vendors and brands continue to look to Amazon's advertising capabilities to reach customers in the always competitive holiday season, even as the macro environment required them to scrutinize their own marketing budgets. We saw good growth in advertising revenues in Q4, up 23% year-over-year, excluding the impact of foreign exchange. Prime membership continues to be a great value for our customers, and improving our Prime benefits is a continuous part of our investment strategy. Along with competitive pricing, broad selection and faster delivery speed, we've seen Prime members respond to our expanding entertainment offerings. During the quarter, we completed our first season of The Lord of the Rings

Operator:

[Operator Instructions]. And our first question comes from the line of Brian Nowak with Morgan Stanley.

Brian Olsavsky:

Brian, this is Brian. First, let me just start with your second question. On the -- sorry, can you hear me? On the expectation for retail margins, especially in North America, what we've said is when we look back to our cost structure pre-pandemic, we were just in the end of 2019, early part of 2020. We're just starting to roll out one-day shipping in North America, and we had an expectation of what our cost structure would look like. That has changed quite a bit in the last 3 years now due to a doubling of our network expansion. I think you've heard me tell this story on different calls. But essentially, we're now trying to, again, regain our cost structure that we've had in the past, balance the -- and get more efficient on the assets we've added in the last 2, 3 years now and also look at all the investment areas that we are working on to drive growth, continuing to look at them where we need to make course corrections, where we need to change things up. And we expect that, again, a lot of the improvement will be in North America operations costs. 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 hope to make and expect to make big improvements in 2023.

Operator:

And the next question comes from the line of Doug Anmuth with JPMorgan.

Andrew Jassy:

On the first one on grocery, I'd just start by saying that we think grocery is a really important and strategic area for us. It's a very large market segment, and there's a lot of frequency in how consumers shop for grocery. And we also believe that over time, grocery is going to be omnichannel. There are going to be a lot of people that order their grocery items online and have it delivered to them, and there are going to be a lot of people who continue to buy in physical stores. But you're going to also see a hybrid of those, where people pick out what they want online and pick it up in stores, or people are in stores and there's something that's not in inventory in the stores, so they go to their app or to a kiosk and order it to be delivered from online. And so I think having omnichannel is going to really matter. And I think that we have a pretty significant-sized grocery business. I think people sometimes don't realize that and that we've been building for a long time. It's continuing to accelerate, and I kind of see it broken into a few pieces. If you think about the online grocery offering, we have a very large business there. It looks different from the typical mega physical grocery store. But if you think about the aisles in a grocery store, from packaged food to paper products to canned goods to pet supplies to health and personal care items to consumables, we have a very large business there that continues to grow at a rapid clip and then we think will continue to grow. But it doesn't have a big market segment share in perishables. And if you really want to have significant market segment share in perishables, you typically need physical stores. And we have kind of 2 different offerings there. For what I think is the very best organic physical store experience and selection, we have Whole Foods, which is a very significant-sized business that's continuing to grow. I really like the progress that, that business has made on profitability in the last year. And I like what I see in front of it, and I think that's a very -- it's a premium product, but it's a significant business. It's a good business for us in the grocery space. I think if you want to have a mass physical store offering, you need a different offering. And that's what we've been working on with Amazon Fresh, and we have a few dozen stores so far. We're doing a fair bit of experimentation today in those stores to try to find a format that we think resonates with customers. It's differentiated in some meaningful fashion and where we like the economics. And we've been -- we've decided over the last year or so that we're not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023. We're working hard at it. We see some encouraging signs. And when we do find that equation, we will expand it more expansively. But I think that we have a very significant opportunity in the grocery segment. I think we're building a pretty broad grocery network across online and physical, and you're going to see us continue to work on it.

Eric Sheridan:

Maybe I'll ask one big picture of Andy and then just a housekeeping matter to Brian, if I can. Andy, keeping on this theme of sort of big picture and strategy and your perspective, 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? And maybe, Brian, if I can just ask a quick follow-up. In the Q1 operating income guidance that you gave, I think there's some confusion among investors as to where you might be capturing some of the restructuring charges from the announcements that the company has made on employee count between Q4 and Q1. Can you just clarify what was captured in Q4 versus what might be included in the way you frame the Q1 operating income guidance?

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. Now we're -- at this stage, we're big enough in our developed international territories that when there's something significant happening in the macro, we're going to be impacted as well. And if you just look in Europe as an example, the inflation is higher than most places, and the impact on Europeans for the war in Ukraine is more significant, and also the energy prices and hikes there are more significant. So you can see that in some of our growth numbers. 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.

Justin Post:

Great. Maybe one for Andy and then one for Brian. AWS, if you look at the revenue growth of mid-teens, it implies it could be flattish and even down this quarter. So maybe talk about what's driving that. Is it workload changes? Are there some clients that are shifting? Anything on the market share you could comment on? And then second, when do you think this could recover? Like what's the time frame? And would you expect margins to come back when revenues reaccelerate? I'll leave it at that.

Andrew Jassy:

So I would just add -- I mean, I think Brian covered a bunch of it. I think most enterprises right now are acting cautiously. You see it with virtually every enterprise, and we're being very thoughtful about streamlining our costs as well. And when you are being cautious, you look for ways that you can find -- you can spend less money. And where companies can cost optimize or, in some cases, they may be used to doing analysis over 90 days of information and they say, "Well, can I get away with it for 2 weeks, doing 2 weeks' worth," it's not necessarily the best thing long term. But a lot of companies will do that when they're in uncertain economic situation. And the reality is that the way that we've built all our businesses, but AWS in this particular instance, is that we're going to help our customers find a way to spend less money. We are not focused on trying to optimize in any one quarter or any one year, we're trying to build a set of relationships in business that outlast all of us. And so if it's good for our customers to find a way to be more cost effective in an uncertain economy, our team is going to spend a lot of cycles doing that. And it's one of the advantages that we've talked about since we launched AWS in 2006 of the cloud, which is that when it turns out you have a lot more demand than you anticipated, you can seamlessly scale up. But if it turns out that you don't need as much demand as you had, you can give it back to us and stop paying for it. And that elasticity is very unusual. It's something you can't do on-premises, which is one of the many reasons why the cloud is and AWS are very effective for customers. I think -- and I've spent a fair bit of time with the AWS team on this, and we look closely at what we see. We have a very robust, healthy customer pipeline, new customers, migrations that are set to happen. A lot of companies during times of discontinuity like this will step back and think about what they want to change strategically to be in a position to reinvent their businesses and change their customer experiences more quickly as uncertain economies emerge, and that often means moving to the cloud. We see a number of those pieces as well. 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.

Ronald Josey:

Maybe a bigger high-level question here just around Prime member engagement and just seeing third-party seller services growth accelerating in the quarter. And I believe it was mentioned that customer is spending more on everyday essentials, which may be a relatively new use case. Talk just a little bit more, maybe Andy and Brian, just around how engagement is evolving here for Prime members and really how this has grown wallet share over time and where this is going.

Andrew Jassy:

Just to add really one piece here, which is just, if you step back and think about a lot of subscription programs, there are a number of them that are $14, $15 a month really for entertainment content, which is more than what Prime is today. If you think about the value of Prime, which is less than what I just mentioned, where you get the entertainment content on the Prime Video side and you get the shipping benefit, the fast shipping benefit you can't find elsewhere and you get the music benefit, you get the Prime Gaming benefit and you get the photos benefit and you get the Buy with Prime capability, use your Prime subscription on websites beyond just Amazon and some of the grocery benefits that we provide, and RxPass like we just launched to get a number of medications people take regularly for $5 a month unlimited, that is remarkable value that you just don't find elsewhere. And we will continue to add things to Prime and continue to experiment with lots of different features and benefits. But it's still early days. And as we continue to make the service better and better and fully featured, we see people continuing to spend more at Amazon across our various businesses. So we're optimistic about it.

Mark Mahaney:

Two questions. Brian, just any color on why mid-teens is kind of a holdable growth rate for AWS over the next couple of quarters, given what looks like pretty clearly, continuing deterioration in enterprise demand? And then, Andy, I wonder at a high level if you could just talk about how your priorities may have changed or the company's priorities may have changed over the last year or so as you've been the CEO. And it looks like there's a bit of a peel back on devices, a peel back on physical stores, except for groceries and then maybe a little bit more of a lean in on health. And I'm not quite sure what you're doing with entertainment content spend like that. Maybe it's the same, maybe it's a little bit more. But just at a high level, how would you say your priorities have changed or are different than the prior CEOs?

Andrew Jassy:

Yes. I would say I think for any leadership team, each era is different, and it's often meaningfully impacted by what's happening around you. And I think that if you look at the last couple of years with things like the pandemic and the labor shortage in 2021 and the war in Ukraine and inflation and uncertain economy, good leadership teams look around and try to figure out what that means and how they should adjust their businesses. And so if you look at -- in the early part of 2022, I think we realized that as we tried to make sure we met the surge in demand for consumers and sellers and having to make decisions in 2020 for what fulfillment network investments we're going to make in 2022, we just had more capacity than we needed. And you saw us in the early part of 2022 delay some of our builds and mothballed some of our facilities to try and be more economic. And I think when we look at some of our physical business investments, physical store investments, I think there were just some areas where we didn't have conviction that they were going to be big needle movers for Amazon. And so that's why we closed down our 4-Star bookstores. And as we got into the early part of the summer, where we start our operating planning process, we -- and there was a lot of things happening in the macro economy, we started that process with the high-level tenet of we want to find a way to meaningfully streamline our costs in all of our businesses, not just their existing large businesses, but also in some of the investments we're making. We want to actually do a pretty good, thorough look about what we're investing and how much we think we need to, but doing so without having to give up our ability to invest in the key long-term strategic investments that we think could change broad customer experiences and change Amazon over time. And you saw that process led to us choosing to pause on incremental headcount as we tried to assess what was happening in the economy, and we eliminated some programs in fabric.com and Amazon Care and Amazon Glo and Amazon Explore. We decided to go slower on some -- on the physical store expansion in the grocery space until we had a format that we really believed in rolling out and we went a little bit slower on some devices, and until we made the very hard decision that Brian talked about earlier, which was the hardest decision I think we've all been a part of, which was to reduce or eliminate 18,000 roles. And so those were all done with an eye towards trying to streamline our cost but still be able to invest in the things that we think really matter over the long term. Now we have a way of looking at investments that is different maybe from some other companies. I'm not saying it's right or wrong. It's just the way we look at it, which is when we think about big areas to invest in, we ask ourselves a few questions. We ask, if we were successful, could it really be big and move the needle at Amazon, which is a high bar at a place like Amazon? Do we think it's being well served today? Do we have a differentiated approach? And do we have some competence in those areas? And if we don't, can we acquire them quickly? And if we like the answers to those questions, we will invest. Sometimes, that leads to very logical extensions for people. When I got to Amazon 25 years ago, we were a books-only retailer. And when we expanded into music and video and electronics, that seemed pretty natural to people. Amazingly, people were very surprised we were expanding into tools. That seemed far field for people, but it turned out not to be. When we launch something like Buy with Prime, I think people see that as more predictable. That process has also led us to less predictable investments. And I remember, I had a front-row seat in the AWS experience, having worked with the team and led the team from the very start. And I remember both externally and internally, there were a number of people who wondered why we were doing that. It was so different from retail only. But think about how different a company Amazon would be today if we hadn't invested in AWS. And so that informs some of the other meaningful investments we're making beyond our stores, in retail and advertising and AWS businesses. I think that while we've gone slower in some devices and things, we still -- when we look at the answers to those 4 questions, we are very enthusiastic about our investments in streaming entertainment devices, our low Earth orbit satellite and Kuiper, health care and a few other things. And I think that do I think every one of our new investments will be successful? History would say that, that would be a long shot. However, it only takes one or two of them becoming the fourth pillar for Amazon for us to be a very different company over time. So I think it's very worthwhile. We're going to continue to invest. We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.

Operator:

Good day, everyone, and welcome to the Amazon.com Q3 2022 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 will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead.

Brian Olsavsky:

Thank you for joining today's call. Before we move to questions, I will make some comments about our Q3 performance and the outlook for Q4. For the third quarter, worldwide net sales were $127.1 billion, representing an increase of 19% year-over-year, excluding approximately 460 basis points of unfavorable impact from changes in foreign exchange rates. As the dollar continued to strengthen during the quarter, the foreign exchange impact was higher than the 390 basis point impact we had incorporated into our Q3 guidance. This represents a headwind of approximately $900 million, more than we initially guided to. Throughout the quarter, our worldwide stores business continued to stay highly focused on our customers and driving the inputs that matter most, which helped to accelerate sales growth in the quarter. We now offer our widest selection ever. We've taken actions that have driven strong recovery of in-stock rates, and we continue to work on improving delivery speeds, all while ensuring our pricing remains sharp for our customers. 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. And we're working with these partners, most of whom are small and medium-sized businesses, to build an even stronger offering. We recently hosted Amazon Accelerate, our US conference for selling partners, where we introduced new tools, including new e-mail marketing capabilities, free-to-use shipping software that offers discounted shipping rates and new features and analytics to help sellers better understand and act on conversion-driving content. This was a big quarter for Prime members. We celebrated our eighth Prime Day in July, which contributed approximately 400 basis points to our Q3 year-over-year sales growth rate. Prime members purchased more than 300 million items worldwide, making it the biggest Prime Day net sales event in Amazon's history. As a reminder, Prime Day occurred in the second quarter of 2021. We also debut the two largest Prime Video releases ever. The Lord of the Rings

Eric Sheridan:

Thanks for taking the question. Brian, maybe I'll just ask a two-parter with respect to the revenue guide for Q4. Can you help us better understand some of the comments you made around the exit velocity, specifically with respect to the US e-commerce business or the AWS business and how that might inform, some of the lower-than-seasonal trends that seem to be implied in the Q4 guide, specifically with respect to either optimizations on the AWS side or changes in consumption behavior on the US e-commerce side? Thanks so much.

Operator:

Thank you. Our next question is from Doug Anmuth with JPMorgan. Please proceed with your question.

Brian Olsavsky:

Yeah. I think if you look at our free cash flow, there's multiple factors here. One is the drop-off in income for the trailing 12 months versus the 12 months before it, and a lot of that is driven to things that we've talked about on these calls. Ops cost, we’re still not in a -- our network doubled over the last 2.5 years. While we're making strides in productivity and network optimization, we still work to do there. So we have to get our cost structure back to pre-pandemic levels in a lot of areas of the company and mostly in operations. There's a unique thing going on with inventory right now because we have a lot of weeks of cover mainly due to supply chain issues coming out of Asia primarily and we're seeing with our sellers, too. We just have additional weeks of cover. We think our model reacts quickly to customer demand. This is more about the other side of the equation, the supply chain and having more in stock. So what the issue there is that we generally have a favorable working capital impact from accounts payable that is more days than our inventory. That's been flipping the last year, and we expect that to normalize as we move into 2023. And then CapEx is a big driver. We had, again, a doubling of the network, had very high CapEx the last two years. You'll see that we've lowered CapEx year-over-year. We probably cut about one-third of our budget from what we originally thought for 2022 while still focusing our capital dollars really on the AWS business and increasing customer demand or capacity for increasing customer demand in our stores business. So we're working hard on all those dimensions. And we expect, as we see a recovery in income generation, normalization of the inventory versus accounts payable cycle and efficiency in our CapEx spend, we intend to flip those numbers around.

Mark Mahaney:

Let me ask two profit questions. AWS margins were a little lower than we would have thought. Is that just a reflection of the full quarter impact of that stock-based compensation granted to those employees earlier in the year? Is that the new normal for AWS margins? And then international losses also were a little bit heavier than we thought, just talk about what drove those losses. And is that also the new normal for that segment? Thank you.

Operator:

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

Brian Olsavsky:

Let me have Dave answer the backlog question first.

Brian Olsavsky:

Yes. And your first question about cost optimization, first, there are some industries that have lower demand that's showing up in our volumes as probably like other companies as well, things like financial services, the mortgage business being down, cryptocurrencies being down. We're very strong in some of those industries, and that's part of it. But basically, what we see is customers are looking to save money versus their committed spend. We have options for them to do that. They can manage workloads better. They can switch to lower-cost products that have different performance profiles. They can switch to Graviton chips that have higher cost performance ratios. So, all really good things for the customer and for Amazon long-term. Again, we think the benefit of cloud computing is really showing up right now, because we allow customers to turn what can normally be a fixed expense into a variable expense, and they can let us manage the highs and lows of inflation and other cost of electricity and everything else. And they can get about to do their business using our services in a very highly secure way. So, I think just like in 2020, these time periods are good for long-term adoption on cloud computing. But the offset in the short run is that some companies have demand that drops. I think what was different in 2020 was there were companies that went down and there's companies that went up quite a bit that were servicing high volumes during the pandemic. So, that dynamic is not in place right now, and I think everyone is just cautious and they want to, again, watch their spend. And as CFO, I appreciate that, and we're doing the same thing here at Amazon.

John Blackledge:

That’s great. Thanks. Two questions. First, could you provide some more details on the cost structure initiatives, and when we could see those initiatives hitting the P&L? And then second, on the holiday season. It's a bit implicit in your guide and remarks thus far, but just curious of your expectations for consumer demand this holiday season versus last year. Thank you.

Operator:

And our final question will come from the line of Ross Sandler with Barclays. Please proceed with your question.

Brian Olsavsky:

Was that second question on AWS, Ross?

Brian Olsavsky:

Okay. Let me start with the efficiency. I just outlined a lot of it in the prior answer. But just to clarify, we were aiming for about $1.5 billion improvements sequentially versus Q2 and Q3. We feel like we came up about $0.5 billion short on that. Primarily -- mostly in our productivity we have a lot of -- with the Prime Day and the preparations for the Prime Early Access event, we have been running with very high inventory levels in our warehouses. But our inventory and our sellers, as we get ready for those events, paid off in the events themselves. In-stocks have been at really high levels. But in that environment, it's a little harder to work on. There's, blockages to making improvement in productivity. There's a lot of extra work when you have space constraints. But we will continue that fight. And while I can't forecast into 2023 yet, and I'm not really only talking about Q4. My message is that we have work to do in 2023, that we are aware of and working on today. Dave, do you want to take that question on AWS?

End of Q&A:

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

Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q2 2022 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 will be turning the call over to the Director of Investor Relations, Dave Fildes. Please go ahead.

Brian Olsavsky:

Thanks for joining today's call. Before we get the questions, I'll make some comments about our Q2 performance and the outlook for Q3. Let's start with Q2. During the quarter, we saw improvement in many of our key operational metrics, including in-stock levels and delivery speed and saw a subsequent step-up in consumer demand. For the quarter, worldwide net sales of $121.2 billion exceeded the top end of our revenue guidance range and represented an increase of 10% year-over-year, excluding approximately 320 basis points of unfavorable impact from changes in foreign exchange rates. This was a larger foreign exchange headwind than the 200 basis point impact we had incorporated into our Q2 guidance. As a reminder, our revenue growth accelerated to over 40% growth from the period between May 2020 and May 2021. While demand has remained strong, the lapping of this high growth period, depressed our revenue growth rate for the following 12 months ending in May of this year. Our growth rates going forward will no longer require this historical explanation. Q2 of last year was also when vaccines had become more available, particularly in the United States and we began to see more normal shopping patterns. Prime Day also occurred in Q2 last year and contributed about 400 basis points to our Q2 2021 year-over-year revenue growth rate. This year's Prime Day sales event occurred on July 12th and 13th, and is incorporated into our third quarter guidance. As the impacts of the last two years are normalizing, we are happy with how we've served customers and how they have responded. Our compound annual growth, since the start of the pandemic, stands at 25%, a growth rate higher than what we are seeing prior to the pandemic. Prime members have meaningfully increased their spend since the start of the pandemic. Over that period, we've seen stronger usage of Prime benefits by Prime members and a greater reliance on Amazon for their shopping and entertainment. We continue to improve the customer experience in Q2, including quarter-over-quarter improvements in delivery speed and inventory in stock levels. We have also moved quickly to adjust our staffing levels and improve the efficiency of our significantly expanded operations network. We have slowed our 2022 and 2023 operations expansion plans to better align with expected customer demand. While there's still work to be done, we've made good progress in Q2. Our Prime membership program remains a key driver of our worldwide stores business, and we continue innovating to make the membership even more useful and valuable. That includes the upcoming premier of The Lord of the Rings

Brian Nowak:

Thanks for taking my questions. I have two. The first one, Brian, I wanted to just talk a little bit about the bridge from 2Q to 3Q EBIT guide a little bit. It sounds like you're going to have revenue up nicely. You talked about the efficiencies of the $1.5 billion quarter-over-quarter and some of the incremental investments in content, et cetera. Where are the other areas where you're sort of investing more to grow and is any of that associated with merchandise margin or step-ups in discounting? That would be the first one. And the second one is kind of going back to your comment about you – how you've slowed 2022 and 2023 operations expansion plans. How should we think about the fulfillment and transportation CapEx sort of looking into the fourth quarter into next year? How far ahead of this build have you gone through for the last, call it, nine months? Thanks.

Operator:

Our next question comes from Doug Anmuth with JPMorgan. Please proceed with your question.

