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Amazon.com, Inc. (AMZN) Management on Q2 2019 Results – Revenue Call Scripts



Amazon.com, Inc. (NASDAQ: AMZN) Q2 2019 Income Conference Call July 25, 2019 17:30 ET

Company Participants

Shelly Kay Pfeiffer – Investor Relations

Brian Olsavsky – Senior Vice President and Chief Financial Officer

Dave Fildes – Director, Investor Relations

Conference Call Participants

Brian Nowak – Morgan Stanley

Heath Terry – Goldman Sachs

Justin Post – Merrill Lynch

Jason Helfstein – Oppenheimer [19659004] Youssef Squali – SunTrust

Mark Mahaney – RBC Capital Markets

Ross Sandler – Barclays

Mark May – Citi

Colin Sebastian – Robert W. Baird

Brent Thill – Jefferies

19659004 ] Eric Sheridan – UBS

Operator

Thank you for standing. Good day all, and welcome to Amazon.com Q2 2019 Financial Results Teleconference. At this time, all participants are in listening mode. After the presentation we will conduct a question-and-answer session. Today's conversation is recorded.

For opening remarks, I will transfer the conversation to the Director of Investor Relations, Shelly Kay Pfeiffer. Please proceed.

Shelly Kay Pfeiffer

Hello, and welcome to our conference call for financial results 2nd quarter. Brian Olsavsky, our CFO, joins us today to answer your questions. and Dave Fildes, Director of Investor Relations. When you listen to today's conference call, we encourage you to have our press release ahead of you that includes our financial results, as well as quarterly calculations and comments.

Please note, unless stated otherwise, all comparisons in this conversation will be against our results for the comparable period 2018. Our comments and answers to your questions reflect the management's views from today, July 25, 2019, and will include forward-looking statements. Actual results may differ materially. Further information on factors that could potentially affect our financial performance is included in today's press release and our submissions to the SEC, including our last annual report on Form 10-K and subsequent submissions.

During this conversation, we can discuss certain non-GAAP financial measures in our press release, slides included with this webcast, and our filings with the SEC, each posted on our IR site. You will find further disclosures about these non-GAAP measures, including the reconciliation of these measures with comparable GAAP measures.

Our guidance contains the order trends that we have seen so far, and what we believe to be appropriate preconditions today. Our results are inherently unpredictable and perhaps significantly influenced by many factors, including fluctuations in exchange rates, changes in global economic conditions and customer costs, world events, growth in the internet, online trading and cloud services and the various factors detailed in our submissions to the SEC.

Our guidance assumes, among other things, that we do not terminate any further business acquisitions, investments, restructurings or legal settlement. It is not possible to accurately predict the demand for our goods and services and therefore our actual results may differ materially from our guidance.

With that we will go to questions and answers. Operator, please remind our listeners about how to start a question.

Question-and-answer

Operator

Thank you. At this point, we will now open the conversation for questions. [Operator Instructions]

Our first question comes from the line of Brian Nowak with Morgan Stanley. Please continue.

Brian Nowak

I have two. It appears that the total retail business accelerated quite nicely in the quarter. Maybe you can only talk about 24-hour shipping is in it? So what specific categories of consumption do you see driving that acceleration? And then the opposite question on AWS, which has slowed down, can only talk about some of the pads and take in the AWS revenue growth this quarter against the previous Q? Thanks.

Brian Olsavsky

Sure, Brian. Thanks for your questions. Let me start with AWS. We feel this really strong quarter. We had a growth of over $ 24 to $ 33 billion year-over-year, so 37% growth. USD 9 billion with which we increased the running price was only the second quarter last year as far as our history. So, as you can say, we've been quite transparent with the AWS revenue and revenue we've broken it out for 2015, and we're really excited about the absolute dollar growth, and we're seeing a range of customers and their usage, their increased pace in business migration, increased use of our services, especially our machine learning services. And continuously, AWS is chosen as a partner for many companies because of our leadership position in technology, our lively partner ecosystem, and also the stronger security we offer.

On your question in a day, let me update you with it, because it was obviously a big topic of conversation last quarter, and you can see that it is starting to show up in our results in the second quarter. So we are very pleased with our customers' response to our growing day-to-day service.

In the second quarter, we had a meaningful step up in the daily broadcast, primarily in North America. And volume – one day's volume accelerated through the quarter. The Ops team did a fantastic job here not only to expand a day's range and delivery capabilities, but also to prepare for and handle some very high volumes on Prime Day earlier this month.

So we're in the middle of the journey here. We expect to see a continuation of the availability of one day for the next quarters both in North America and internationally. Internationally, somewhat in the second quarter increased, but for the most part the improvement in delivery speeds will be in future quarters there. On the cost side, we last talked about $ 800 million for transportation costs to deliver one day, the extra day in the second quarter. We were slightly higher than this number in total costs.

We saw some extra transition costs in our warehouses. We saw somewhat lower productivity as we expanded quite quickly, both local capacity in the low season also in our delivery networks. We also saw that some costs moved – to buy more stock and move inventory in our network to have it closer to the customers. And we built it not just that cost structure, but an accelerated cost penalty in our Q3 guidance that was released with our revenue today.

And as I said in other surroundings, we've seen this before. We have had major changes in the distribution and transport network repeatedly in our history from going from the media to a large selection of