Brian Olsavsky:

Sure, Doug. I'll start with second question. So on margins in AWS, yes, as you mentioned that is dropping sequentially. The margin rate is going to fluctuate and this business is going to be always a factor of new investment and things like the sales force and new regions and infrastructure capacity offset by infrastructure efficiency gains that we see. Pricing issues as we extend contracts, we've seen really good progress with our customer base, longer and longer commitments, really committing to the cloud, some of that comes with credits to help them make their conversion to the cloud and so that the revenue pattern can be, and the margin on that revenue can fluctuate quite a bit quarter-to-quarter, but see a lot of strength in the business right now. We're very happy with the growth rate. We're happy with the adoption of the cloud. As you hit a potential rough patch in the economy, I think the last time we saw this was back in 2008-ish. And it’s hard to draw lessons from that, but we did notice that it did help our cloud business at the time because again, when you're trying to launch a new product or service and you have to face with building your own data center and getting capital for a data center and building it yourself or moving to the cloud and essentially buying incremental infrastructure capacity, the cloud computing really shows its value. So we're prepared – just like when the slowdown in 2020, we are prepared to help customers optimize their costs and will help them any who are scaling down. But we'll also, again, continue to find new customers and new industries including government agencies and happy with that. And if you look again, where our investments been over the last few years and the growth of our sales force and our sales support, it's starting to – it is showing benefits, and we expect that to continue. On your – sorry, your other question was, is that…

Brian Olsavsky:

Got it. I blended into one answer.

Brian Olsavsky:

Yes. Hopefully that covered what you’re asking about.

Brian Olsavsky:

Doug, just to – I mean, just to pile on to that too. I mean, I think just the longer term vision I probably talked about here, we're right now with 84 availability zones. So that's 26 geographic regions, and we've got plans for – to launch 24 more of those availability zones across eight regions. And this is Australia, Canada, India, Israel, New Zealand, Spain, Switzerland, UAE, so a lot of different spots. And so continuing to focus on building out to customers, working on that pipeline and building longer commitments, making – finding customers that are making longer commitments is really important to that. And just to that point, the backlog figure that we've discussed in the past and disclosed on a quarterly basis on our filings, it's up 65% year-over-year or about 13% quarter-over-quarter and the weighted average remaining life of those long-term commitments that we're talking about here continues to grow. So it's at about 3.9 years on a weighted average remaining life basis. So again, a lot of good work, a lot of still good opportunity out there to come, and as Brian talked about, we're working hard in many facets and investing in that to make sure we're in good position to serve folks.

Eric Sheridan:

Thanks for taking the questions. Maybe two-parter on the advertising business, where you saw continued strength. Is there any way to give us an update of how much of the advertising services line at this point is driven by North America e-commerce versus international e-commerce, and how you think about the relative growth rates and advertising going forward between North America and international? And the second part would be away from the e-commerce-driven parts of advertising. How are you feeling about the positioning and the investments you need to make around things like Connected TV and programmatic advertising, where from the outside in it looks like you're continuing to make greater levels of investment and increasing your exposure to a wider array of advertising products? Thanks.

Dave Fildes:

Yes. I think it was – Eric, it was a question around kind of interactive work. I mean, we've got – one of our main priorities is building relevant and engaging ad experiences. And so, we of course, introduced interactive ads last year for streaming video content, things like Freevee. We've got Amazon Music as ad supported tier as well for audio ads. So looking for opportunities like that, where customers can more easily engage with brands while streaming content. So I think there's a lot of good opportunity for that, but what's great, video advertising, as you mentioned, it's still early in that space, it's increasingly coming mainstream and then viewing behaviors have really shifted away from some of the more traditional cable or kind of traditional viewing and advertisers are using our ad- supported content to reach those viewers. So things that are ongoing we've talked about around Freevee, around Twitch, and then of course, some things we're obviously excited about it. Thursday Night Football and Amazon streaming TV ads capabilities that we're going to continue to work with these partners and work with our own kind of technology capabilities to keep building out.

Operator:

Our next question comes from Jason Helfstein with Oppenheimer. Please proceed with your question.

Brian Olsavsky:

Let me start on your first one. So challenge the premise is a little bit there about incenting mix, sorry, I believe that is how I interpreted your question. We are relatively indifferent as to whether some customer buys a third-party or first-party product from us. We're all about obviously is price selection and convenience. And 3P particularly helps us with selection. And when it's part of FBA can also help as being more Prime eligible and available to ship in one, two days or whatever the Prime offer happens to be. So we're happy with the selection that we've added from third-party sellers. And I think that shows in the percentage mix that you see. We're proud of the investment we've made to build tools and products that allow sellers to be successful on our site. And it's a great partnership and it's worked really well. Sellers and vendors are also some of our larger advertising customers as well and helps – that advertising helps them surface new selection to our customer base. So it's a very strong partnership and it's been getting stronger. And I think you'll see also that they had a very big part in our Prime Day earlier this month.

Operator:

Our next question comes from Youssef Squali with Truist Securities. Please proceed with your question.

Brian Olsavsky:

Sure. Thank you, Youssef. So first on the – let's take them one at a time. So on the Prime fee increase earlier in the year, we're happy with the results we're seeing in the Prime program. Prime membership and retention is still strong. I think that change has been above our expectations positively. And I think the benefit of the program continues to get better and better. And as I mentioned in-stocks never been higher, delivery speed is increasing. So not to mention a lot of the new content, especially on the video side that will be coming in the fall. So we feel good about the program and the state of the Prime members after a very rough couple years of pandemic turmoil. And we think it's good base to build upon. So on the seller fee again, we added that fee grudgingly in May to compensate for some of the inflationary pressures we're seeing. I don't want to give you the idea that either of those fee increases came close to covering our costs. You can see from our operating results, some of it's internal related, but a lot of it's external factors that they're – we are not passing through that at a 100% to external groups. And it’s – we've got to work our way out of the condition we are in and we are making good progress in Q2 and expect to keep pressing on that in the second half of the year, but saw strength in the seller results in Q2, as we mentioned on the percentage mix. So I think, seller business remain strong in an integral part of our customer offering.

Operator:

Our final question comes from Stephen Ju with Credit Suisse. Please proceed with your question.

Brian Olsavsky:

Sure, Stephen. Thank you. On the headcount, yes, I think it was more as we mentioned last quarter – last year – excuse me, in Q1, we added – to give you a flavor for it, we added 14,000 workers in Q1, prior year we had reduced our net headcount by 27,000. So we’re pretty transparent about the fact that we had hired a lot of people in Q1 for the coverage of the Omicron variant, luckily that variant subsided and we were left with a higher headcount position that has come down through adjusting our hiring levels and normal attrition and – was pretty much resolved by the end of April or early part of May. So that is dominating the quarter-over-quarter reduction in headcount. I would note that we're still up 188,000 year-over-year and nearly double the headcount of what we had heading into the pandemic in early 2020. So you're right, there will be adjustments to that as we move forward into more holiday level demand. Right now, we see a stabilization in the workforce, maybe we see good hiring rates. And so I think as you remember, there was a very difficult labor period in the second half of last year, and it didn't arrived kind of quickly out of nowhere. So we're certainly diligent on that and making sure we have a good workplace and an environment that will attract employees.

Dave Fildes:

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

Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q1 2022 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 will be turning the call over to the Director of Investor Relations, Dave Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining today's call. I'd like to start with a few comments on what we're seeing as we're coming out of the pandemic, both on the customer experience side and on the operating cost side in this current inflationary environment. Let's start with demand and customer experience. Worldwide net sales in Q1 were $116.4 billion, an increase of 9% year-over-year, excluding the impact of foreign exchange. This is the top end of our guidance range of $112 billion to $117 billion. Our compound annual growth since before the pandemic stands at 25%, a growth rate higher than what we were seeing before the pandemic. Our prime members continue to be a key driver of growth. Prime members have meaningfully increased their spend since the start of the pandemic, and we continue to see consistently high member renewal rates. We also added millions more new Prime members during the quarter. Throughout the past two years, we've seen stronger usage of Prime benefits by Prime members and a greater reliance on Amazon for their shopping and entertainment. In the first quarter, we made encouraging progress on key customer metrics. Delivery speed performance is now approaching levels not seen since the months immediately preceding the pandemic in early 2020. And we now have the widest selection ever available for Prime's fast delivery. We have worked to protect and enhance the customer experience despite a sharp increase in costs, particularly over the past three quarters. We've seen a large cost to keep up with demand these past two years. During this period, we doubled the size of our operations and nearly doubled our workforce to 1.6 million employees. Labor and physical space are no longer the bottlenecks they were throughout much of 2020 and 2021. However, we continue to face a variety of cost pressures in our consumer business. We'll break these into two buckets, externally driven costs, primarily inflation; and internally controllable costs, primarily productivity and fixed cost deleverage. The externally driven costs are a result of intensifying inflationary pressures throughout Q1. Line haul air and ocean shipping rates continue to be at or above the rates in the second half of last year, which were already much higher than pre-COVID levels. Some of this is due to the impact of the Omicron variant in China and labor shortages at point of origin, and the start of the war in the Ukraine has contributed to high fuel prices. For example, the cost to ship in overseas containers more than doubled compared to pre-pandemic rates. And the cost of fuel is approximately 1.5 times higher than it was even a year ago. Combined with the year-over-year increases in wage inflation, these inflationary pressures have added approximately $2 billion of incremental costs when compared to last year. While we will continue to look for ways to mitigate these costs, we expect they will be around for some time. The next bucket of costs related to productivity and fixed cost leverage, which we consider to be more within our control and are working to reduce. These additional costs correspond to the state of the labor force and fulfillment network following two years of disruption and large demand variability. We now look forward to more predictability in our consumer order patterns and greater stability in our operations. Let's start with labor. As a reminder, in the second half of 2021, we were operating in a labor-constrained environment. With the emergence of the Omicron variant in late 2021, we saw a substantial increase in fulfillment network employees that on leave, and we continue to hire new employees to cover these absences. As the variant subsided in the second half of the quarter and employees returned from leave, we quickly transitioned from being understaffed to being overstaffed, resulting in lower productivity. This lower productivity added approximately $2 billion in costs compared to last year. In the last few weeks of the quarter and into April, we've seen productivity improvements across the network, and we expect to reduce these cost headwinds in Q2. The last issue relates to our fixed cost leverage. Despite still seeing strong customer demand and expansion of our FBA business, we currently have excess capacity in our fulfillment and transportation network. Capacity decisions are made years in advance, and we made conscious decisions in 2020 and early 2021 to not let space be a constraint on our business. During the pandemic, we were facing not only unprecedented demand, but also extended lead times on new capacity. And we built towards the high end of a very volatile demand outlook. Now that demand patterns have stabilized, we see an opportunity to better match our capacity to demand. We have lowered our operations, capital expenditures for 2022 and are evaluating other ways to increase our fixed cost leverage. We estimate that this overcapacity, coupled with the extraordinary leverage we saw in Q1 of last year, resulted in $2 billion of additional costs year-over-year in Q1. We do expect the effects of these fixed cost leverage to persist for the next several quarters as we grow into this capacity. When you combine the impacts of the externally driven costs and the internally controllable costs, you get approximately $6 billion in incremental costs for the quarter. Approximately two-thirds of these costs are within our control. And with demand normalizing, we remain focused on rightsizing our cost structure and driving out any cost inefficiencies. Our guidance includes an expectation that we will incur approximately $4 billion of these incremental costs in Q2. We saw another strong quarter of innovation and customer engagement in the AWS segment, where net sales were $18.4 billion in Q1, up 37% year-over-year and now represent an annualized sales run rate of nearly $74 billion. Developers at organizations of all sizes from governments and not-for-profits to start-ups and enterprises continue to choose Amazon Web Services. Companies like Telefonica, Verizon, Boeing, MongoDB, Amdocs, Bundesliga, Maple Leaf Sports & Entertainment, the NHL and Thread announced new agreements and service launches supported by AWS. We also continue to build support infrastructure to best serve AWS' millions of customers. We recently completed the launch of our first 16 local zones in the United States with 32 more to come across 26 countries. Local zones extend AWS regions to place our services at the edge of the cloud near large population, industry and IT centers, expanding our infrastructure footprint and enabling customers to build with single-digit millisecond latency performance. Last quarter, I provided some detail on our overall capital investments. So, let me add to that with our current thinking. First, as a reminder, we look at the combination of CapEx plus finance leases. Capital investments were $61 billion on the trailing 12-month period ended March 31. About 40% of that went to infrastructure, primarily supporting AWS, but also supporting our sizable consumer business. About 30% is fulfillment capacity, primarily fulfillment center warehouses. A little less than 25% is for transportation. So, think of that as the middle and last-mile capacity related to customer shipments. The remaining 5% or so is comprised of things like corporate space and physical stores. For full year 2022, we do expect infrastructure spend to grow year-over-year, in large part, to support the rapid growth in innovation we're seeing within AWS. We expect infrastructure should represent about half of our total capital investments in 2022. For the consumer business, as I said earlier, we currently have some excess capacity in the network that we need to grow into. So, we've brought down our build expectations. Note again that many of the build decisions were made 18 to 24 months ago, so there are limitations on what we can adjust midyear. That said, we expect fulfillment dollars spent on capital projects to be lower in 2022 versus the prior year. We also expect transportation dollars spent on capital projects to be flat to slightly down. Finally, I'll highlight a few additional items. We reported an overall net loss of $3.8 billion in the first quarter. While we primarily focus our comments on operating income, I'd point out that this net loss includes a pretax valuation loss of $7.6 billion, included in nonoperating expense from our common stock investment in Rivian Automotive. You may remember that we had a $12 billion gain on Rivian in Q4. We also provided our second quarter financial guidance as part of our earnings release. As a reminder, our comparable period of Q2 2021 included the continuation of extraordinary net sales growth in roughly the first half of that quarter. That began to moderate in the second half as vaccines became more readily available in many countries and people started getting out of their homes. In addition, note that this year's Prime Day sales event will occur in the third quarter, in July to be specific. Last year, in 2021, Prime Day occurred in the second quarter. Prime Day contributed about 400 basis points to our Q2 2021 year-over-year revenue growth rate. Lastly, as you look at our Q2 operating income guidance, a reminder that we will see our seasonal step-up in stock-based compensation expense as our employees receive annual restricted stock unit grants in the second quarter. This year, we expect to see stock-based compensation expense of approximately $6 billion, up from $3.3 billion in Q1, largely reflecting wage inflation as we continue to hire and retain employees in high-demand areas, including engineers and other tech workers. With that, let's move on to your questions.

Mark Mahaney:

Okay. Thanks. I want to ask two questions, please. In terms of the revenue guide for the June quarter, I think it sort of implies about 3%. And if you look sequentially and if you look back at the last couple of years, the non-COVID years, the growth has been between 4% and 6%. Are you seeing signs of consumer softness or weakening? Is there any particular factor that would be -- cause your sequential growth to be lower than typical? And then briefly on the margins for Q2. So, you got $4 billion in kind of these incremental costs versus $6 billion in the March quarter, but yet your guidance year-over-year implies kind of the same sort of year-over-year margin decline, about 500 bps. Could you just explain that a little bit? Thanks.

Dave Fildes:

And Mark, I think your second question was related to the operating income guidance and some of the detail there. So, as Brian said, the first time we've given the guidance for the second quarter. But you detailed a number of pieces, but like you said, expect to see, in aggregate, about $4 billion of pressure for the 3 buckets that Brian talked about, higher inflationary pressures, lower productivity and some fixed cost deleverage persisting into Q2. So, that will be at some lower levels as we aim to and kind of expect to see some improvement in productivity, some of those other areas. We're also committed to just generally reducing variable cost per unit and working to lever our fixed costs, specifically where we have those controllable cost buckets Brian spoke about. The other thing -- again, Brian mentioned it towards the end there of this opening -- to see that seasonal step-up in stock-based compensation expense. So, recall that our employees received those RSU grants in the second quarter. This year, we expect to see the expense of approximately $6 billion. And so, that's up from about $3.3 billion in the first quarter.

Justin Post:

Big picture, Amazon hasn't really been around during a period of high inflation. How do you think about passing through the higher input costs through pricing? When you look at your units, they're flat and you're just not seeing any price increases in there. I know FX is a headwind, but how do you think about passing that through? And when can we start to see that? And then, second question, it looks like your shipping costs are up 14% versus units flat, probably makes sense with the input costs. But we would expect some savings as you bring a lot of that transportation in-house, a lot of the delivery in-house. Is -- are you seeing savings there? And how do you think about shipping costs versus units? Thanks.

Dave Fildes:

Justin, on your second point regarding inflation, of course, we've talked about we're not immune to inflationary pressures on the cost side and with the ongoing supply chain disruptions and the start of the war in the Ukraine since our last quarter. We see larger impacts of inflation, some line haul, shipping rates, fuel shipping supplies and wages, which we talked about in some recent quarters as well. And we also see some volatility in utility pricing for some of the energy costs in operating the AWS data centers. Now, when you look at costs for customers and sellers in terms of product pricing, I just reinforce our pricing philosophy hasn't changed. We aim to offer low competitive pricing and try to stay on top of that pricing environment and make sure we're delivering a great price for customers. For our 1P business, that means continuing to be really competitive in that space with low prices relative to the reputable competitors out there and staying really close to that on the data. For third-party, we don't control that price that's set by third-party sellers. So, they're running their own businesses and we'll adjust the pricing to account for inflationary costs in their environment as well. And of course, on pricing and another other many other services with sellers, we offer services to help them not only handle with logistics, but also get better pricing information to make sure that they're staying on top of that as well. So, wherever we can help them, we do that. We did increase some fees effective, I believe, is today related to the FBA sellers and some surcharge there. We're focused on, of course, addressing permanent costs and ensuring our fees are competitive versus those charged out there by their sellers. But it's still unclear if the inflationary costs will go up or down and so -- and for how long they'll persist. So, rather than a permanent fee change, we implemented that fuel and inflation surcharge for the first time. And it's, of course, a mechanism that's broadly used across the supply chain providers that are out there already, but it's the first time that we've done something like this.

Brian Thomas:

Great. Thanks for taking my questions. I have two. First one, Brian, I want to ask you about one day, same day. Now that you're getting inventory selection, SKU selection in some cases back to where it was pre-pandemic. What are you seeing from a demand or an elasticity perspective as you get more inventory available for one day, same day? Is it really leading to incremental sales based on your data? And the second one, I want to ask about tech and content. It came in a little higher despite AWS costs coming in lower. Is there anything else we should sort of be thinking about in our modeling in tech and content, whether it's Kuiper or other items that are moving through that line item for the year?

Dave Fildes:

On the second point, the technology and content. Just as a reminder, components in there is you got the Amazon Tech and the AWS infrastructure, so everything from servers, network and equipment, data center-related depreciation, rent utilities, those types of things. The AWS Tech employee costs and costs to support the dotcom website and a number of other technology initiatives that we're working on. For Q1, it was up about 19% year-over-year, which was down a little bit, less than what you see for year-over-year growth throughout 2021. That growth rate, though, does, of course, include an offset Q1 2022 related to a partial offset, I should say, related to the change in estimated useful lives for servers, which was a little under $1 billion of impact in the first quarter. In terms of just the investment areas, I just reinforced it, it’s continued investment in the tech infrastructure. One of the bigger pieces remains AWS, of course, there. And then, just broadly speaking, inclusive of AWS, the headcount to support -- the build-out and support that the AWS team is doing as well as some consumer tech teams, Alexa and Echo devices and certain other areas there.

Doug Anmuth:

Thanks for the question. You talked about how you're no longer chasing physical or staffing capacity and, in fact, you're actually running at in excess at the moment. So, hoping you could talk a little bit about how long you think it could take to regain some of the productivity and cost efficiencies in the fulfillment network. Thank you.

Operator:

Our next question comes from Eric Sheridan with Goldman Sachs.

Brian Olsavsky:

Sure thing. Good questions, Eric. Let me start with the cost penalties. So, in Q4, we did mention $4 billion of cost penalties and drag on that quarter. And $1 billion of that was fixed cost deleverage, principally a combination of having enough space and having super high leverage in the prior year when we were chasing volume and had less space. And we indicated that that would be carrying over into 2022 and it has. From a productivity standpoint, our issues in the second half of last year were different. They were -- we didn't have as much labor, even though we added, I believe, was 200 -- I have it right here, 270,000 workers in the second half of last year. We were chasing labor and it was creating much disruption within our network. Long zone shipments, half full trucks, all kinds of negative consequences of not having labor, but we made it through Q4 with the anticipation that we'll be able to hold our labor for Q1 and labor certainty would be a lot better and certain in our network. That is still the plan, and we're probably a couple of months late on that because of some of the issues with Omicron in January. And our reaction to it was that uncertain labor environment where a lot of people were on leave. We hired more people and then found ourselves overstaffed when the Omicron variant subsided rather quickly, at least from our standpoint in warehouses. So, the issue is switched from disruption to productivity losses to overcapacity on labor. And we believe that that will dissipate. It will take time in Q2, but -- so it's not the full -- we don't get the full $2 billion back in Q2, but we will make great strides on that. Inflation has been in both periods. Inflation was in the transportation costs, especially in wage inflation last year. It remains there. It's been amplified a bit by the fuel costs following the Ukraine conflict, which has happened since we last spoke. So, it's more a factor -- those costs will now, we believe, will persist a little longer than we were hoping at the beginning of the year. And I mentioned some of the per unit rates for transportation, cargo shipments and also fuel costs. Those are real, and we have to find ways to offset those or use less of high-cost things, like transportation and fuel. So, we're working on that. As we progress, there's only guidance for Q2. But what we see is that the fixed cost deleverage will narrow as we go through the year, and we'll be really glad we have this capacity in Q3 when Prime Day hits because that's always a big surge of both, inventory and orders, and then definitely in the holiday season. So, we will -- the way we see it as we've come out of a very tumultuous two years. We are glad we made the decisions we made over the past two years. And now we have a chance to more rightsize our capacity to a more normalized demand pattern. So, what's left there is really inflation, and that's what we're working on and evaluating and finding ways to mitigate and in some cases, having to pass some of the costs through to third-party sellers as well so that we're not subsidizing sales there. And then, we will see. So, we expect the year-over-year revenue comps to improve in the second half of the year because, again, we're passing this year of super high growth that I mentioned before from May of 2020 to May of 2021. But, it's not like the volume has receded. Like, in Q1 literally, where revenue 61% higher over two years from 2020. So the way to think about it is it went up and stayed up and now it's -- it will resume a more normal growth pattern. But I wouldn't be full by the revenue growth rates in this difficult comp period.

Ross Sandler:

So, the letter mentioned some impacts post the Ukraine invasion. I'm guessing it's mostly on the inflation and the fuel costs just mentioned. But any comment about how revenue trajectory compared in March after the conflict started versus before across your geographies? And is there any noticeable difference between Prime member volume and non-Prime? Thanks a lot.

Operator:

Our final question comes from Jason Helfstein with Oppenheimer.

Dave Fildes:

Yes. Jason, I'll take the second one first, just on the backlog. So, yes, I mean, we're continuing to see what the backlog is, right? It's the increase of AWS customers making long-term commitments for AWS. At the March period ended, we had $88.9 billion balance for that. So, that's up about 68% year-over-year. And the weighted average remaining kind of life term for those is 3.8 years.

Dave Fildes:

Thanks for joining us today on the call and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest. And we look forward to speaking with you again next quarter.

Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q4 2021 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 will be turning the call over to the Director of Investor Relations, Dave Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining us today. Let me start by once again acknowledging and thanking our employees around the world for their efforts. This was the second holiday season during this pandemic, and it required exceptional collaboration and coordination among our employees and business partners to prioritize both safety and customer experience. The team did a great job of delivering for customers this holiday. Now, let’s discuss our fourth quarter financial results. For the fourth quarter, net sales were $137.4 billion, an increase of 10% year-over-year, excluding the impact of foreign exchange. We continue to focus on offering the best experience for our customers across our businesses. On the consumer side, we welcomed millions of new Prime members in both the United States and international during the quarter, while continuing to see consistently high member renewal rates across geographies. Our third-party sellers, in particular, benefited from strong customer demand this holiday season. 3P sellers provided 56% of all unit sales in the quarter, the highest fourth quarter mix ever. And AWS saw a continuation of the strong usage and revenue growth we’ve seen throughout 2021. AWS added more revenue year-over-year than any quarter in its history, and it’s now a $71 billion annualized run rate business, up from $51 billion run rate one year ago. Even on a large base, revenue increased 40% year-over-year. As I’ve mentioned in prior calls, we also encourage you to look at the multiyear compounded annual revenue growth rate since the onset of the pandemic to better put this revenue growth in perspective. Despite lapping 2020’s extraordinary sales growth, we continue to see an increase in customer demand and sales during the remainder of 2021, even as the economy opened back up. For Q4, Amazon’s two-year annual compounded growth rate was 25%, excluding impacts from foreign exchange, consistent with our rate in the third quarter. We’ve invested significantly to keep pace with this demand, including nearly doubling our operations capacity in the past two years, expanding our fulfillment center footprint while adding significant transportation assets to ensure fast on-time delivery. There are now 1.6 million Amazon employees worldwide, also doubling in the two-year period. Our fourth quarter operating income was $3.5 billion. As we mentioned in the last earnings call, we did see more than $4 billion in costs from inflationary pressures and loss productivity and disruption in our operations. The inflation primarily relates to wage increases and incentives in our operations as well as higher pricing from third-party carriers supporting our fulfillment network. Loss productivity and network disruptions were driven primarily by labor capacity constraints due to challenges in staffing up our facilities for peak. This is driven by the very tight labor market in the second half of 2021 and more recently by the emergence of the Omicron variant. We do expect these cost challenges to persist into Q1, albeit adjusted for lower seasonal volumes relative to the fourth quarter. Our results also include approximately $1 billion year-over-year negative impact from lower fixed cost leverage in our fulfillment network. Recall that we saw very high unit volumes for most of 2020 and the first half of 2021 and that fulfillment network was running at close to 100% capacity during this time. Now with more normal fulfillment capacity, our operating leverage decreases versus the comparable prior year periods. We expect to continue to see some negative year-over-year impact from this in Q1 of 2022. While we navigate these near-term headwinds, the fundamentals of our retail business are strong and we are optimistic about a number of growth businesses and a strong innovation pipeline. AWS delivered another strong quarter of growth as enterprises and developers continue to look to AWS for critical innovative cloud solutions. Now to $71 billion annualized revenue run rate, AWS revenue grew 40% year-over-year in Q4, our fourth consecutive quarter of revenue growth rate acceleration. We hosted our 10th re:Invent conference in the quarter, welcoming 26,000 in-person attendees and hundreds of thousands who attended virtually. re:Invent remains a highlight of the year for us because it’s a great opportunity to introduce new services while engaging with customers and partners to better inform where we should be focusing next. We announced more than 115 new services and features during the event as businesses spanning all major industries continue to choose AWS as their technology provider to speed up innovation in their organizations. In the past quarter alone, NASDAQ announced a multiyear partnership to migrate North America markets to AWS, including their matching engine. Best Buy selected AWS as its preferred cloud provider for cloud infrastructure services. Meta, the parent company of Facebook, Instagram and WhatsApp selected AWS as its long-term strategic cloud provider to accelerate artificial intelligence research and development. And Stellantis, the parent company of Chrysler Dodge, Fiat, Jeep and Ram selected AWS as its preferred global cloud provider for vehicle platforms to accelerate new digital products and upskill global workforce. You can find more examples in our earnings release of how the world’s largest companies such as Adidas, Goldman Sachs, Pfizer, Rivian and more are using AWS to transform their businesses. Overall net income was $14.4 billion in the fourth quarter. While we normally focus our comments on operating income, I’d point out that this net income includes a pretax valuation gain of $11.8 billion related to our common stock investment in Rivian Automotive, which completed its initial public offering in November. Before we move to Q&A, there are three additional items I’ll mention related to our disclosures. First, we are now separating advertising services revenue from other revenue as part of our revenue disclosures by groups of similar products and services. This updated presentation is provided in the supplemental financial information included in our earnings release. We’re excited to continue innovating in areas like sponsored ads, streaming video and measurement. Of course, advertising only works so we make it useful for Amazon customers when we create great customer experiences, we deliver better outcomes for brands. Second, we’re prospectively updating the useful life of our servers and networking equipment, beginning in January. As a practice, we monitor and review the useful lives of our depreciable assets on a regular basis to make sure that our financial statements reflect our best estimate of how long the assets are going to be used in operations. We are increasing the useful life for servers from four years to five years and network equipment from five years to six years. As a result, our first quarter guidance includes an approximate $1 billion of lower depreciation expense. We expect the quarterly impact of this change to decrease throughout the year. Although we’re calling out an accounting change here, this really reflects a tremendous team effort by AWS to make our server and network equipment last longer. We’ve been operating at scale for over 15 years, and we continue to refine our software to run more efficiently on the hardware. This then lowers stress on the hardware and extends the useful life, both for the assets that we use to support AWS’ external customers as well as those used to support our own internal Amazon businesses. And finally, we will increase the price of Prime in the United States in Q1. We continue to make Prime better. In recent years, we’ve added more product selection available with fast free unlimited shipping, more exclusive deals and discounts, and more high-quality entertainment, including TV, movies, music and books. Since 2018, Prime Video has tripled the number of Amazon Originals. And this September, Prime Video will also release the highly anticipated the Lord of The Rings

Eric Sheridan:

Thanks so much for taking the question. I want to come back to the comments in the release by Andy on same-day delivery. Can you talk a little bit about how many of those investments might be behind you versus ahead of you with respect to same-day delivery and how that sets the Company up with respect to either consumption behavior by consumers versus the competitive dynamic you’re seeing against elements of like omnichannel and last-mile delivery competitors? Thanks so much.

Operator:

Our next question is from Brian Nowak with Morgan Stanley. Please proceed with your question.

Brian Olsavsky:

Sure. On the second one, we have a history of making long-term bets for customers, and some of those fall into very small short-term revenue businesses. They’ll generally roll up into other revenue, which you see as very small after we’ve separated out advertising. So, I think that you do see it in our revenue disclosure generally. But a lot of our profitability is shown at the segment level, and we’ll continue to do that with the revenue disclosure. You asked about the business model. I think it’s a good question. And we are -- as we reflect over the last two years, we are encouraged by a lot of things. You ticked them off there, the adoption of digital benefits, the use of grocery and how valuable that’s become to customers, not to mention the acceleration of companies going to the cloud. The ability to double our fulfillment capacity over that time period, including making major strides in our Amazon Logistics sets us up well for the future. And -- but we’ve been also dealing with a lot of disruption during this time period. So, the early wave of disruption was handling volume without the capacity to handle it, and then, quickly playing catch-up. And as that was starting to improve, labor took a turn in the United States, especially labor availability, and we’ve really had scrambled to add workers. We’ve been successful at it. We added over 273,000 employees in the last half of last year. But I think if you look at the prior year, it was over 400,000. So, there’s a lot of expansion that’s been going on in the network. And we feel good about the basic contributors of profitability. There’s -- if you step back, there’s procurement margin and working with vendors and sellers as well. There’s fees in some cases, for 3P services and Prime, as we just mentioned is going up. Advertising has certainly added a layer of contribution over the last few years. But again, that only works and is only successful if we make it a good customer experience. So, we’re really working hard to do that. And that becomes a part of our ability to offer lower prices, better selection and more convenience. So, if you take those, those are all stable and strengthening areas. It’s really the onus – our onus is to get our operational efficiency back in all of our areas of cost. We have, again, built a lot of capacity. We’ve hired a lot of people. Some of those people are still -- our teams are all battling Omicron right now. But, we do see the sun coming out and getting better here over the next number of quarters, and that’s going to be where we’re going to put a lot of our effort.

Doug Anmuth:

Thanks for taking the question. Brian, you doubled your fulfillment network and also your headcount over the past two years. I believe you’re about 2.5 years into this investment cycle. Where is Amazon in terms of emerging from this investment cycle? Can you see a slowdown in that big investment spending this year?

Operator:

Our next question is from Mark Mahaney with Evercore ISI.

Brian Olsavsky:

Okay, Mark. Just remember that I’m sitting in Seattle. So, my view of the sun coming out is a little different than perhaps where you are. But we do see things improving. We do -- let’s step back to Q4. We had said that we would have about $4 billion of additional costs due to labor shortages and the inefficiencies of that cause as well as increased labor rates and shift differentials of premiums and external transportation costs. We came in just slightly over that $4 billion. I think things went as expected. I would say that the hiring was strong, but we could have done better. We could have had more people, so we had to cover a lot of -- there was additional overtime. There are some higher costs on third-party transportation. But, all-in-all, the challenge in Q4 was to staff, raise -- or excuse me, increase the staffing, and we said we wanted to add 150,000 people or more. We added net-net of about 140,000 in the quarter, 273,000 in the second half of the year. So, as you turn the page into 2022, we feel good -- better about labor, except Omicron has kicked up, and now you have a different type of labor issue where there’s a lot of people who are on leave of absences and short term as they work to have a positive test on COVID and can get back into the workforce and protect their fellow workers. So, there’s instances where you’re paying twice or 3 times for the same labor hour if someone is on leave, you’re paying them and you’re also paying potentially for someone who’s covering the shift on over time. So, there’s cost pressure in Q1. I think, the good news is that the labor challenge is not as great in Q1 as it is in Q4 -- Q3 and Q4. So, we’re hopeful on that. We have to work to now make our operations more efficient as we get staffing levels up. And we’re going to plow a lot of our effort into increasing our transportation speeds and beating our pre-pandemic levels. So, there’s a lot of different challenges going on right now. The team has been working heads down for over two years now. So, they need -- we’ve got a great team, and we have confidence that we will -- things will improve as we get through the year. So hopefully, that answers your question.

Colin Sebastian:

I wanted to ask about AWS, and nice acceleration in revenues there. Wondering if you could talk about maybe more specifically the driver of that acceleration. Is the application layer maybe now large enough where you’re seeing that contribute incrementally to growth? And I think in the release, you also highlighted infrastructure expansion globally. I think it might be interesting to add some context around the scale or distribution of the AWS business internationally outside of North America, if you could put some context around that. Thank you.

Dave Fildes:

Colin, it’s Dave here. Just following up on the international point, what we’re seeing outside of the U.S., I mean we are -- as part of that overall strong growth, we are continuing to see considerable momentum really around the world. It’s customers moving their workloads over to AWS at different phases. And so, as you look at the release, some of the other announcements, there’s a good diverse list of companies, Adidas in Germany migrated its SAP environments to AWS, in the Netherlands, Stellantis selected AWS as its preferred cloud provider. There’s a number of really great companies examples doing different big things at different stages of that migration. What’s been important to us, amongst many things is continuing to expand our global infrastructure footprint really to support this momentum we’re seeing. So, just this last quarter in the fourth quarter, we opened the Asia Pacific region over in Jakarta. And we’ve got announcements for plans to launch and Canada in the Calgary region next year or perhaps it 2023 or 2024. So, a lot of work and a lot of momentum. Those are just a few examples. But where we sit now, it’s -- AWS has 84 availability zones in 26 regions around the world right now. And just in terms of the forward-looking road map, we have announced to launch 24 more zones in 8 more regions, and those will be here in the next couple of years.

Jason Helfstein:

Thanks. So, I just want to dig a little bit into third-party seller services. The growth slowed there even on a two-year stack. So maybe if you could talk about some of the factors that you think could be weighing on that? And then, just on AWS, you kind of laid out some color there. Is there any bottlenecks to growth that you’re still seeing? I mean, you talked about why this is a very good quarter and having to do with some of the comps, but any bottlenecks to grow, either supply chain or employee related? Thank you.

Jason Helfstein:

Yes, on AWS.

Operator:

Our next question is from Justin Post with Bank of America.

Brian Olsavsky:

Yes. Let me start with why we broke it out. We’ve looked at the proportion of other revenue that is advertising services. And we got to a point where -- and I had been pretty much mentioning every quarter that for the majority of that line item was advertising revenue. And we feel it at a certain size that we should break it out and split the other half of that. So, that was really the impetus for the change. And we look at those things every year, and end of year was a good time to do it as we start 2022. So hopefully, that’s helpful for you to understand the growth rate without having to impute it from the other revenue. The growth rate in the quarter of 33% was down from 66% in Q4 of last year. Q4 last year obviously had Prime Day in it for first time. And Prime Day carries a lot. I can’t scale it for you, but there’s a lot of advertising tied to Prime Day, obviously. So when that moves quarters, it generally has an impact on the run rates. We saw that a bit in Q2 of this year when we did have Prime Day and it was lapping -- Q2 2021 was lapping, the 2020 period that didn’t have a Prime Day in it. So, that will move around a bit. But I think the bigger story here is the success we’re having with sellers and vendors, and making that a useful product for customers.

Operator:

Our next question is from John Blackledge with Cowen.

Brian Olsavsky:

Hi, John. Thank you for your question. First on the Prime question. We evaluate each country differently. We look at the relative price to the customer versus our cost to supply that and the usage and the value that we’re creating for customers. We felt, especially after not raising the price in the United States since 2018 that the time was right to raise it. And we think it’s a much more valuable program today than it was in 2020, let alone 2018. So, other countries, we’ll continue to evaluate every year and nothing else to announce right now. On supply chain, there’s specific things that I think we all see in the supply chain where we’re waiting for products. But as far as Amazon is concerned, we did a lot to combat the supply chain issues we saw in Q4 or anticipated in Q4. We bottled product ahead. We work with vendors to secure inventory early, in some cases, paid earlier, which had a working capital impact. We also worked very hard to open up channels of -- existing channels of input into the country, whether it was port capacity or vessel capacity. So, we did everything. We knew how to as far as trying to get more capacity in a constrained market. And we think it worked for our customers in Q4 as challenges remain in ‘20, I wouldn’t say we’ve totally passed that, but we don’t expect it to be a big issue in Q1.

Dan Salmon:

First, I just wanted to follow up a little bit and see on the advertising numbers, if there’s any qualitative color that you could add, say, rough balance of performance advertising versus brand advertising, maybe U.S. versus rest of the world. Anything you add could be great. And then, just second, Brian, you mentioned the exclusive broadcast of Thursday Night Football and is one of the reasons supporting a higher price increase for Prime. Dave, you mentioned it as an element that is a dynamic new one for the advertising business. Maybe could we just return to that point as the sort of importance of live sports in the video space is incredibly important, is that one that you see kind of taking the business to a new level at this stage?

Dave Fildes:

Arsenal, I don’t know.

Dave Fildes:

Dan, in terms of just break out, I think as we’ve said before, on the advertising side, the sponsored products and brands, they make up the majority of the ad revenue today. We haven’t given a split on a geographic basis. But suffice to say, a lot of these efforts, Brian talked about, whether it’s on the video, advertising opportunities for -- in those sponsored products and sponsored brand efforts, we’ve replicated a lot of the tools and features and services around the world and are kind of constantly learning and building out the brand and the presence with that so we can make better inroads with customers over the long term.

Dave Fildes:

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

Operator:

Thank you for standing by. Good day, everyone, and welcome to the amazon.com Q3 2021 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 Director of Investor Relations, Dave Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining us today. Let me first start by reiterating and expanding on a few comments that Andy made in our earnings release. We are now reporting our results for the seventh quarter since the pandemic began and we're especially proud of our employees for both their response to the unprecedented customer demand we have experienced, as well as for their implementation of many safety procedures to create a safe work environment. During this period, we have continued to earn the trust of our customers, especially our Prime members, who have increased their annual purchases and their use of Prime benefits over the last 20 months. We've also seen strong growth in our advertising products, as vendors and sellers have embraced our ability to build their brands and to reach customers just as they are considering their purchases. And AWS has seen a reacceleration of revenue growth as customers have expanded their commitment to the cloud and selected AWS as their cloud partner. As a result, Amazon 's Q3 revenue of $110.8 billion represented a two-year compounded annual growth rate of 25% versus a pre-pandemic growth rate in the low 20% range. We're grateful to our customers who have put their trust in us. However, there have certainly been challenges to overcome since February of last year. We've nearly doubled our operations capacity in the past two years to keep up with customer demand. We've incurred billions of dollars in additional cost to keep our employees safe and to support testing and other COVID-related costs. And we have grown our global headcount by 628,000 employees in the past 18 months and are recruiting for more, including more than 150,000 in the U.S. to support Q4 seasonal demand. This demand for labor has recently coincided with the shortage of available workers, particularly in the United States. It began in Q2, but it really started to impact our operations and cost structure in Q3. It's led to wage increases and sign-on incentives, as companies compete for workers, as well as inconsistent staffing levels in our operations. In addition, disruption to the global supply chains and inflation in the cost of materials such as steel and services such as trucking have also raised our cost of operations. We estimate the cost of labor, labor-related productivity losses, and cost inflation to have added approximately $2 billion in operating costs in Q3, particularly in August and September. Our Q4 guidance range anticipates that these costs will approach $4 billion in Q4 as we see a full quarter's impact of these effects and a higher seasonal unit volume. Specify in Q3, we saw nearly $1 billion of inflationary pressures, primarily tied to wage increases and incentives in our operations. Our average starting wage is now over $18 per hour, with an additional $3 per hour depending on shifts in many locations and sign-on bonuses that can be up to $3,000. In addition, we saw inflationary pressures in raw materials and services, as I mentioned, particularly in steel and third-party trucking. We also saw over $1 billion of cost tied to loss productivity and disruption in our operations. In Q3, labor became our primary capacity constraint, not storage space or fulfillment capacity. As a result, inventory placement was frequently redirected to fulfillment centers to have the labor to receive the products. This resulted in less optimal placement, which leads to longer and more expensive transportation routes. In short, our operations are normally well-staffed and optimized to be in-stock and to deliver to customers in one to two days. Labor shortages in supply chain disruptions upset this balance and resulted in additional costs to ensure that we continue to maintain our service levels to customers. As you look to Q4, we've incorporated this nearly $4 billion of added costs into our operating income guidance range. In addition, we have a nearly $1 billion year-over-year increase in Q4 for spend to support our digital media content efforts, including video, music, and games. We recently launched New World, a multiplayer online PC game, and we're delighted with the response and engagement. New World has become the highest played new game this year on Steam. Moving to video content. Prime Video has a compelling lineup of live sports, including the UEFA Champions League and Ligue 1 soccer in France, as well as NFL Thursday Night Football in the United States. And we have a great lineup of original series to look forward to, including the Wheel of Time, Lord of the Rings, and Citadel and new seasons from Jack Ryan, The Marvelous Mrs. Maisel and The Boys. We're excited to add this content to our Prime benefits and increase the value of our Prime membership. Q4's guidance also includes an estimated $1 billion year-over-year negative impact from lower fixed cost leverage in our fulfillment network. Recall that we saw very high unit volumes in Q4 of last year, and then our fulfillment centers were running at close to 100% capacity as we work to add physical capacity to match demand. As we're now back to having more normal Q4 fulfillment capacity and have even brought forward 2022 capacity into 2021, our operating leverage drops compared with last Q4. Our revenue guidance for the fourth quarter reflects the current trends we are seeing, including the lapping of our Prime Day Event in October of last year. We are dealing with labor risks and supply chain interruptions like many other companies, which increases our range of potential outcomes in Q4. Consumers have started to return to pre-pandemic spending patterns, increasing the mobility and spending more on travel and services in Q2 and Q3. But we're appreciative that the incremental demand that came our way during the pandemic has remained and that we're continuing to grow on top of that. We're all set to make this a great holiday season for customers. Last quarter, we discussed the physical capacity we were adding to meet customer demand. We made strong progress in Q3 to build and open new facilities. And as a result, for the first time since the pandemic began, we're no longer capacity constrained for fiscal space in the network. September alone, we brought online more than 100 new buildings in the United States, including fulfillment centers, source centers, and last-mile delivery stations. For the year, we expect our 2021 footprint additions to exceed last year's buildout, which was also significant. Put this in perspective, we are on track to double our fulfillment network over the two-year period since the pandemic's early days. A lot of this increased capacity supports our FBA sellers. Third-party sellers and the products they offer remain an important strength of our offerings for customers, representing 56% of total paid units sold in Q3, that's up from 54% in Q3 of last year. And we're working with these partners, most of whom are small and medium-sized businesses, to build an even stronger offering. We recently hosted Amazon Accelerate, a U.S. conference for selling partners, where we introduce new tools and capabilities, including local selling, which enables sellers to start or expand their multichannel offerings by providing both in-store pickup and fast delivery to nearby customers and global selling tools to make it easier for U.S. third-party sellers to offer their products worldwide. I'll finish with a few highlights regarding two fast-growing areas with strong profitability profiles. First, we saw continuation of strong usage and revenue growth in AWS, with revenues accelerating to 39% year-over-year in Q3, driven by a broad base of services and customers. There are number of areas we're excited about, but let's focus for a moment on our efforts in machine learning. Customers of all sizes and across all industries are using AWS as their preferred cloud provider for machine learning services. We've been investing in this area for several years, offering an extensive set of machines learning services, including ones that can be applied to common business problems, like Amazon Connect for contact center intelligence, or Amazon Kendra for intelligent enterprise search. We recently launched solutions specific to industries, including industrial machine learning services, as well as Amazon Health Lake to help healthcare and life sciences customers seamlessly transform their data across disparate sources to understand and extract meaningful medical information. And Amazon SageMaker continues to help customers scale their use of machine learning to core workloads, making it one of the fastest-growing services in AWS history, with tens of thousands of active external customers using it every month. We also continue to see strong interest in rapid adoption of our custom silicon and AWS design Graviton2 processors, delivering customers up to 40% better price performance than current X86 processors. Moving to Graviton2 means little to no code changes, so that customers can quickly and easily migrate their workloads to access the best price performance in Amazon EC2. Last but certainly not least, Amazon Advertising continues to grow quickly, representing the significant majority of other revenue, which grew 49% year-over-year in Q3. We're seeing strong adoption across Amazon vendors, sellers, and authors, as well as brands that don't sell in our store, particularly as we've built out our streaming TV offerings. Of course, advertising only works if we make it useful for customers. And when we create great customer experiences, we deliver better outcomes for brands. The team also recently hosted unboxed 2021, our annual conference for advertisers and brands, where we shared some of our newest solutions to help companies connect with their customers, measure the impact of their advertising, and grow their businesses. As we shift into Q4, we're heads down, focused on delivering a great experience for our customers this holiday season. We are committed to make the necessary investments in both people and capacity to bring more items in stock and to deliver them quickly to customers. With that, let's move on to Q&A.

Justin Post:

Great. Maybe I will ask about fulfillment capacity. You said your capacity is up 2x since before the pandemic and I've got units up around 55% on a two-year basis. So just wondering, is the capacity needed per unit going up as you speed up delivery times and try to get to one day? And then second, are you in really good shape for next year? And could you be ahead of plan for next year and kind of cut down the investment there? Thank you.

Operator:

Our next question comes from Mark Mahaney with Evercore ISI. Please proceed with your question.

Brian Olsavsky :

Yeah. I definitely do, and I'm glad you brought that up because I didn't include it in my last answer. But yes, we have unfinished business on the one-day promise side. We were ramping that up nicely in 2019 and in the first quarter of 2020 before the pandemic. We're still not back to levels that we saw pre-pandemic. We're getting closer. We feel again that labor constraints have not helped us close the gap there. But we don't want to be as good as -- just as good as we were before the pandemic. We expect that to increase in 2022, and we're going to plan accordingly. And I think you start to see the difference in the growth rate before and after that one day. I won't forecast it too much, but we do -- we did see pick-up and we saw really that we got into the consideration set for more purchases. When something's available in one day or less, now you really don't have to go to a store even if you need it very quickly. So, it just opens up more ways for us to serve our customers, especially our Prime customers. On your comment about international, yes, you're right, it was a larger loss than in prior quarters. In fact, we had flipped to positive operating income through the pandemic. A lot of that was again getting two years of volume growth on top of a one-year's -- current year cost structure. There's also a bit of a slowdown just in content and other things, although we're building that, we would have built it at a higher clip. But the long-term trends remain the same in international. It's a group that has a very different life -- we're in different stages in different countries. The established countries of Europe and Japan are further along, obviously, and they perform closer to the North America results. We have new countries. We've added a lot in the last few years, the investments in Brazil, the Middle East, Australia, and adjacent countries of Poland and Sweden within Europe. So those are all important investments, but they start as an investment. And they -- we build over time and we front-load a lot of Prime benefits in those countries, especially things like video. We find video as a really strong, excuse me, attractor of customers and it's a gateway to Prime in a lot of those countries. So, the model is a bit flipped as versus what we saw in North America, just because we added video later in the game. But we like what we see and we see the actual the hours watched in the percent of Prime members who watch video is actually higher in a lot of the countries, the new countries that we're getting into. So, we're - as we said, we're going to make money long-term in international. Right now, it's a bit of an umbrella that catches a lot of different countries in different stages. We're happy with both the established countries. They are also seeing, however, the pressures that we're seeing in United States on labor and cost and disruption from supply chains. So, can't forecast this any further at the segment level, but just want to give you a little color.

Doug Anmuth :

Thanks for taking the question. Brian, just curious, how have you fared in pulling holiday shopping earlier thus far this quarter? And to what degree can that help ease some of the impact? And perhaps, what did you learn there last year from having Prime Day in 4Q? And then can you just also talk a little bit about the drivers of AWS acceleration and how you think about the margin profile with more contribution from enterprise deals? Thanks.

Operator:

Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question.

Brian Olsavsky :

Sure. Let me start with your comment on the, we'll call it the core retail business. We're very bullish on the retail business. In fact, it's impossible and not productive to even try and separate advertising from third-party from retail. It's all, to us, part of a flywheel where we service customers. We do it in an efficient way and we earn their trust in their future business, and we fight that battle every day. And we look to expand the Prime program to build that flywheel. We look to add new products and services like grocery and video and music and the list is long. So, when you look at retail, certainly expensive right now, especially with the costs I’ve laid out in Q3 and Q4, for us to service that business. However, we have other monetization vehicles, including advertising that if we do well, become a benefit to customers and to advertisers at the same time. That's what we work on. So that is an important part of our profitability structure. It's tied directly to happy customers and customers who are engaged in buying things. So, we don't separate those two. We do for some reasons. We want to make sure that we're understanding where our cost and where our profits happen to be. But we do realize it's all part of the same customer offering. So – and we like the return on investment flywheel. We do. We - I get to see investments in warehouses trucking programs, new offerings that we do in new country expansion. We segment those as much as we can into discrete decisions. And then we track them and make sure that not only are we delighting customers or delighting shareholders in the long-term. So, we feel good about that. Certainly, the cost of fulfillment in the last few months and what we forecast into the next quarter are not what we're happy about, but we see ourselves as the shock absorber, absorbing a lot of the costs, so that the customers not impacted and sellers are not impacted. And again, it's just quite limited options in the short run to impact your cost structure. Most companies would delay shipment or incur -- add fees or something. We don't think that is customer-centric nor productive. And we will get through this period and then we are committed to getting our cost structure down.

Operator:

Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.

Brian Olsavsky :

Sure. Thanks, Eric, for your questions. I will just start with the second one. So how should we think about the cost permanence? Certainly, on the labor front there, we estimate about half of the cost is permanent base wage. The other half is in incentives that we currently offer to attract workers. We're going to have to see. I think it's going to adjust -- we are going to have to adjust and work to lower our costs going forward, especially on things that we procure that may have gone up in price in the last few months. Mostly what I’m talking about is kind of third-party things like trucking and steel for fulfillment center construction. So, we will be working on our cost structure for a while. If you're trying to do the bridge for Q4 year-over-year, a couple of things I would say, yes, the COVID costs are lower by $1.5 billion versus last year.

Brian Olsavsky :

Yes. If your Q4, excuse me, the 4 billion is going to be pure variance year-over-year. That's what we've identified, 2 billion roughly of labor inflation and 2 billion of operational disruption mostly through higher transportation costs. There are a couple of other items year-over-year. If you remember last year, we were running at nearly 100% capacity. That's not the ideal for us, but it has the benefit of being highly leveraged and can have other costs, but it's highly leveraged mathematically on a cost per unit shipped. As we get more into a normal buffer, so that we can handle swings in volumes, especially as we get closer to holiday cutoffs, but we generally run with more slack in the system. And we’re kind of in a good fortunate for returning to maybe a more normal profile and space, this Q4 issues again on labor. So there's that. There's the increased cost in digital content, combination of video, games, music, audible. So, some rather large items year-over-year, having given you a complete bridge, but that's what we're seeing.

Operator:

Our next question comes from the line of Dan Salmon with BMO Capital Markets. Please proceed with your question.

Brian Olsavsky :

Sure. Thanks, Dan. I’m going to start with the first question on Prime. So yes, we're very excited about the current programming that’s coming out in the back-end of this year, and also the prospect for 2022. We think it's a real step-up in options and quality and volume for our customers globally in the video side and very excited about it. And you're right, it does have a lot of value. I've nothing to discuss or announce around Prime price increases. But we always look at that. We look at the value where it's generally a country-by-country discussion. We look at the value we’ve built. We look at the time since our last price increase. There’s a lot of strategic factors involved obviously. But the main job is to build the value of Prime, and that's what we work on and video is a big part of that.

Operator:

Our next question comes from Ross Sandler with Barclays. Please proceed with your question.

Dave Fildes:

Yeah. I'll take the second question first related to games. So, I think as we mentioned at the top, really excited to get New World out there to more customers' hands and saw some really good momentum kind of an engagement coming out of the gate with customers there and some of the offerings like the Steam platform and Twitch as well. But if you step back, I think, look, we've said for a while now that gaming is obviously one of the fastest-growing industries in the entertainment space. And we find and see a number of different ways to be able to offer some folks a variety of services. So, we developed and published games for customers through Amazon Games, which developed that New World. We're also leveraging the Flywheel -- the Amazon Flywheel, offering some exclusive and free content as part of Prime Gaming, so it’s part of Prime benefits. You've got AWS, utilizing AWS servers to stream games with our Luna -- Amazon Luna offering. And then as I mentioned before, building this large, engaged, passionate gaming community online with Twitch. So, I think, again, kind of to my point about a lot of really interesting ideas when we're talking about video and the advertising space, it's a lot of different areas that can interrelate, serve different communities within the gaming area. And so, we're going to keep working on that, keep building and listening to customers on the games we've launched, and keep pushing forward with an exciting slate in the future.

Operator:

Our final question comes from Brent Thill with Jefferies. Please proceed with your question.

Brian Olsavsky :

No. We're actually -- again, we're seeing strong growth. Obviously, the Prime Day is always a really great advertising event as well. And then you saw a little bit of that in Q2 when we had Prime Day in Q2 this year and we're lapping Prime Day from Q4 of last year. So, there might be comparable issues, but as far as the strength of the offering and the differential between the growth of the advertising business versus the unit growth, we think we're really resonating with advertisers. We're given new products, new ways to advertise, new ways to highlight the brands. It’s resonating with sellers as well for the same reasons. And we feel it's additive to the customer experience. It helps customers find curated selection and also see brands that they may not have otherwise seen. Dave Fildes Thanks for joining us today on the call and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon, and we look forward to talking with you again next quarter.

Operator:

Thank you for standing by. Good day, everyone, and welcome to the amazon.com Q2 2021 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 will be turning the call over to Director of Investor Relations, Mr. Dave Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining us today. Before we get to Q&A, I'd like to first thank all of our Prime members, our vendors, our 3P sellers, and my Amazon colleagues, especially the Worldwide Ops team, for a record-breaking Prime Day in June. Third-party sellers, who are mostly comprised of small- and medium-sized businesses, were a big contributor to Prime Day 's success. The Prime Day event was the biggest two-day period ever for these SMBs in our stores, and our 3P revenue continued to grow significantly faster than our online stores revenue. Third-party units represented 56% of our total paid units in Q2, up from a 53% mix one year ago. Our second quarter net sales were $113 billion or at about the midpoint of our guidance range. That’s a year-over-year increase of 27% or 24% excluding the impact of foreign exchange, and included the shift of Prime Day into Q2 this year, which added about 400 basis points to the year-over-year growth rate. Q2 of this year was a transition period for many of our customers. As the quarter progressed, people were at home less as restrictions and lockdowns eased in some of our largest geographies, including the U.S. and much of Europe. As a result, while Prime members continued to spend more with us, growth in Prime members spend moderated compared to spending seen during the peak of the pandemic. As you look at our recent revenue growth rates, I want to give you some insight into what we are seeing as there have been some noticeable intra-quarter changes in our revenue run rate. Prime Day has also been in three different quarters the past three years, so I will normalize for this impact in my growth rate comments. Also since FX rates have bounced around, all of my comments exclude foreign exchange. Here’s a quick recap of our growth rates in 2020 and 2021. First, before COVID-19, we've been growing at a revenue growth rate close to 20%. 2019 full-year growth was 22%, and revenue growth for the first two months of 2020 was 21%. Once the pandemic hit and lockdowns began in March 2020, the initial growth rate jumped into the mid-30% range. Q1 of last year ended with a revenue growth rate of 27%. However, our operations network took time to step up to serve this growth in demand due to space constraints and our need to ramp up hiring quickly while prioritizing employee health and safety. By mid-May of last year, we have made good progress to open up more capacity by adding hundreds of thousands of employees. This allowed our revenue growth rate to jump to the 35% to 45% range and remained at that level through Q1 of this year when we had 41% growth. In Q2 of this year, we began to comp this high sales period from last year, and the year-over-year revenue growth rate has narrowed. It has also narrowed as vaccines become more readily available in many countries and people are getting out of their homes. Since May 15, again, excluding Prime Day, our year-over-year growth rate has dropped into the mid-teens. Our Q3 revenue guidance range of 10% to 16% growth reflects an expected continuation of this trend. Given all this volatility, it is useful to consider the 2-year compounded annual growth rate, which remained strong in the 25% to 30% range. Recall, this compares to our pre-pandemic growth rate of 21%. This reflects the acceleration of Prime membership and Prime member purchase levels over the past 18 months. While I'm not giving forward guidance beyond Q3 of this year, we do expect this pattern of difficult year-over-year revenue comps to continue for the next few quarters. As we move forward and start to comp COVID 's impact on our revenue growth, we encourage you to also look at the multiyear compounded annual growth rate since the onset of the pandemic to better put this growth in perspective. Now, back to the Q2 highlights. We continue to be very pleased with the Prime member growth and engagement we're seeing. We've been fortunate to welcome more than 50 million new members in the past 18 months, and Prime member benefits usage remains high. That includes continued strong engagement in Prime's family of digital offerings, like Prime Video's original movies. For example, Prime members helped make The Tomorrow War and Tom Clancy's Without Remorse, the number one streaming movies on their respective opening weekends. Amazon Advertising is innovating at a fast clip, launching over 40 new features and self-service capabilities in the quarter, making it easier for sellers, companies, and authors to grow their businesses by helping customers discover their brands and products. Other revenue increased 83% year-over-year in Q2, excluding the impact of foreign exchange, driven largely by continued acceleration in our ads business. Moving on to AWS, revenue growth accelerated across a broad range of customers. We see strong growth in enterprises, governments, educational, and research institutions, and our start-up and digital native customers. We recently announced new commitments and migrations from customers across a diverse set of major industries, including Swisscom and Bell Canada in Telecom, BMO Financial Group, and Bancolombia in financial services, and Ferrari in automotive. AWS customers recognize that the move to the cloud is very positive for their businesses in the medium and long term. Disruptive economic events like COVID have caused many people to step back and think about how they want to change strategically, and many have come to the conclusion that they do not want to own and run their own datacenters. They assume they can save money and gain agility and innovation by moving to AWS. I'll finish up with some comments on our ongoing investments in operations. As we think about the pull-forward in demand we've seen these past 18 months, it has required and will continue to require a significant amount of investment in our fulfillment network. Our teams have done a remarkable job stepping up to serve customers and support our vendors and sellers, and we've worked hard to increase capacity at a rapid rate. For the trailing 12 months ended Q2, Capex and equipment finance leases increased 74% versus the prior trailing 12-month period. And as usual, most of our 2021 spend and building openings are planned in the second half of this year. This is all part of a multi-year investment cycle for us. Unit volumes, while obviously growing at lower rates of last year's large comp continue to remain high, and we see strong demand for FBA and third-party sellers. So, there's more work to do, including additional build-outs of our FCs, as well as our middle mile and last-mile capabilities to support our fast-improving delivery offers for customers. I encourage you to read the business highlights in our press release. It's a diverse collection of efforts supported by many thousands of customer-focused Amazon employees, from Amazon Pharmacy to Business Prime to to AWS' plans to add seven new regions to NFL Thursday Night Football starting next year, to the Black Business Accelerator program, to Alexa’s collaboration with Ford Motor Company. We remain heads down, focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for our shareholders. With that, let's move on to Q&A.

Doug Anmuth:

Thanks for taking the questions. Brian, I just want to ask two, just going back to the 2Q revenue beyond Prime spend moderating and the reopening, is there anything else you'd point to, in particular, that they have kept you in the middle of the range versus obviously where you've been over the last year versus expectations? And I guess, in particular, can you talk about Prime Day relative to your expectations? And then secondly, the BigCommerce partnership, a couple weeks ago, you seem to have opened up more to working with merchants away from Amazon. Just hoping you could talk more about the multichannel fulfillment opportunity, and do you think you now have the logistics capabilities, and has everything recovered to the point where you can offer these services more to third parties? Thanks.

Dave Fildes:

Doug, on your second question, it's Dave here. I’d just say our focus is really squarely on adding capacity to meet the current high customer demand that Brian talked about in his opening remarks. We're always working to develop new and innovative ways to support partners, SMBs in particular who sell on Amazon, and that includes testing shipping programs and newer initiatives that can help those businesses get packages to customers quickly and reliably. So, continue to see us look for ways to be able to innovate where it's appropriate relative to the customer demand we're already seeing in our network.

Colin Sebastian:

Thanks very much, guys. I guess sort of masked in the headline results is actually pretty solid performance in the higher margin segments of the business, including third-party services, subscriptions, AWS, and advertising. and then I think that was evident in gross margin as well. I guess my question is whether there is any deliberate shift towards these services or is that just more of an output of somewhat weaker trends you saw after mid-May? And then secondly, is Prime Day still a once per year phenomenon or would you consider separate events spread out during the same year to capitalize on different seasonal trends? Thanks.

Operator:

Your next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.

Brian Olsavsky:

Sure. Thanks. Yes, I would say on the fulfillment side, there are a number of things. First, we are adding a lot of capacity. If you step back, the Amazon fulfilled unit volume, so that's the units coming out of our fulfillment centers both retail and FBA have doubled in the past 2 years. And the AMZL, the delivery arm of our business, has more than doubled in that time period. So, you can see there's been very strong multiyear demand here that we're still catching up with from last year. So most of -- I mentioned earlier our year-over-year growth in CapEx and equipment leases is 74% in the second -- at the end of June compared to 38% the year before. So, we're continuing to add and most of that development is really ahead of us in the second half of the year. So, if you've been with us a long time, you know, the cadence is that as we add demand -- excuse me, as we add capacity, there's a lot of additional costs from hiring to starting up to training, to getting that building or sort center or delivery station up and running. It usually takes a multi-year period to tame those assets. And we've literally nearly doubled our network here in the last 18 months from a size standpoint. There's a lot of that going on, a lot of strong effort by our fulfillment and ops teams to help mitigate the costs. The other thing is wage pressure has become evident, we've talked about this a bit. The wage increase for -- that we normally would do in October, we pulled forward into May. We're spending a lot of money on signing and incentives. And while we have very good staffing levels, it's not without cost. It's very competitive labor market out there, and certainly the biggest contributor to inflationary pressures that we're seeing in business.

Operator:

Your next question comes from line of Youssef Squali with Truist Securities. Please proceed with your question.

Brian Olsavsky:

Sure. Let me start with the online store's revenue. You're probably looking at a growth rate of 13% in Q2 versus the revenue growth -- FX-neutral revenue growth rate of 24%. I would point you back to last year in Q2. At that online stores grew 49%, there were restrictions on what we stocked in our warehouses. And as you remember, we had to constrain space for a lot third-party sellers as well as our retail offering. But the mix shifted for the early part of Q2 last year to be more of a retail mix and then MFN mix, and then it flip back to be more balanced mix that you've seen in the past. On forward investment, here's how I would explain it. Again, we are sitting here with demand volumes that have gone up on an Amazon Fulfilled Network basis. It's doubled in the 2-year period. So we are not back to where we want to be on a number of dimensions. We handled Q4 last year, we've been playing catch-up pretty much since the pandemic started. But what suffered is space and space constraints. And that's -- it's gotten better, but it was a factor last year. And also our one-day delivery percentage has dropped and has not returned to levels seeing pre-pandemic in the United States, It's on par and getting better than pre-pandemic in Europe. But in the United States, while it's improving, it still hasn't reached the pre-pandemic level. So we have a lot of growth to do there. As far as the stickiness of purchases. I think there's certainly a number of things that were purchased last year that didn't repeat for a lot of retailers. Things like consumables early on, gloves, cleaning supplies, computer monitors, some things you use to outfit your house. You can probably go through your own checklist of purchases and say, okay, I probably will not do this every year. But there has been a healthy movement to online commerce. We have -- we've added Prime members, and the Prime members that we have have ratcheted up their purchases with us, which was always part of the plan and a good sign. It means we're offering them more things that they can buy and satisfying more their demand needs. Even in Q2, when, and as I said, rates are starting to moderate, in the quarter, those Prime member purchases still grew year-over-year on a -- per Prime member basis they just didn't grow at the same cliff that they had in the prior 3 or 4 quarters. So that's a good sign. And we like the engagement levels and the retention levels that we see with Prime members. So all-in-all very positive story on that front has accelerated the model quite a bit. There's just, again, some comparison issues that we'll just have to realize and perhaps look at a 2-year compound annual growth rate for a period of time to judge where we are on that progress because there's been a lot of ins and outs, especially with Prime Day moving around. So hopefully that answers your question.

Stephen Ju:

Thank you so much. Brian, it seems like the pandemic has touched off what looks like a greater urgency among SMBs to accelerate their presence online, and I was wondering if your third-party marketplaces' platform is seeing perhaps a faster influx of more sellers or emerging brands. And following up on the labor market commentary there, do you think you will see any incremental headwinds hiring the necessary people for performance centers this year? Thanks.

Brian Olsavsky:

And on the labor comment, we can't predict too far in the future. We've got labor estimate in our Q3 guidance, I would say it's a bit of a complicated mix of economic growth and industries opening up, government payments in some areas that may impact people's working, and then whether or not children are at back at school fully in the fall. So there's a lot of dynamics we do count on having more employees in Q3 and Q4, as you know, from our ramp up to the holidays. So I would I would probably count on wage pressure remaining for the immediate future.

Ron Josey:

Great. Thanks for taking the question. I wanted to ask on just international operating income. that's -- if you look at the results, it's now producing consistently positive results here. And so can you talk to us a little bit more? Just talk to us a little bit more about what's driving that. Is this the result of most major builds are now complete, and you're seeing the efficiencies in fulfillment centers, and so we should see this trend continue or is there something else that's driving international operating income? Just remaining positive here. Thank you.

Operator:

Our next question comes from Jason Helfstein with Oppenheimer. Please proceed with your question.

Brian Olsavsky:

Hi, Jason. Thank you. Let me start with that second question. No, my comments were really about throttling of space last year which did impact -- it impacted our vendors and our retail business as well as our third-party business, probably more pronounced in Q2 of last year, especially April and into early May as we are working to get fully staffed in a help -- helpful and safe way, and also build out more capacity. In Q4, again, we're handling volumes that were somewhat unheard of year-over-year. Our Q4 growth rate was 42%. That's usually not the case, and it's magnified at peak when we're already handling the highest volumes of the year. All I was trying to say was that our space planning and if you will, throttling of space for their price was not something we like to do. We don't think we're the only ones who had that issue. And that's why we're building out our networks so quickly in our minds. It's hard to do quickly. but we're moving as quickly as possible. And again, we have a lot of new capacity being added in the second half of the year. On AWS growth, if you look at the run rate in last year, we had 33% growth rate in Q1 and it dropped to 29, 29, and 28 the last 3 quarters. There's always a lot of year-over-year things going on, but we do note that last year there was a lot of effort by companies to limit their spend and operate more efficiently as as we're all plunged into an unknown demand curve and some industries who were hurt worse than others. If you remember, we worked -- we actually worked very hard with our customers to help them lower their demand for AWS services as best we could to match any new demand patterns. We also help [Indiscernible] scale very quickly. Companies like [Indiscernible], Netflix and others were very help -- glad that AWS was there to help them scale to meet volume very quickly, so there's a lot of mixed bag there. We think that it was a strong performance for this quarter. We can see good trends with new contracts and new clients that are either signing up with AWS and making the journey to the Cloud or accelerating their journey to the Cloud, or setting up new longer-term contracts with us.

Justin Post:

Great. A couple. No one's really mentioned the CEO change. So I was wondering if it is not on the call but any change in direction, investment philosophies, or any -- more integration of AWS, or anything that we should be aware of related to that change? And then second, AWS margins, really strong revenues. The margins came down quarter-over-quarter. Can you just remind us of what drives some of that margin fluctuation? Thank you.

Dave Fildes:

Thanks for joining us today on the call and for your questions. A replay will be available on our IR website for at least 3 months. We appreciate your interest in Amazon and we look forward to talking with you again next quarter.

Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q1 2021 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 will be turning the call over to Director of Investor Relations, Mr. Dave Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining us today. Before we get to Q&A, I will touch upon a few highlights from the first quarter of the year. Let me start by highlighting the momentum we are seeing in AWS. In the first quarter, AWS revenue growth accelerated across a broad range of customers. During COVID, we've seen many enterprises decide that they no longer want to manage their own technology infrastructure. They see that partnering with AWS and moving to the cloud gives them better cost, better capability and better speed of innovation. We expect this trend to continue as we move into the post-pandemic recovery. There's significant momentum around the world, including broad and deep engagement across major industries. For example, last quarter, we announced new commitments and migrations from some of the world's most renowned sports leagues, the National Hockey League, the PGA Tour, Formula 1 and the German Bundesliga. We continue to expand our AWS infrastructure footprint to support the strong growth we're seeing. AWS offers 80 availability zones across 25 geographic regions around the world. And we've announced plans to launch 15 more availability zones in five more regions. Turning to the consumer business, we continue to see strong customer demand globally in the first quarter. Revenue growth in our international segment grew 50% on an FX-neutral basis year-over-year in Q1 as restrictive regional and national lockdowns were in place throughout the quarter, particularly in the UK and Europe. In North America, revenue growth of 39%, largely reflects the continuation of demand trends that we have seen since the early months of the pandemic. Third-party sellers were largely comprised of small- and medium-sized businesses, continue to see strong sales and serve more customers. Our 3P seller services revenue increased 60% on an FX-neutral basis year-over-year in the first quarter, growing significantly faster than online stores revenue. Third-party units represented 55% of our total paid units in Q1, up from 52% in Q1 of last year. Prime members also continue to shop with greater frequency and across more categories than before the pandemic. These trends have also extended to Prime's digital benefits. Over the past 12 months, Prime Video streaming hours were up over 70% year-over-year. Amazon Studio had its best award season yet, and Prime members can look forward to a strong slate of upcoming original series and films featuring an impressive group of diverse talent and creators. We're also continuing to expand our roster of live sports content, and we're excited to partner with the NFL and be the exclusive home of NFL Thursday Night Football into the next decade. Twitch is also seeing great momentum. Hours watched on Twitch nearly doubled year-over-year in the first quarter, and we now average more than 35 million daily visitors. Another popular benefit of Prime membership is Prime Day, and we are excited to announce that we will hold the two-day savings event during the second quarter. Prime Day is also a great opportunity for our selling partners to reach more customers, and will make supporting small businesses a big focus again this year. We'll have more to share on Prime Day, including the event dates a bit later this quarter. We continue to prioritize the safety and well-being of our employees. In the U.S., Amazon has held on-site vaccination events in 29 states, reaching more than 300,000 frontline employees and contractors. We are watching events closely in Europe and in particular, India, where we have put in place employee initiatives, from medical health lines, teleconsulting, hotel rooms for quarantining and financial support, as well as donating 100 ICU ventilator units to local hospitals. We'll continue to invest in the health and safety of our employees and delivery partners, particularly in our global fulfillment and logistics operations. And finally, to summarize our financial results. Total revenue of $108.5 billion came in above the guidance range of $100 billion to $106 billion. In addition to our strong segment results, advertising revenue within the North America and international segments also accelerated during the quarter. The leverage we are seeing on this higher revenue, combined with strong operational performance led to higher operating income as well. Operating income of $8.9 billion in Q1 was above our guidance range of $3 billion to $6.5 billion. We incurred a little less than the $2 billion in COVID-19-related operating costs that we had projected in the first quarter. We continue to incur these costs across our global fulfillment network as we maintain social distancing measures, which impacts our productivity and as we make direct investments in employee safety. Looking ahead, we expect to incur approximately $1.5 billion in COVID-19-related operating costs in the second quarter. Lastly, I'd like to congratulate and thank our employees for making Amazon #1 in the U.S. on LinkedIn's 2021 top companies ranking, an annual list identifying the most sought-after places to work. We appreciate the customer obsession and passion for innovation from teams across the company to make Amazon a great place to work. With that, let's move on to Q&A.

Ross Sandler:

Great. Thanks, Brian. A question on last-mile delivery. So you guys are investing pretty aggressively to build out that Amazon control last-mile fulfillment. We see the blue vans driving around everywhere in the Bay Area, so congrats on that. So I guess the question is, how long until you feel like if that's in the right place as far as all your major metros where you want to set that up. And at what stage, does the unit cost of shipping start to improve from these initiatives? And I guess, high level, is controlling the last mile allowing you to further penetrate or gain market share in certain categories where speedy delivery is of the essence. Can you talk about that, please? Thank you.

Dave Fildes:

This is David, Ross. Just to add to that, Ryan touched upon it, but there are an important part of this last-mile effort has been the program we've had, the -- Brian called this -- mentioned the delivery services partner program, or the DSP, it's an important part of the last-mile network. And that -- just as a reminder, that employs more than 100,000 drivers, and it's been growing for the past few years. And it's really -- it's a program with an incentive for those folks to become small business owners and start their own package delivery business. So it's a great way for those folks to access the delivery technology and the package volumes we have and tapping on the network. And we've got a lot of really cool elements as part of that program, grant programs to support entrepreneurs and minority groups and really help them build out and helps us support a diverse business community as well.

Brent Thill:

Good afternoon. On AWS, I'm curious if you could give us a backlog number. And there have been a lot of questions about the incredible backlog strength you've seen in the last several quarters, and it finally seems that you're seeing the conversions between that backlog growth and now revenue growth accelerating. If you could just comment a little more on that conversion and how you expect it to trend? Thank you.

Operator:

Your next question comes from the line of Youssef Squali with Truist Securities. Please proceed with your question.

Brian Olsavsky:

Yes. Thanks, Youssef. Yes, I would say we're seeing strength pretty much across the board in international. And it does vary by country. But if you just step back a minute, on an - even on an FX-neutral basis, we grew 50% in the quarter. We grew 50% last quarter, although that's aided by the fact that Prime Day was in Q4 this year. But if you look at the growth rate prior to COVID and post-COVID, in the international segment, on a -- even on an FX-neutral basis, has been tripling their prior growth rate in revenue anyway. So very strong and probably advancement of the model in a lot of countries by a year or more. And we're really pleased that we've been able to show our value to those customers, not only with our shipments and our ability to deliver and get them what they need to survive in homes in place during the pandemic, but also the strength that we've seen in the digital offering and the adoption of video, music, our devices. So it's really -- and we're forward investing, as you know, in that, in international with a lot of those Prime benefits. So it's really -- it's good to see as the underlying consumer shipping business, part of it grows, that we're still seeing healthy engagement and growing engagement. So I don't have a downside case yet. In fact, surprised a bit by the growth. I don't think we normally would have forecasted 50% growth in Q1. And certainly stressing our operations. But I would -- my hat's off to the operations team, they handled the volumes in Q1 very efficiently. Costs were very much under control. We started to see strong leverage of our fixed assets, especially our fulfillment center and transportation assets.

Operator:

Your next question comes from the line of Ed Yruma with KeyBanc Capital Markets.

Brian Olsavsky:

Sure. Grocery has been a great revelation during the post-pandemic period here. I think people really value the ability to get home delivery. And we've seen that as numbers go up considerably pre and post-pandemic. So -- but we've also worked very hard to increase our capacity during that time period. In the United States, we're delivering out of our Whole Foods stores, and we've engaged -- we'll be allowed to pick up a greater expansion of pickup at Whole Foods stores. Amazon Fresh became a free Prime benefit, as you know, in the late part of 2019. And customers really adopted it and continue to see strong growth. So I think on the fresh stores, it's a little too early. The stores themselves, we're confident that the Just Walk Out technology that will be a boon, a benefit to customers. And we're very excited about what's in the works, but that's still really early in day 1.

Operator:

Your next question comes from the line of John Blackledge with Cowen.

Brian Olsavsky:

Sure, John. Let me start with your second question on advertising. So certainly, traffic has been a large driver of what we're seeing in the advertising space. But it discounts kind of the improvement that we're also seeing, relevancy and new products that the team is, has been rolling out, that the customers also enjoy. So I think the advertising team's done a great job of turning clicks into productive sales, and the advertising that results is valuable to us as well. We're using new deep learning models to show more relevant sponsored products. We continue to improve the relevancy of the ads being shown on the product detail pages. And we've seen rapid adoption of the video creative format for sponsored brands, among other things. So you're seeing a little bit more than just traffic. And again, very pleased with the performance of that team and of the receptiveness of our customers, our vendors, our authors and sellers to our advertising products. We think it's also very valuable for consumers as well, helping them find things more easily and discover new brands. On Q2 guidance, yes, I would say, we are projecting, again, continued strength across all of our segments. We -- I will remind you that Prime Day has been scheduled for later in Q2, and we'll have more on that as the quarter unfolds. So that's a consideration as well.

Doug Anmuth:

Just wanted to follow up there on Prime Day, Brian. Can you tell us at all just in terms of quantifying or just how you're thinking about the contribution within that 2Q guidance? And then also just on the rationale for timing, given historically in 3Q, we moved to 4Q last year and then now in 2Q. And then hoping you could also just talk about the Thursday Night Football deal, the strategy there, how that drives engagement and strengthens the ecosystem and also what it needs for ad dollars for you.

Operator:

Your next question comes from the line of Justin Post with Bank of America.

Brian Olsavsky:

So let me start on the AWS acceleration. We wouldn't point to any particular customer group. We're seeing great usage and expansion across a number of industries and a number of types of customers from startups all the way to enterprises. To put it little bit in perspective for you, in Q1 of 2019, we were at $31 billion run rate. By last year, we had increased that to $41 billion revenue run rate, which is a 32% increase. This year, we're up to a $54 billion annualized run rate, which is, while also a 32% year-over-year growth, it added $13 billion of revenue in the last 12 months as opposed to $10 billion prior -- $10 billion in the prior 12 months before that. So the percentages can be a little deceiving. I would encourage you to look at the absolute dollar growth, although both were very strong in this quarter. So we are seeing, again, strength across the board. We have firm confidence that we offer a lot of advantages to AWS customers from functionality to a vibrant and robust partner ecosystem. And then really, we also have less downtime and better security, which I think is super important to all of our customers, especially security nowadays. So that's on AWS. On -- Dave, why don't you pick up the...

Operator:

Our final question comes from Brian Nowak with Morgan Stanley.

Brian Olsavsky:

Sure. Thanks, Brian, for your questions. There's always a lot of areas that we're working to improve upon. I think generally, the speed of innovation is very quick at Amazon, but we always want it to be quicker. And we always want it to be globally consistent, and we want to take the best practices from 1 country to make sure we're doing it the same way everywhere. I think currently on our list right now is that we are in the process of getting our 1-day shipment percentages back up to where they were pre-pandemic. We're there in Europe, and we're starting to see in Europe not only strong 1-day, but also more broad, same-day selection, so they tend to go hand-in-hand. In the U.S., we've made improvements or consistently getting better. I would say the end delivery is really a function of everything before it, and how well we can handle and process in a timely manner all the orders in North America. It's been challenged by the volumes, but it's also been challenged by the rapid expansion of space. But we're making progress nonetheless, and we hope to get that even higher in 2021. We're very excited about the adoption of our Prime benefits pretty much across the board, especially with the digital benefits. We are looking forward to some new content, even though we're very happy with the performance, the studios business and the content and awards that they were nominated for and were able to garner this year. We have some big things on the horizon, including Lord of the Rings, and we're very excited about getting that type of content to our Prime members quicker.

Dave Fildes:

Thanks for joining us today on the call 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 we look forward to talking with you again next quarter.

Operator:

Thank you for standing by. Good day, everyone and welcome to the Amazon.com Q4 2020 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 will be turning the call over to Director of Investor Relations, Dave Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining us today. I realize that you may have questions about the news which we announced today in our press release, but I would like to begin with some comments on Q4 results, and then we can proceed to your questions. First, I’d like to start by thanking the nearly 1.3 million Amazon employees who have risen to the challenge of serving customers around the world during this pandemic. We are proud that more than 500,000 people chose to take new jobs at Amazon in 2020. We are committed to providing all employees with great jobs, including $15 an hour starting pay in the U.S., health insurance, 401(k) matching, leading parental benefits, and upskilling opportunities. We remain focused on the safety of our employees and delivery partners, particularly in our fulfillment and logistics operations in stores as well as the customers shopping in our Whole Foods Market and other stores. Our Q4 results include approximately $4 billion in COVID-related operating costs, including additional employee pay during the holidays. We continue to see productivity headwinds from physical separation and training of new employees and of course investments in PPE for employees and enhanced cleaning for our facilities. This Q4 spend brings our total COVID-related costs for the year to more than $11.5 billion. Our teams worked hard in 2020 to ramp up in-house COVID-19 testing capabilities that are incremental to those already available to the general public. More than 700 employees are now being tested every hour, and globally we have built hundreds of COVID-19 testing sites in two labs. We are encouraging essential employees working at Amazon fulfillment centers, AWS data centers, and Whole Food Market stores across the country to receive the COVID-19 vaccine at the earliest appropriate time. We are also working at the federal and state levels to support the vaccinations of frontline employees and those in the community who are providing essential services throughout the pandemic, including enabling pop up clinics in Washington State and Florida with more on the way. Now some comments on Q4 results. Our fourth-quarter holiday season has always been the busiest time of our year. This year presented additional challenges for our teams as we work to meet strong customer demand, while simultaneously growing our operations’ footprint and welcoming far more new employees than any prior Q4. We welcomed nearly 175,000 new full and part-time employees in Q4 alone. This compares with 50,000 in Q4 of 2019. We also continue to add buildings in our fulfillment and logistics network with square footage growing about 50% year-over-year in 2020. And unlike in a typical year when new buildings are mostly in place by the end of Q3, this year a significant number of them came online in Q4 as our teams pulled out all the stops to be ready for customer demand, and it turns out we needed that capacity in order to fill the strong customer demand in Q4. Revenue for the quarter was $125.6 billion versus our guidance range of $112 billion to $121 billion. You will remember that we kicked off the holiday season early for customers with Prime Day in October versus its usual timing in Q3. We then saw strong seasonal holiday demand through Q4. Our Q4 results also largely reflect the continuation of demand trends we have seen since the early months of the pandemic, particularly as people are staying at home, including for household staples and other home products. We saw sales growth across our major product categories, led by strong Prime member engagement. Prime members continue to shop with greater frequency and across more categories than before the pandemic began. Prime members also continue to expand their usage of Prime’s digital benefits including Prime Video and Prime Video channels. Amazon Music launched podcast in September and in Q4, Prime members listened to millions of hours of podcasts each month. We’re reaching more customers with our grocery offerings. In Q4, we had another strong quarter that largely reflects the continuation of demand trends from Q3. We saw strong growth in new Prime member sign-ups. As demand remained strong in the quarter, the additional volume leverage helped to achieve higher-than-expected profits. We saw strong order volumes throughout the holiday season with good sales growth not only in our peak sales days, which include Prime Day, Black Friday, and Cyber Monday, but also throughout the remainder of the quarter. We had good operational performance within our fulfillment centers and transportation network even as we added significant capacity. Third-party sellers also stepped up as never before to serve customers. The 2020 holiday season was the best ever for small and medium-sized businesses selling in our store, with our worldwide sales growing over 50% year-over-year in Q4. Third-party units represented 55% of total paid units during the quarter, the highest 3P unit mix we’ve ever had since we invited businesses to sell on Amazon more than 20 years ago. Lastly, AWS’ efforts were headlined by our Ninth Annual re:Invent Conference. This is the first time in our history that the event was virtual and free. We had over 570,000 registered attendees during the three-weeks-long event. AWS continues to innovate at a rapid clip, announcing more than 180 new services and features at re:Invent across compute, storage, database, machine learning, and more. You can read more about this in our earnings release. The team also announced significant customer momentum with new commitments and migrations from JPMorgan Chase, Thomson Reuters, ViacomCBS, and Twitter just to name a few. We continue to see companies meaningfully growing their plans to move to AWS. In Q4, AWS saw continuation of strong usage and revenue growth. AWS added more revenue quarter-over-quarter and year-over-year in any quarter in its history and is now a $51 billion annualized run-rate business supporting millions of active AWS customers. And just as they have all year, sellers, partners, and employees across Amazon stepped up to deliver on unprecedented customer demand, and for this we remain extremely grateful. And today, we announced that our Founder and CEO, Jeff Bezos will transition to the role of Executive Chair in the third quarter this year and that Andy Jassy will become Chief Executive Officer at that time. Those of us who know Andy are excited to see him take on this greater responsibility. He is a visionary leader, a great operator, and he understands what makes Amazon such a special innovative company. We are also excited that Jeff will retain a very important role at the company that he founded and has guided for over 25 years. He has created a culture of invention and innovation that drives us every day, and we remain bound by our common focus and obsession on the customer. With that, let’s move on to Q&A.

Heath Terry:

Great. Thanks. Just wanted to dig a bit deeper into the incredible acceleration that we saw in the international business, obviously, pandemic aside, wondering if you could help us sort of break down the pieces of what drove that into specific regions, specific initiatives that drove that level of acceleration? And then just on the AWS business, bit more of a housekeeping question, would you mind going through just where the backlog stands and any material drivers of changes in the that to the extent there has been any?

Dave Fildes:

Yes, Heath, this is Dave. On the backlog number, it’s at about $50 billion at the end of the year, the balance and that’s up about 68% year-over-year. So that’s one component of all the great work that AWS is doing, and of course you are seeing some continued very strong growth, strong usage and revenue growth there, $51 billion annualized run-rate business. So, it’s continuing to grow at a meaningfully larger absolute dollar rate than others out there, and we are really pleased with the growth we are seeing in there. It’s as Brian touched on at the opening, just a lot of good engagement and innovation coming out of the re:Invent conference as well.

Eric Sheridan:

Thanks so much for taking the question. Just following up on some of the comments you made between the release and in your opening comments, Brian, wanted to know if we could tease out how we should be thinking about the level of investments that are needed between the mix of fulfillment versus where you want to go on the customer service side and the logistics and delivery side as you look up to ‘21. And obviously, it’s going to be a very different year in ‘21 than what we saw in ‘20, where you saw a surge in demand and a lot of capacity constraints that have opened up as the year goes on. And there will be sort of tougher comp dynamics as you get into the middle of ‘21 as you are lapping against that demand impact in ‘21? How do we think about the levels of investment you will make, where those investments are going to go, and what that means for sort of confidence on the demand side over the medium to long-term? Thanks so much.

Operator:

Our next question comes from Doug Anmuth with JPMorgan. Please proceed with your question. Doug, your line is open. Please proceed with your question.

Brian Olsavsky:

Yes. So yes, for the full year, we are again $11.5 billion was our gross cost for 2020, $4 billion of that in Q4. We see a step down to closer to $2 billion in Q1 that compares with a $600 million spend last Q1 as the pandemic just started and we started to react in March. And obviously, this cost escalated in Q2 and Q3. So, if we look at the core components of that, right, there is productivity that – productivity drags from hiring so many new employees and also having physical separation. That gets better all the time. It was exasperated a bit in Q4, because of all the new hires that we brought on over 170,000 new people that should moderate. That’s why one of the reasons that we see a step down in Q1 versus Q4, it’s volume-related and also mix of employees. After that, we are going to have to see again hopefully the vaccine gets going, everyone gets vaccinated and we return to normalcy. That would be very helpful on a lot fronts for everybody. And if not there will be continuation of some of these costs. I will say that, while we are very transparent or try to be on the costs that we are seeing, specifically around COVID, there are some positive things happening as that counteract a bit of that and not the least of which is the top line volume in 2020, we grew 37% on an FX neutral basis versus growing 22% in 2019. And the fact that we have been running pretty full out since arguably April, but definitely it’s May, has created operating efficiencies of its own that counterbalance the physical separation and the training of new employees. So there is a lot of moving parts in here. We are able to save about $1 billion in transportation costs this year – excuse me in 2020 as for universally, all travel was shutdown and our sales teams found new ways to reach customers. We will see how that develops over time. Marketing, although it got back to probably more healthy levels in Q3 and Q4 definitely was lower in Q2 as we work through some capacity issues and it wasn’t fruitful to invest in marketing when you are having trouble hitting existing customer demand. So, there are a lot of moving parts that I will try and be as transparent on as I can be during the quarter and this again Q1 is we are seeing about $2 billion of absolute COVID costs. And Dave can take the AMZL question.

Operator:

Our next question comes from John Blackledge with Cowen. Please proceed with your question.

Brian Olsavsky:

Sure, John. Let me start with the other revenue question. Yes, we saw strength in other revenue grew 64% in Q4 versus 49% in Q3 and 41% in Q2 that is primarily advertising. That’s the majority of it. I would say that there has been a recovery, in advertising spend as the year progressed. The fact that we moved Prime Day into Q4 has an impact here, because again it carries a lot of clicks and eyeballs into Q4 for this time period. But I want to highlight a lot of great work being done by the advertising team. Their main principle is to help sellers, vendors, authors, publishers and partners use our tools, navigate them as fluidly as possible, and add value both for them and for our customers – and customers and get to see and find and discover new and different products. There is some things that are adding to the efficiency of advertising. We are now using a deep learning model to show more relevant sponsored products and had success with that. We are improving the relevancy of ads shown on the product detail pages all the time. And we have seen rapid adoption of video creative format for sponsored brands. All these things help checkup the conversion and the productivity of the advertising both for the seller or vendor involved and also for Amazon and makes it more productive experience with the customer as well.

Operator:

Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question.

Brian Olsavsky:

Sure, Brian. Let me start with your international question. I think the biggest learning is that if we can move 2021 volume into 2020, it creates good leverage for us and it’s kind of what we saw. There was essentially a doubling of the growth rate versus probably the going in time – rate for 2020. Now again, that was a very hard volume because of the COVID restrictions and issues with our workforce, keeping our workforce safe and everything else, but I think what you saw was some very high leverage on that model that overcame some of the more fixed costs that we’re seeing in the Prime benefits. So we pre-invested, as we have discussed in the past, in things like video and devices and other elements of the Prime offering, now grocery, you’re starting to see. And we have added those Prime benefits ahead of probably the curve that you would have seen in North America. So that has always created a bit of a drag on operating income, that as well as investments in new geographies, the investment in India, the investment that we’ve made over the last two or three years that are in places like the Middle East, Turkey, Brazil, Australia, most recently, Sweden and the Netherlands in 2020. So there’s a lot of moving parts in the international segment. But you’re starting to see the benefit of the higher volumes and with it, higher advertising as well that we expected and we expect over-time. And we’ll see the growth rate is going to have the same challenges year-over-year that perhaps we’ll see in North America we’re going to have a race between lapping things that may have been one-time in nature in 2020 versus accelerating Prime membership and Prime members’ purchases, purchase frequency and adoption of digital benefits. So we will see what that looks like in 2021, very happy with the performance in 2020 and really hats off to the teams in many countries around the world who are all dealing with the same issues that we were in North America.

Brian Olsavsky:

And then your question on one-day, I believe it was whether our investments will be consistent with establishing higher and higher levels of one-day. Yes, definitely. And we’ve been doing that throughout the year and it’s been getting better. In fact, we had a lot of examples of deliveries right up to the last minute on December 24 in the United States for holiday gifts. So the one-day has been getting better, and it’s – the issues in 2020 was essentially around capacity and volume and getting things at the door and being able to then hit a shortened time period. So it wasn’t that we were delaying or slowing down the shipment itself, it was the time taken to get through the warehouse and handle backlog of demand. So as the year progressed, we did see that get better and better. We do forecast that it will get better. I’m not quantifying this for you. I realize that. But I think you can generally notice wherever you’re particularly are, whatever geography you are, some cities are back probably to one-day levels that they saw or even better pre-pandemic. Other areas that may have other dynamic issues are still working their way out of backlogs and volume issues. But when the dust settles and as we open up more and more capacity, you’ll see greater and greater one-day percentages for our Prime shipments.

Justin Post:

Alright, thank you. A couple. First, obviously, the Jeff Bezos announcement is quite important. I think Jeff Wilke is also retiring. Can you talk a little bit if you expect any changes to Amazon, how we should think about that? And then maybe Dave Clark is taking over retail. Talk a little bit about that. And then secondly, obviously, the backlog is really strong in AWS, up 68%. The margins did come down a little bit quarter-over-quarter to 28%. Can you talk about the deals, how pricing is in the cloud segment? Is it remaining robust and any reason the margins came down a little bit quarter-over-quarter? Thank you.

Dave Fildes:

And Justin, just on your AWS point, I mean, like I’ve mentioned before, AWS growth rate is strong. The factors we’ve talked about in the past continue to be in play. We’re improving infrastructure planning to meet the capacity needs, given the growth we’re seeing. More broadly, our results reflect that balance between the investing, the price reductions, driving cost efficiencies and the margins are going to fluctuate quarter-to-quarter depending on those factors to the extent we are investing in new regions and some other elements. A few discrete things that aren’t probably new but just to call out, the driver of the reduced impact from the change in the useful life of the servers. As you recall, we amended the server useful life at the beginning of the year from 3 to 4 years, and so we saw some benefit to the AWS margins and the broader margins in total. When we look at that, the impact does diminish throughout this year. So when we increased it beginning in January, the benefit from this change in Q4 was about $538 million. That’s down from $634 million in Q3. So that gives you some sense of it’s coming down. That’s the total amount that’s allocated amongst the segments, but the majority of those figures I just gave do relate to AWS because significance of the server assets going to that segment. And again, that impact’s going to continue to taper down over time for example into Q1 of 2021. One other element is just FX impact. That’s always going to hit us to some degree, but AWS customer billings are primarily denominated in U.S. dollars. The cost, though, if you think about it, many of the costs are going to be for build-out in local currency for data centers and the people that work there and power and what have you, so there’s a bit of a foreign exchange difference there. And that happens to be this time around a little bit bigger. We saw an unfavorable impact of about $96 million to the AWS margin this time around for FX, so just another point to call out there. You mentioned the backlog, too. Look, I think that’s one data point amongst many as you look at AWS, but I think we’re really encouraged by just general large enterprise business adoption is continuing to do well as they are choosing AWS as a tech provider and speeding up innovations. You saw a long list of the many companies that we have announced arrangements within the past 90 days, so really excited to continue to build onto that.

Ross Sandler:

Hey, guys. Yes, just going back to the topic of shipping cost inflation. This is one of the few lines that’s kind of variable and kind of increasing a little bit faster than the other fixed costs. And Dave, you mentioned that over half the orders are now going through Amazon Logistics worldwide. When do you expect that rate of inflation per order to level out a little bit because of these efforts? And if you look at the cost curve in places like the UK where – or in London, where you have well over half on your own last-mile delivery, are you starting to see leverage there? Any comments on that? And thanks a lot.

Dave Fildes:

Thanks 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 we look forward to talking with you again next quarter.

Operator:

Thank you for standing by. Good day, everyone and welcome to the Amazon.com Q3 2020 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 will be turning the call over to Head of Investor Relations, Dave Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining us today. I'd like to start by extending a big thank you to all the folks who worked hard to make this year's Prime Day a great success, not only for our more than 150 million Prime members around the world. But also for the hundreds of thousands of small and medium-sized businesses who sell on our Amazon store many of whom are facing their own challenges during this pandemic. These businesses thrived on Prime Day. With third-party sellers recognizing more than $3.5 billion in sales over the two-day global event, that's 60% increase compared to Prime Day last year. I also want to thank and recognize the contributions of more than one million Amazon employees and delivery partners who are continuing to work hard to serve our customers all around the world, who will continue to spend what it takes to ensure the safety and well-being of our employees and partners. Now let me share some highlights from the quarter. Our Q3 results largely reflect a continuation of demand trends we saw when we exited the second quarter. The strong demand in sales growth across our major product categories globally including hardlines, consumables, softlines and media. We also continue to see strong Prime member engagement. Prime members continue to shop with greater frequency and across more categories than before the pandemic began. They continue to expand their usage of Prime's digital benefits including Prime video. Internationally, the number of Prime members who stream Prime video grew by more than 80% year-over-year in the third quarter and international customers more than doubled the hours of content they watched on Prime video compared to last year. We're also reaching more customers with our grocery offerings. In Q3, our year-over-year growth rate of online grocery sales continued to accelerate and we continue to offer more convenient options for customers including grocery pick up which is now available from all Whole Foods Market stores. And just as we saw in Q2, Prime member renewal rates improved in Q3 year-over-year. 3P sellers who as I mentioned are largely comprised of small and medium sized business continue to be important part of our offering to customers. Our 3P sellers services revenue continue to grow faster than online stores revenue. With particularly strong growth this quarter in FBA, as we return to similar mix of FBA as a percentage of total 3P units as we've seen prior to COVID. 3P units continue to represent over half of overall unit volume increasing to 54% of the total unit mix in Q3. We're investing heavily to support sellers and are pleased to report that over half a million sellers are seeing record sales in our stores this year. We continue to focus on stepped up employees safety particularly in our fulfillment and logistics operations. To help ensure the safety and well-being of our employees and partners as well as the employees and customers shopping at our Whole Foods Market and other stores. This of course has added incremental cost to our P&L. The largest portion of these costs relate to continue productivity headwinds in our facilities including process revisions to allow for social distancing and incremental cost to ramp up new facilities and the large influx of new employees hired to support strong customer demand. This also includes investments in PPE for employees and enhanced cleaning of our facilities. In total, we've incurred more than $7.5 billion in incremental COVID related costs in the first three quarters of 2020 and we expect to incur approximately $4 billion in Q4. Our consolidated revenue and operating income exceeded the top end of our guidance range. As demand remains strong in the quarter the extra volume and operating leverage helped us to achieve higher than expected profitability. And we saw another strong quarter of revenue growth in operating income performance in AWS and advertising. We had good leverage with our fulfillment centers as well as in Amazon logistics, our transportation network despite the higher COVID related cost that I mentioned. Although we had strong growth in our network in Q3 some of our fulfillment network expansion shifted out a few weeks thought it happened in Q4 rather than Q3. Once new buildings open, their short-term headwind to profitability as they ramp up and we prepare for Q4 peak. More of this headwind will be felt in Q4 rather than in Q3 and this is reflected in our Q4 guidance. We were able to meet the heightened demand in Q3 because we opened up more network capacity particularly in our transportation network. I pointed two important drivers of this. First, we hired a lot more people to support the strong customer demand. We welcomed 250,000 permanent full time and part time employees just in Q3 and have already added about 100,000 more in the first month of Q4. I will note that these are permanent jobs with industry leading pay including Amazon's $15 minimum wage and great benefits such as health insurance, 401(k) plan and parental leave. Secondly, this has been a big year for capital investments. We've invested nearly $30 billion in CapEx and finance leases through the first nine months of 2020 including over $12 billion in Q3. As I mentioned last quarter, we expect to grow our fulfillment and logistics network square footage by approximately 50% this year which includes significant additions to our fulfillment centers as well as our transportation facilities. Majority of these buildings open in late Q3 and into Q4. About half of this square footage growth will be on the transportation side to be opening more sort centers and delivery stations. And finally, in AWS customer usage remained strong. We continue to see companies meaningfully growing their plans to move to AWS. While we're busy gearing up for our Annual re:Invent Conference. This year reinvent will be a free three-week virtual conference running from November 30th through December 18th. We're extremely grateful to our employees across Amazon who have delivered on unprecedented demand for several months now as well as a strong Prime Day in October. We're ready to go and looking forward to meeting the needs of our customers this holiday season. With that, let's move onto Q&A.

Brian Nowak:

Thanks for taking my question. I've two Brian. The first one you mentioned the fulfillment center saw good leverage in the quarter. Can you just talk to us about some of the qualitative drivers of this improvement you're seeing in fulfillment cost per fulfilled unit in the quarter and sort of year-to-date and how to think about the durability of that overtime? And then secondly, I think throughout the summer Amazon logistics launched the third-party delivery service in the UK. I'm curious just to hear about early learnings from that product and how you think about scaling that to other countries and maybe globally? Thanks.

Dave Fildes:

And this is Dave, I don't have much to share I think on, what we've got going on with any of [indiscernible] efforts other than I'll just say, we're always working to develop new and innovative ways to support. The companies we work with including small and medium-sized businesses we sell on Amazon and that includes testing and shipping programs that can help any of these businesses gets packages to customers quickly and reliably.

Operator:

Our next question comes from Doug Anmuth with JPMorgan. Please proceed with your question.

Brian Olsavsky:

Sure, Doug. One last comment, I forgot to mention to Brian on his last question is, the fact that a lot of that heightened demand so far coming to Q2 and Q3 when we tend to have excess capacity before Q4, so that's another source of leverage especially in non-peak orders. As far as guidance is concerned again, I think there's lot of uncertainty certainly in Q4. We generally have a lot of uncertainty around the holiday things from holiday spending to what our cost to fulfill normal orders would be whether issues that can come up this year's an election year. We saw some disruption in 2016, so there's a whole host of issues that generally come to bear in Q4. I think the fact that COVID is dwarfing all of those is causing us a lot of uncertainty on our top line range. We saw continuation in Q3 of some really good trends from Q2 and we've project those into Q4. Some of the negative factors that you mentioned as foreign profitability is again. We'll see more of the brunt of the capital investment and the people investment. We had a lot of people in the last quarter and then we added another 100,000 people in October so far. So there's that, there's generally the dynamics of Prime Day because it's a deal-oriented time period that's usually not the highest margin period and that shifted into Q4. But generally, we have really because of the calendar this year we have really built our capacity included both in facilities and people and are carrying it through the entire quarter. We carried it through Prime Day and now we're carrying it through into the rest of the quarter. I think in other quarters you might have seen more gradual build up that would have occurred through October end and probably maximized in November and December. So that's what I would tell you on holiday again. We have our normal caveats, so there's a lot of uncertainty and things that could go right and wrong, so that's why we put a range around it. And I'm sorry, could you repeat your second question?

Brian Olsavsky:

Sure. I think some of the investment things like grocery delivery and that capacity are things that we would have invested in over time and it being matched by higher order volume. So our intent is to continue to deliver a great grocery delivery experience for our customers. So that is a little bit of pull forward. Yes, we did expect to build out our logistics capacity a lot this year especially as we have been rolling out one-day delivery the middle of last year, that was setting us up for a big build this year. So we pull forward a bit from 2021 into this year to satisfy the demand. I think we've - the logistics team is really good at in one way you're locking up long-term commitments on space and buildings. But on the other hand being able to adjust the timeline in or out to match the capacity and demand. I think at this point we're not trying to cut it close and we're erring on the side of having too much capacity and we think that's the right call. It has been this year. We'll adjust as we get through the holiday and we'll learn a lot more. Hopefully the pandemic will be in better shape as a country and globe in Q1 of next year. It's very reactionary at this point. We've got to play the hand that we're dealt and we're trying to anticipate and keep the customer insulated from any variability. But it's challenging certainly.

Operator:

Our next question comes from Justin Post with Merrill Lynch. Please proceed with your question.

Brian Olsavsky:

Sure. It's hard to predict. I would say that there's been phases of this year. Early on there were a lot of stock ups of groceries and other household supplies followed by a wave of people buying gloves and disinfectant wipes and masks. That maybe a bit of bubble that people are not going to buy as much next year hopefully that will be a good problem to have it, as that demand went down. But otherwise we're seeing Prime number engagements. So it's strengthening our Prime program. The renewal rates are going up and the engagement is going up. So people are buying more frequently and across more categories. They're using more of our digital benefit. We like the trends on kind of connectedness to our Prime program and we think that will have lasting value. When things open up a bit more and there's more store options for people to buy from, there will be leveling of volume back to the stores I would imagine. So we think the trends are good. They've been pulled forward probably a bit from our - the adoption curves have been pulled forward from our initial - pre-COVID thinking especially on things like grocery delivery. So your second question on the cloud. Cloud is a mixed bag right now because we're very happy with the cloud performance and we're seeing a lot of customers who are now moving to the cloud at a faster pace. It accelerated their plans. There's anomalies in different industries going on this year things like travel and hospitality are down. A lot of companies are in holding pattern in middle and some are doing really well things like video conferencing, and gaming, and remote learning, and things tied to entertainment. So I would say that majority of the companies though are looking for ways to cut down on expenses. Going to cloud is a good way to cut down on expenses long-term. To trying to cut down on their short-term costs in the cloud, by tuning their workloads and we're helping them do that and doing the best we can to help them save short-term dollars and again tune their usage again some of our benchmark. We think that is good for the customer and therefore, it will be good for us long-term. But even and despite those actions with strong growth the year-over-year growth in absolute dollars this quarter were the largest we've ever seen and we feel good about the state of the business and the state of our sales force and their ability to drive value during this period. We've seen a lot of companies extending their contracts with us. The backlog of multi-year deals has gone up quite a bit. It's good from a customer connectedness standpoint. Certainly each industry is going through different dynamics right now.

Operator:

Our next question is from Heath Terry from Goldman Sachs. Please proceed with your question.

Brian Olsavsky:

Yes, thanks Health. I'll start with that last one yes. [Indiscernible] intertwined here so. The third-party shipping, we rely on third-party shippers. We've great partnerships around the globe with third-party shippers and we know that their capacity will be tight as well as ours. We do feel good that we've invested quite a bit in our own capacity and you just mentioned that, about half of our CapEx is going to expanding transportation. A lot of the people that we're hiring are also focused on transportation. So we feel good that we've been able to develop that capability a lot of this year because we needed it and we're going to need it in Q4. Having said that, it's going to be tight for everyone and I think it will all be stretched and it's advantageous to the customer and probably to the companies for people to order early this year. But regardless of the order pattern we're going to do our best to get the usual excellent service to our customers. On CapEx levels, again we've grown our fulfillment and logistics infrastructure 50% this year. We'll see again what that implies for next year. We do see continued expansion and CapEx specifically in transportation area. So that will be start of probably multi-year period where we're hiring CapEx for that. But we'll see, right now we're just focused on Q4 and giving the guidance for Q4. Your question on capacity utilization. It's been very tight this year certainly we're able to fill up a lot of our any excess capacity in Q2 and Q3 that might have seasonally been excess. As we get into Q4 and everything stepping up. We're adding it and using it simultaneously. We had a really good test for Prime Day and we feel good about that performance in that work and we continue to add on top of that. Lots of excitement around the holiday. But we feel we're in good shape and ready to go.

Mark Mahaney:

Thanks, two questions please. How should we think about these $4 billion expenses in the fourth quarter, $7 billion year-to-date like? Do you view them more as one-time-ish or just overall increases as you built out the network? Are they structural or one-time-ish I really want to get at that? Secondly international segments been nicely profitable or reasonably profitable for two quarters in a row. Is there some reason to think that's sustainable? And I'm sorry, third question. The other revenue growth accelerated to 49% can you give any color behind that? Thanks a lot.

Operator:

Our final question will come from Eric Sheridan with UBS. Please proceed with your question.

Brian Olsavsky:

Yes, great. Eric I'll start off with the questions on advertising. So just to ground you and I think our main priorities here at the space and some of these probably aren't too surprising is, we're focused on making our tools easier to use. Sponsored ads, sponsored brand site, a bidding sponsored product targeting. Working on just simplifying registration for agencies and marketers, getting set up. But we're also very focused on being smarter about servicing more relevant ads to customers. Making display ads easier and then increasing usability to Amazon demand site platform. So we've been working on a number of those areas and then developing new products and a lot of that's focused around, how are we serving brands from various areas Twitch [ph] sponsored brands, stores of course, so another interesting area. We're certainly in a unique position to be able to provide measurement services that help all these brands or understand the impact of other advertising in ways they're going to help them grow their business. Video, you mentioned I think video is one that's we're working hard on with some of the OTT video advertising opportunities there. We're seeing some good momentum with that. We offer inventory and IMDB TV, ad supported space and 3P apps [indiscernible] pulling off the Fire TV. I think good momentum and a lot of good learning on some of those initiatives there. I won't say too much about what we'll look like next year in the future but that gives you kind of sense of priorities where we're spending our time and focused on.

Dave Fildes:

Great, thanks for joining us today for the call and for your questions. A replay will be available on our investor relations website for at least three months. We appreciate your interest in Amazon and we look forward to talking with you again next quarter.

Operator:

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q2 2020 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 will be turning the call over to Director of Investor Relations, David Fildes. Please go ahead.

Brian Olsavsky:

Thank you for joining us today. I’d like to start by thanking and recognizing the contributions of hundreds of thousands of Amazon employees and delivery partners and hundreds of thousands of small and medium-sized businesses who are working hard to serve our customers all around the world in these uncertain times. Amazon’s second quarter was another highly unusual quarter. As I mentioned on our last earnings call, we began to see a significant increase in customer demand beginning in early March, and demand remained elevated throughout Q2. Strong early demand in groceries and consumable products continued into Q2, while demand increased during the quarter in our other major product categories like hardlines and softlines. At the same time, we continue to focus on stepped up employee safety, particularly in our fulfillment and logistics operations, to help ensure the safety and well-being of our employees and partners. In Q2, we incurred more than $4 billion of COVID-related expenses, getting products to customers and keeping employees safe. The largest portion of these costs related to compensation for our frontline employees, including higher hourly wages through the end of May and a more than $500 million Thank You bonus in June. We also experienced productivity headwinds in our facilities. This included changes to over 150 of our processes to provide for social distancing as well as costs to onboard and train over 175,000 new employees who are hired to meet the higher customer demand. This $4 billion also included investments in personal protective equipment for employees and enhanced cleaning for our facilities. Our consolidated revenue and operating income significantly exceeded the top end of our guidance range. Strong top line performance was driven by increased consumer demand, led by Prime members. We continue to see high Prime member engagement throughout the quarter. Prime members shop more often with larger basket sizes. Worldwide streaming video hours doubled year-over-year driven largely by Prime video. We’re reaching more customers with our grocery offerings. Online grocery sales tripled year-over-year. Existing Prime member renewal rates improved, and the Prime member growth rate accelerated both in the U.S. and worldwide. Our 3P sellers, who are largely comprised of small and medium-sized businesses, also stepped up to help make more selection available for customers. And as a result, these small and medium-sized businesses have seen significant growth in their sales. Our third-party seller services revenue grew faster than online stores revenue in Q2, with strong growth in both fulfillment by Amazon and merchant fulfilled or MFN seller sales. Third-party units continue to represent more than half of overall unit volume, helped by improved quarter-over-quarter growth in active sellers. We are more committed than ever to supporting the success of the hundreds of thousands of small and medium-sized businesses to sell their products in Amazon stores. We were able to meet this heightened demand because we were also able to open up more fulfillment network capacity as the quarter progressed with faster delivery across more selection. I’d point to a few capacity improvements that have allowed us to enhance throughput. First, our regular headcount grew 34% year-over-year as of the end of Q2 and continues to grow. We welcomed more than 175,000 new employees in March and April, many of whom were displaced from other jobs in the economy. As we’ve seen demand remain high, we are in the process of bringing 125,000 of these employees into regular full-time positions. I would also note that Amazon has created more jobs over the last decade than any other company, and we are proud that we’re continuing to create good jobs with industry-leading wages and great benefits during this challenging time. Our combined number of regular and seasonal employees is currently over 1 million. We’ve also been able to expand the output in our existing facilities as we’ve had time to implement, learn and iterate on the new process paths we put in place. Additionally, as a reminder, Q2 is typically our lightest volume quarter for the retail business. That’s not the case this year, but what that’s meant is that we can flex into space normally used for second half peak demand. This led to strong operating leverage in Q2. As we move towards peak in the second half of the year, we will ramp up our space needs even further, and we’ll be adding significant fulfillment center and transportation capacity in the second half of the year. Turning to AWS. This is now a $43 billion annualized run rate business, up nearly $10 billion in run rate in the last 12 months. Customer usage remains strong, although growth varies across industries as a result of the COVID-19 crisis. Lastly, I’ll touch upon our Q3 guidance, which we provided as part of our earnings release. A few additional data points on this guidance. We expect to incur more than $2 billion in COVID-related expenses in Q3 to help keep employees safe, including continued investment in social distancing, PP&E and testing. Costs are expected to be lower than in Q2 primarily due to better cost efficiency at the high demand levels we are seeing. In addition, I’ll remind you that the third quarter is typically when we open the majority of our new fulfillment network capacity, and we expect the same this year. We continue to invest meaningfully, including $9.4 billion in CapEx and finance leases in Q2 alone, an increase of 65% year-over-year, primarily driven by investments in our fulfillment and logistics footprint. Once these buildings open, they are a headwind to profitability as they ramp up and we prepare for Q4 peak. In 2019, we increased network square footage by approximately 15%. This year, we expect a meaningfully higher year-over-year square footage growth of approximately 50%. This includes strong growth in new fulfillment center space as well as sort centers and delivery stations. We expect the majority of this capacity to come online in late Q3 and into Q4. Lastly, we plan to host Prime Day in Q4 this year rather than Q3 as it has been in prior years. The one exception is Amazon India, which will host Prime Day on August 6 and August 7. In summary, we know that people are relying on online shopping more than ever during this unprecedented time, and we are working hard to add capacity to serve customers. We’re extremely grateful to our employees across Amazon for continuously stepping up to meet the needs of customers. With that, let’s move on to Q&A.

Eric Sheridan:

Thanks so much for taking the question. Maybe I could just dive in on the normalized trends you’re seeing as you exit June and get into July. You made a push into essentials and deemphasized non-essentials, as we talked about in the last earnings call. Where are we in terms of the company getting the mix between essentials versus non-essentials right in terms of offering to customers? Where are you in terms of returning to normal on next-day and two-day shipping initiatives to drive Prime? If there was any color on the state of affairs with either of those by geo or region of the world, that would be great. Thank you so much.

David Fildes:

Yes. And this is just David. I think just from a geographic perspective, Brian’s opening comments there, a lot of these order trends and activity, you can see that both the North America and the International segment are growing well. So a lot of those kind of trends in category performances and first-party and third-party seller growth, whether it be merchant fulfilled or FBA sellers, we’re seeing a lot of growth across the board, kind of similar-type broad trends when you think about the U.S. and North America as well as our international regions, in particular, our more established international regions.

Mark Mahaney:

Okay. So two, just a quick follow-up on Eric’s question. Brian, when do you think you’ll get back to par in terms of one day being one day? And then secondly, these profit levels are super high now. They’re becoming super high at the company if you ex out the COVID costs. Is Jeff aware of how profitable the company is becoming? Is he happy about it? And I’m kind of being facetious, obviously, when I asked that. But what I also want to ask really is when you think about new investment areas, and at the top of the list, maybe some new international launches are really building out some of the markets that you’ve – like India, Brazil and Mexico or the business-to-business operations, like there’s a ton of new investment areas, and it seems like the Amazon historically, and I’m sure it’s the same now, would be using this kind of revenue surge and really investing aggressively in these new areas. So just talk about that. I know you’ve got spend on COVID, but as you think about the next three to five years, you’ve got these really profit surges. How can you deploy those? Or how do you want to deploy those into some of the newer investment areas? Thanks a lot.

David Fildes:

Yes. This is Dave. Just to add to that, I think Prime is such a big focus, and some of the growth statements that Brian talked about at the opening of the call, whether it was strength in Prime membership and the acceleration we saw in the U.S. or worldwide or some of the usage stats like the grocery momentum or the doubling of video hours, for us, it’s just another encouraging sign. We think there’s still a lot more value we can add to that program. And that’s not just in the United States where we’ve got sort of a broader set of services than some of the other regions, but really focusing on supporting in some of those other regions. And so we’ve got places like Australia, the Middle East. We’ve talked about India many times, but a lot of focus on building that out. I think what’s great about a place – all geographies with a place like India is we’re really focused on digitizing the Indian sellers. A lot of micro, small and medium-sized businesses there. We launched some new features there to help support the digitization efforts with some of those brands and just a lot of work, great work being done by that team. They have some goals there around getting more sellers on board and hiring many more people as well. So a lot of focus there.

Brian Nowak:

Thanks for taking my question. I have two. The first one, Brian, is going back to the investments, and you’re often making multiyear investments for customers and customer offerings, and you’re the man behind the capital allocation plan. I guess I’d be curious to hear about can you give us some examples of areas of investment that may have been pushed out this year because of shelter in place and the higher demand that you’ve been seeing? So what were areas where you thought you were going to spend more at the start of the year than you actually have now in the current 2020 plan? And then the second one, the international strength, I appreciate the color on Europe and Japan. Nice to see the profitability. Maybe just talk to us sort of qualitatively about some puts and takes around your core international markets, Europe and Japan? And how to think about whether or not they could be more or less profitable than the U.S. long-term? Thanks.

Operator:

Our next question comes from Doug Anmuth with JPMorgan. Please proceed with your question.

Brian Olsavsky:

Yes. Let me start with that second one. Thanks, Doug. So in the AWS segment revenue, what we see are companies are working really hard right now to cut expenses, especially in the more challenged businesses like hospitality and travel but pretty much across the board. We’re helping them. We’re actively, with our sales force, looking for ways that we can help them save money. This includes things like scaling down the usage where it makes sense or benchmarking their workloads against our architectural best practices. So that’s not going to help our usage growth in the short run, but it will help those customers save money. And we think that’s the right thing to do, not only for their success and so they can come out of this at a better shape but also for the long-term health of our relationship with them as an AWS provider. But we’re also seeing a lot of companies that are really wishing that they had made more progress on the cloud because they’re seeing how companies that are on the cloud can turn into a variable cost and either scale up or scale down depending on their particular situation. They realize their on-premise infrastructure is not really flexible to go up or down. And especially in the time of sinking demand, it’s a big fixed cost for them. So we expect – we’re seeing migration plans accelerate. They’re certainly not going to happen overnight, but we see companies moving more in that direction. We think that will be a good long-term trend. And there’s certainly winners in this area right now, things like video conferencing, gaming, remote learning and entertainment. All are seeing usage growth. And it’s a bifurcated world out there. So the – on your e-commerce adoption, I think it’s hard to tell. We’re super encouraged by the fact that grocery delivery has picked up, and that’s been accelerated versus what we would have thought. We certainly are glad to be there for our Prime members who are shopping more frequently and buying more. We do know that there’s reasons that there are other options are limited. I mean there are always retail options out there, especially to go pick up in store, but less people want to go into stores perhaps now. So we’re going to have to see what is maybe a step-up in the curve and getting to a point quicker versus what are some onetime sales and things like – hopefully, things like masks and gloves and cleaning supplies in the fullness of time become onetime purchases, but we’ll see. And sorry, your last point was on new customers versus existing customers. We’re seeing similar trends. We’re seeing good pickup in frequency and basket size for new members in Prime as well, certainly not the same as people have been Prime members for a number of years. But it’s encouraging. And as you saw, Prime growth retention has increased. We’ve accelerated the number of – the growth of Prime members, both in the U.S. and internationally. So that’s a good sign that we’re happy about. And we hope that, that has long-term ramifications.

Ross Sandler:

Yes. Just a follow-up to that last comment. So the Prime behavior for international Prime members, you guys have talked about how like in the 16, 17 countries, the overall service levels are a little bit behind, selection is a little bit behind. So has the last few months in the pandemic closed that gap meaningfully in terms of GMV per Prime member for international versus what you see in the U.S.? Any comment there? And then on the 3Q guidance, you pushed Prime day for western markets into 4Q. So how much of the deceleration – it’s obviously a really strong number for 3Q, but the growth rate is decelerating a little bit. Is that mostly from Prime Day? Or can you just talk about what kind of behaviors you’re seeing right now as you go into 3Q? Thank you.

Operator:

Our next question comes from Brent Thill with Jefferies. Please proceed with your question.

Brian Olsavsky:

Yes, sure. I’ll give you the backlog number. It grew 65% year-over-year and 21% quarter-over-quarter. So that’s healthy, and we have the average contract length is over three years for our AWS contracts. I would say contract volume and negotiations are strong and have maintained through this period. So it is – that’s a good sign. It really does boil down to short-term versus long-term incentives here for a lot of our customers. They’re – if you’re in an industry that’s been heavily impacted by COVID in the economy, you’re looking for ways to save money and you’re trying to do a click and we’re trying to help in that regard. And one of the best ways to save money long-term is to use the cloud, not only to turn it into a variable cost, it could be a fixed cost, but also to be able to take advantage of the partner network that we have, the security that we have and also the constant evolution of products and services that we bring to market.

Aaron Kessler:

Great. A couple of questions. First, maybe just one of your competitors noted that growth was slowing in some markets that have opened up, I guess, probably more in Europe. Maybe just thoughts there. Are you seeing any changes in sort of the markets that are starting to open up? And just any commentary on the Zoox acquisition, how you kind of – can use that technology longer term as well? Thank you.

Aaron Kessler:

Correct.

David Fildes:

Yes. And then, Aaron, just on your second question on Zoox, I mean, it’s – there’s not too much to say at this point. It’s still pretty early, but I think it probably goes without saying it’s a tremendously forward-thinking team, which resonates with us. And they really do kind of pioneer in that space, the ride-hailing space. So a lot of cool work they’re doing, designing autonomous vehicles and focused on the passenger, right, in front of mind in that. So I think, again, just as we think about kind of the innovation components and commitments to solving kind of problems and challenges for customers, it’s pretty exciting for us to be able to work with them and bring that vision to fruition in the years ahead.

Justin Post:

Great. A couple of questions. Obviously, a great cost quarter on the leverage side. Any changes in e-commerce gross margins to call out? Is scale and getting size, improving gross margins or anything on the mix shift there that’s interesting? And then secondly, we talked about a lot about one day investment last year. Obviously, the shipping times were impacted by COVID, but are you back to kind of normal times? And where are you on the one day investment? Thank you.

David Fildes:

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

Operator:

Good day everyone and welcome to the Amazon.com Q1 2020 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 will be turning the call over to Director of Investor Relations, Shelly Kay Pfeiffer. Please go ahead.

Brian Olsavsky:

Before we move on to the Q&A, I'd like to lead off with a few comments. What we've all seen transpire in the past two months has been gut-wrenching and unprecedented. But it has also been a time of heroic action by healthcare workers, government officials, police and emergency personnel and all essential workers in our communities. This includes frontline Amazonians, including our Whole Foods team and our partners around the world. They've provided a lifeline of groceries and other critical supplies to the doorsteps of all of us at this critical time. I'd like to give you some insight into what we have seen at Amazon and how we are responding to this crisis. Beginning in early March, we experienced a major surge in customer demand. Particularly for household staples and other essential products, across categories such as health, and personal care, groceries and even home office supplies. At the same time we saw lower demand for discretionary items such as apparel, shoes, and wireless products. This large demand spike created major challenges in our operations network. And with our seller community and our suppliers, what we generally have experienced getting ready for spikes in demand for known events, like the holiday season and Prime Day, we also generally spend months ramping up for these periods. The COVID crisis allowed for no such preparation. We took quick action to react to the higher order levels, while continuing to provide for the safety of our workforce. We established rigorous safety and cleaning protocols, including maintaining six foot social distancing, procuring 100 million masks, tens of millions of gloves and wipes and other cleaning supplies. We began requiring temperature checks across our operations network. In our Whole Foods stores, we added plexiglass barriers between cashiers and customers, and reserve special hours for senior customers to shop. We temporarily raised wages and overtime premiums, we funded a new Amazon relief fund, and we allowed employees to take unpaid time off at their discretion. To deal with the unprecedented demand, we hired an additional 175,000 new employees, many of whom were displaced from other jobs in the economy. We took steps to dampen demand for non-essential products, including reducing our marketing spend. Our network pivoted to shipping priority products within one to four days and extending promises on non-priority items. Our independent third-party sellers, most of whom are small and medium-sized businesses worked tremendously hard to serve our customers, and we are grateful for their efforts. Third-party sellers continue to see strong growth in our stores, with more than half of our units sold or from third-party sellers. We increased grocery delivery capacity by more than 60%, and expanded in store pickup at Whole Foods stores from 80 stores to more than 150 stores. And other Amazon teams shifted their focus to directly helping customers and the overall effort to fight the COVID virus. AWS has created data lake to assist healthcare workers, researchers, scientists and public health officials working to understand and fight the coronavirus. Many of our AWS products are helping in the government response to the crisis, and are there for customers who are seeing their own demand spikes, companies enabling video conferencing, remote learning and online health services, for example. Amazon Flex is supporting food banks by donating delivery services of groceries to serve 6 million meals in Los Angeles, Miami, Nashville, Orlando, San Francisco, Seattle and Washington DC, with plans to ramp this up to 25 cities across the U.S. And Alexa is helping customers access important CDC guidance, and help them evaluate their own COVID-19 risk levels. How is all this impacting our business? While customer demand remains high the incremental revenue we are seeing on many of the lower ASP essential products is basically coming at cost. We've invested more than $600 million in COVID related costs in Q1, and expect these costs could grow to $4 billion or more in Q2. These include productivity headwinds in our facilities as we provide for social distancing and allow for the ramp up of new employees. Investments in personal protective equipment for employees, enhanced cleaning of our facilities, our wages for our hourly teams and hundreds of millions of dollars to develop COVID-19 testing capabilities. In Q1, we also had another $400 million of costs related to increased reserves for doubtful accounts. On the flip side, we did see a drop in travel, entertainment and meeting costs, as well as lower marketing as a way to dampen our demand for non-essential items. While we can't have great certainty about what the next few quarters will look like, I'm humbled by the efforts of my fellow Amazonians in delivering essential goods and services to so many people. We take this responsibility seriously and we're proud of the work our teams are doing to help customers through this difficult time. With that, let's open up for questions.

Douglas Anmuth:

First, I just wanted to ask, within the $4 billion of COVID related incremental costs in Q2, you talk about spending hundreds of millions on your own testing capabilities. Can you just talk about the strategic thinking there underlying trying to build this in-house versus sourcing from elsewhere? And does this potentially take you into a new business path over time? And then how do you think about the spending here in Q2 and whether over time does that change your margin structure for an extended period of time beyond just the next quarter? Thanks.

Operator:

Your next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.

Brian Olsavsky:

Well, I think we've learned that it's easier to get ready for a holiday or a Prime Day then it is to be ready for something like this when everything hits at once. High demand and also a need to restock automatically and prepare for it. So that's not something that we want to keep learning, but we're doing our best to maintain and provide key services for, and essential items for our Prime customers and all our Amazon customers. On the Prime program, what we're seeing is, again, you're seeing a lot of pickup in Prime shopping benefits. We see our prime customers are shopping more often and they have larger basket sizes. We're also seeing a lot more use of our video benefits and our digital benefits. So in March, for the first time viewers nearly doubled, which is I think a good time for people to when they're, a lot of them are staying at home to stay entertained. And you'll see our video collection. It's also beyond kind of Prime Video. It's also our channels and video rentals also went up, as I'm sure others in the entertainment business saw that as well. I think people are finding more benefit from Alexa when they're at home. They're listening to more music, asking questions, particularly questions related to COVID and issues around it. They're using it in education with their children. And I think we're seeing a lot more on the communication side using people using Alexa calling and drop in. So I think the Prime story is that shopping is, you know, really important for people now, especially when they, those people can't leave their houses. I think the digital benefits are scaling well. I think they are handling the additional demand, and it gives it gives people a good time and reason to use all of their Prime benefits that maybe they hadn't used as much in the past.

Mark Mahaney:

First, could you just talk about where you are in terms of fulfillment efficiencies? The way you track it pre-COVID, Amazon was able to, had some sort of level of standard of meeting demand with within a certain period of time, how low that got given the surge in demand, and where you are in terms of the recovery? In other words, when are you going to be - how long will it take for Amazon to get back to a point where you'd have the same sort of service efficiency levels on the retail side that you had pre-COVID? How far are you away from that? And then the second one was, could you talk about the AWS business? And I guess I would have expected maybe the growth rates were really robust, but maybe even a kick up in the growth rate? What are you seeing there in terms of, I assume there is much greater usage of AWS now? Is that something that would show up in the P&L, maybe on a delayed basis? Just talk about what's happening to that side of the business in this crisis. Thank you.

Operator:

Your next question comes from the line of Heath Terry with Goldman Sachs. Please proceed with your question.

Brian Olsavsky:

Yes, so first on AWS. I mean I don't have comments. You may have heard us talk about digital transformation. I think what I would say is, we've continue to see a healthy adoption of our business and healthy usage not only in the United States but globally. Our backlog of future contracts continues to build, and I still think the basic value proposition of AWS that we've always pointed to, things like having the most functionality, largest vibrant community of customers and partners having really proven operational and security experience. And building what customers need in the areas of machine learning and artificial intelligence, and other really key areas has not been impeded by this COVID crisis yet. And yes, we are seeing different performance in different industries. But our sales force is still there to help, help not only with current capacity, but also the transition to new, as people make that journey onto to the cloud. And then expand their use of the cloud. On the $4 billion, or sorry, on the Q2 guidance. I think the question is perhaps if how do we have a range that's above zero, if we have $4 billion of cost? Is that pretty much the essence of your question? I think there is - there are some efficiencies that would leverage that we get on fixed cost on higher volumes, even if they are somewhat breakeven on a contribution profit basis. There's some improvement in our cost structure when we have high volumes. There's also been a resumption of seller volume, especially from third parties using direct shipments to customers as companies are - you get more capability both in this country and other countries. We will continue to moderate our marketing in the time period when we have, again, very much the demand we are trying to fulfill is there and there's some products that are still out of stock. So it doesn't make sense to always do marketing, especially variable marketing in those situations. And we continue to, we believe we'll be saving travel and entertainment costs through the quarter. That's in, I would say in a couple of hundred million dollar size ranges on the cost. So there's a lot of moving parts here, but certainly the investment we're making in the COVID response is pretty significant. On the one-day, I would remind you that the one-day started in earnest Q2 of last year. So we're starting to lap that investment. It's not as large on a year-over-year basis as it's been in the past four quarters. And then the other thing that I would just point out is the - remember the impact of a change in the useful life of our servers, mostly hitting in the AWS business that was a $800 million benefit year-over-year in Q1. And that will continue into the rest of the year. And that that again is the benefit we're seeing from being able to use our server and infrastructure assets for a longer time period. We've been working on the ability to run them longer, it's a hardware and a software challenge. And as we have had success there operating at scale for over 13 years now, we've been able to extend our useful life for assets, or recognized that we have been extending the life. So that's a benefit that we've seen in Q1, and we'll see it the remaining from here on out.

Operator:

Our next question comes from the line of Eric Sheridan with UBS. Please proceed with your question.

Brian Olsavsky:

Sure. Sorry, Eric, I don't have much for you on the second point. Certainly we would look to see lower shipping costs. Although I would, but a lot of, I mean there's certainly things that we do long haul. There's things that we reposition, the airplanes. There's things that we do on long haul trucking, and that's where probably the fuel component would be larger. But we haven't quantified that, not for our guidance. I can't break it out for you right now. On how this may have played out differently in different geographies, we're actually seeing a lot of consistency, I would say in the types of products that people are buying in the state home restrictions. So it's been pretty consistent. There's obviously timing differences between countries, on one certain countries and when it's maybe ones where they are in their curve, and flattening the curve and all that. I think the biggest impact internationally has been in India, where of course, we similar to other companies in India, we're now only fulfilling our essential goods such as grocery. So that's cut back a lot on our offering, and we will further expand when the Indian government announces that were allowed to resume operations. So we're in a bit of a holding pattern except for grocery in India. And in France, there's been restrictions placed on us by the French courts. They did not impact Q1 business because essentially led to the closure of our French fulfillment centers in the middle of April. French customers are still able to order many millions of products from the selling partners we have who can ship directly to customers and through our global fulfillment. And we're continuing to appeal this court decision, but that's also different experience than the other countries internationally.

Justin Post:

A couple, just wondering if you're seeing any sustainable changes in consumer habits you could call out, such as people converting to Prime at a more rapid rate, adding more products in the consumable categories to their subscribe and save, anything you see that could really signal a longer-term change in consumer habits, faster adoption of certain categories. And the second thing for the revenue guidance for 2Q, does that assume a slowdown in growth in May and June related to the crisis? Thank you.

Brian Olsavsky:

And I'd add to that. Justin, I think the changes we've seen in the digital offerings will make people customer to those benefits and maybe advance their knowledge of what's available through - music, video, Alexa, certainly communication features on our devices. We launched Prime Video Cinema in U.S., U.K. and Germany where movies are going direct to pay-per-view because of lack of theaters. And that was a good move by the team and that's been very well received. We've also made a lot of kids and family content available free to watch on Prime Video. So I think people are getting a better look at what's available with the Prime membership.

Dave Fildes:

Well we are heavily constrained, again it's an odd quarter because generally the biggest uncertainty we have this customer demand, and with the order and how much of it they'll order. Demand has been strong, the biggest questions we have in Q2 are more about ability to service that demand and that is the products that people are ordering in a full way, not blocking or making it hard to find non-essential items, increasing marketing, and everything else. So I think the challenge is really on everything besides the top line. And top line is certainly not to be taken for granted. There's always the importance of having attractive offerings in stock for customers. But usually things you can count on, the cost structure, the ability to get products, yes, your capacity for shipping and delivering, those are usually things that you can take for granted, and in this quarter, you can't. That's really where the uncertainty is driven.

Stephen Ju:

So, Brian, I think the third-party unit mix de-indexed a little bit as a percentage of the total this quarter. I know that number jumps around a little bit, but is this primarily a matter of constrained delivery resources? And, I guess, the heightened demand? And any sort of ongoing supply chain concerns that remain worrisome for you from either a first-party perspective or from what the third-party sellers may be calling out. Thanks.

Stephen Ju:

The third-party unit mix de-indexing a little bit as a percentage of total this quarter. I'm just wondering if that's just normal fluctuations, or are you just prioritizing the first-party delivery against what's probably limited resources on the heightened demand.

Operator:

Our final question comes from the line of John Blackledge with Cowen. Please proceed with your question.

Dave Fildes:

Yes, sure. Let me start that second one, I don't have more for you on that. I think we'll announce as we change thresholds on hiring, we'll announce that at the time. Right now we've fully hired 175,000 people that we had discussed prior. 80,000 of them were in place at the end of the quarter. So the other 95,000 have been hired in April. On advertising what we've seen is it's been a very strong quarter in ad revenue. On your comment about other revenue accelerating, there's some other things going on in that other revenue account, the majority is revenue. But there's other, some other things, but I can tell you underneath that is that advertising growth rate has stayed consistent with last quarter. And we're very happy with the progression of that that offering for not only sellers, authors, vendors and positive impact it's had on customer selection. But we did start to see some impact. Yes. In March, some pullback from advertisers and some downward pressure on price, but how but advertising continues to advertise at a high cliff. It wasn't as noticeable maybe as with what some others are seeing, and it's probably offset a bit by the continued strong traffic we have to the site. So it's a bit of a mixed bag. We have again, as I said, downward pressure a bit on pricing. But I think we have a the large portion of our advertising relates to Amazon sales, not things like travel and auto which offsite which may have been disproportionately impacted at least early on here in the COVID crisis. And I think our advertising will prove to be very efficient as well. And it can be directly measured. So even as people are cutting back perhaps on advertising, or are their costs, I think this will be one area that will prove its value. It has in the past.

Operator:

Thank you for standing by. Good day, everyone and welcome to the Amazon.com Q4 2019 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 will be turning the call over to the Director of Investor Relations, Shelly Kay Pfeiffer. Please go ahead.

Operator:

At this time, we will now open the call for questions. [Operator Instructions] Our first question is coming from the line of Heath Terry with Goldman Sachs. Please proceed.

Brian Olsavsky:

Hi Heath. No, I would not isolate it to any one set of customers or products. I think it's been pretty broad-based, and it's kind of the culmination of a lot of work on adding new products and features, adding to our sales and marketing teams, and having better penetration in enterprise customers and hitting a lot of very different industries. So, I think that's what you're seeing. We feel that our product set is -- leads the market, and we add to it at a quicker pace than our competition, so actually the gap on capacity and features is growing as we speak. We also think that there's a real network effect when you use AWS with the millions of active customers and tens of thousands of global partners. And we continue to expand. We're now in 69 availability zones across 22 geographic regions. So, I think it's the combination of increased sales support, more and better products that hit customers' needs, and also the geographic expansion is what you're seeing.

Colin Sebastian:

Great. Thank you. Was just hoping you guys could disaggregate a bit the strength in seller services, how much of that was third-party marketplace commission specifically? And are you seeing more of an uptick in some of the other content and services? Thank you.

Operator:

Thank you. Our next question comes from the line of Justin Post with Bank of America. Please proceed.

Brian Olsavsky:

Sure. Well, as I said, on revenue we came in at $87.4 billion, which exceeded the high end of our range of $86.5 billion. $400 million of -- roughly $400 million of that was due to foreign exchange, but what we saw was essentially very strong holiday performance from the middle of November on. We also had a very big uptick in response to the one-day availability that's been building through the year. I think Prime has been very strong. We mentioned that we have more than 150 million paid Prime members globally now. And we mentioned that more people joined Prime in Q4 than any other quarter before. So, a lot of good momentum there built up on the aggregation of benefits that we continue to add to the Prime program most recently the one-day -- expansion of one-day shipping. On AWS, where are we in the cycle? I talked more in 2018 when the margins in AWS were closer to 30% about the efficiency of infrastructure spend and -- versus prior years. So, we continue to -- since that point, we've continued to add infrastructure capability and -- to support our global expansion as well. But what you're seeing probably more in the margins is the expansion of our sales and marketing effort at some of those costs as well as price decreases and longer-term contracts that we've signed with some of our customers. You notice on our balance sheet that our future commitments on the multiyear deals now stands at $30 billion at year-end, and that's up 54% year-over-year. So, there's a lot of good momentum on the enterprise side as well.

Jason Helfstein:

Thanks. Just to ask about AWS again. I mean, the investors have become, I guess, recently concerned just about again the slowing AWS revenue and margin and whether it's a function of increased competition. So, maybe just talk about how you're reacting. You did talk about spending on sales and price cuts, but just any more you can talk about the competitive environment? Thank you.

Operator:

Thank you. Our next question comes from the line of Stephen Ju with Credit Suisse. Please proceed.

Dave Fildes:

Yes Stephen, this is Dave. Thanks for the question. As you said, I think as we mentioned this in the release, we're definitely continuing to improve the experience in India for customers and sellers, excited by some of the response we've seen. We are continuing to invest meaningfully in digitizing those say MSMBs micro-small and medium-sized businesses. We did pledge to invest $1 billion to help digitize traders and those micro and small businesses across India. And we've got a goal of bringing more than 10 million online by 2025. So, this $1 billion investment will help to enable $10 billion in cumulative Indian exports by 2025. A lot of different facets to those types of investments, won't go into too much for specifics, but a lot of work being done there. We're also focused on job growth, job creation over there. Since we launched over in India in 2013, we've created over 700,000 direct and indirect jobs. So -- we also recently announced plans to create additional one million jobs in India by 2025. So, a lot of -- I think innovation, ideas, investment. That team over there continues to do a great job locally of taking a lot of the tenants that we've had at Amazon around innovation building and really run with that over there and done a great job of coming up with some interesting and new services and features that I think are specific to that region. And hopefully, as we continue to do that, we'll keep identifying areas over in India and tool sets features over in India that we can bring back to other regions to help benefit other sellers and the other websites more broadly.

Brian Nowak:

Thanks for taking my question. I have two. Just, the first one Brian, I think on one of the media interviews, you talked about how you're becoming more efficient with one-day and you continue -- with next-day delivery and continue to do so and talked about $1 billion of cost in that current quarter. Maybe just sort of talk to us about some of the largest qualitative fix in variable costs sort of still associated with one-day and the processes and the opportunities for efficiency to really get that number down as we go throughout 2020. And then, maybe any specific product categories or good categories where you've seen an acceleration in demand from one day that you’d call out?

Operator:

Thank you. Our next question comes from the line of Dan Salmon with BMO Capital Markets. Please proceed.

Brian Olsavsky:

Sure. Let me start on the one-day. So, yeah, we do see expansion of the one-day program as we move through the year. We've been expanding since we started this effort in Q2 of last year. Expansion means additional cities, additional routes, additional zip codes. But more -- I think what you'll see more in 2020 is also an -- more effort internationally, more costs internationally. We have greatly improved our selection of one-day in -- particularly in Europe and Japan. We started with higher one-day percentage of our shipments in those geographies, but we do have to take steps and are taking steps to increase that. And we expect that to be -- it started to be a little more balanced cost globally as we move into 2020.

Operator:

Thank you. Our next question comes from the line of Eric Sheridan with UBS. Please proceed.

Brian Olsavsky:

Sure. Thanks for bringing that up. So, we as a practice monitor and review, the useful life of our depreciable assets on a regular basis to make sure that our financial statements reflect our best estimate of how long the assets are going to be used in operations. In Q4 -- and we've been looking at it in both the FCs, fulfillment centers and also AWS annually. As we looked in Q4 of 2019, we believe it's -- there's enough trend now to show that the useful life is exceeding four years. We have been -- for our servers and we had been depreciating them over three years. So, we are going to start depreciating them on a four year basis. It doesn't unwind any depreciation that's already been booked. It just takes the asset from its current status and extends the depreciation period and then new assets will be put into play will extend out for four years instead of three and we'll continue to revisit this. I do want to point out it's not just an accounting-related change. It's rather a reflection of the work that we've done to make our server capacity last longer. We've been operating at scale for over 13 years in this business and we continue to refine our software to run more efficiently on the hardware. It then lowers stress and extends the useful life both through servers that we used in the AWS business and also the servers that we use to support our own Amazon businesses. So -- and despite that we give AWS customers and actually because of this, AWS customers continue to get access to the latest technologies more quickly than ever before. So, we are essentially reflecting the fact that we have gotten better at extending the useful life here and now building that into our financials moving forward. Yes, you're right. It should also impact our need and our timing of capital. I would say that it's also been part of the reason that we've been able to keep capital relatively under in check the last two years in the infrastructure area. But its $800 -- excuse me $800 million lower depreciation expense in the quarter and it will be consistent. It will change quarter-to-quarter. We will update you. But as you can see in our financial statements, it's about $2.3 billion impact in Q2 2020.

Operator:

Thank you. Our next question comes from the line of Ron Josey with JMP Securities. Please proceed.

Brian Olsavsky:

Yes. First of all on the -- there were two items we discussed last quarter with the Japan consumption tax raising from 8% to 10% effective October 1. The net result was a pull forward of some purchases by Japanese customers into Q3 and also some negative elasticity effects post October 1. The other item was Diwali timing, the Indian holiday which has a very large swing factor on international revenues is, it moved more into the third quarter this year versus -- in 2019 versus 2018. So, it was a help to Q3 and a penalty to Q4. Those two items impacted the Q4 growth rate negatively by about 300 basis points. That was our estimate and we believe that was the actual outcome.

Brian Olsavsky:

On the international segment excuse me yes. The -- sorry the first question was for the holiday season. Yes, we don't see that as a factor actually. And I mentioned that last call as it wasn't incorporated into our guidance in a negative fashion. The way we look at it and the way we believe it works at least in our business is that customers will have a holiday budget and they will spend it between generally the middle of November. It's creeping up to the early part of November through the holiday season. And we do see obviously spikes in Black Friday and Cyber Monday and we also see relative tick-up in trends as we get closer to the holiday and for the shipping threshold cutoff. So, there's a polarization of tends to be a polarization to early shipping -- or excuse me early purchase and late purchases. As far as, the six days that sort of time period between Thanksgiving and the Christmas holiday, we don't see an impact on that. Perhaps it's a bigger issue for stores and foot traffic, but we don't notice it in our business.

Doug Anmuth:

Thanks for taking the question. I just want to shift gears to grocery. I know you added Amazon Fresh into Prime kind of removing the previous $14.99 a month component there and putting it into Prime and you talked about the 2,000 U.S. cities and towns with two-hour delivery. Can you just talk about what the early impact there is of bundling kind of Fresh into Prime at this point? And then just how you're thinking about your grocery strategy as you're positioned now? Thanks.

Operator:

Thank you. Our final question will come from the line of Mark Mahaney with RBC Capital Markets. Please proceed.

Brian Olsavsky:

Good luck 49ers. I'll get that out there first. Good luck Ken Sachse fan. We're indifferent. Let me start with your second one on -- sorry, the -- start with gross margin.

Brian Olsavsky:

And on the comment on seasonality of guidance and Q1 that -- I think the historic trend of peaking a bit in operating income in Q4 and then stepping down in Q1 has been broken up a little bit as we've had the balance of AWS and some other things. But if you actually look back to Q1 of last year, it was the highest operating income quarter on record. And that's one of the -- makes a difficult comp this year, because we had the -- if you remember the slowdown in expenditures in 2018 in things like fixed -- adding of headcount, warehouse space, infrastructure costs, not to zero, but like down off of prior investment levels in 2016 and 2017. A lot of that continued -- that cost baseline continued into Q1 of 2019 and it actually was a super-efficient quarter from a cost and profit standpoint. Q2 of last year, we started to again make larger investments, particularly in one day. And so that's now something that is lapping in Q1 of this year because we didn't really have one-day in Q1 of last year. But -- so I think there's -- it's hard to draw those parallels between quarters anymore. I will though mention the guidance that we do have the $800 million of lower depreciation from our extension of our server useful lives, which is part of the range that we gave you of $3 billion to $4.2 billion.

Company Representatives:

Brian Olsavsky - Chief Financial Officer Dave Fildes - Director of Investor Relations Shelly Kay Pfeiffer - Director of Investor Relations

Shelly Kay Pfeiffer:

Hello, and welcome to our Q3, 2019 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO; and Dave Fildes, Director of Investor Relations. 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 2018. Our comments and responses to your questions reflect management’s views as of today, October 24, 2019 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 maybe materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, 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 also assumes among other things that we don’t conclude any additional business acquisitions, investments, 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. With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.

Eric Sheridan:

Thanks so much for taking the question. I wanted to know if I could go a little bit deeper in the framework you gave around revenue guidance for Q4. Historically, you have seen deceleration in the year-on-year growth rate in Q4 versus Q3, but many of your businesses look like they reaccelerated in Q3 over Q2. So just wanted to know whether it was AWS or advertising or some of the things in e-commerce business, whether there are things we should be keeping in front of mind from a headwind or a tailwind perspective, as we think through some of the moving pieces in Q4? Thanks so much.

Operator:

Thank you. Our next question is from Doug Anmuth with JPMorgan. Please proceed.

Brian Olsavsky:

Sure. Let me start with the second part of that. So back in Q2, I said that we were estimating an $800 million expense tied to One Day in Q2, and we actually were just above that in Q2. In Q3, we expected that to grow, we put into our guidance and we hit essentially where we expected on the guidance. So as we head into Q4, we’ve added what’s just nearly a $1.5 billion penalty in Q4 year-over-year for the cost of shipping, which is essentially transportation costs, the cost of expanding our transportation capacity, things like adding additional poles and shifts in our warehouses, the cost for deploying inventory closer to customers, there’s a lot of tangential costs, by and a way the biggest expenses is on the actual transportation cost. So we’ve built that into our Q4 guidance estimate, but we’re very pleased with the customer response to One Day. You can see it in our revenue acceleration and also in our unit growth acceleration. Once again the ops team has really done yeoman’s work here to create this capacity for us and they continue to unlock additional capacity daily. We’re expecting that it will be again a great help to customers in Q4. We have seen Prime members increase their orders, spend more, so that they must also see it as a real help to them in their daily lives.

Youssef Squali:

Great, thank you so much. Brian, kind of just a couple of quick ones. Of the 400 basis point sequential acceleration growth, can you help us just understand maybe how much of that was driven by Prime Day, which I think you guys said was a record day for you versus One Day shipping. Just trying to extract one versus the other, because obviously going into Q4 you’re only going to have the latter. And then on – a lot of news around counterfeit and whatnot on the side. Can you just help quantify that for us if there is a way for you to do that? And is the higher OpEx 4Q also driven at least in part by the higher investment to combat that? Thank you.

Operator:

Thank you. Our next question comes from Brian Nowak with Morgan Stanley. Please proceed.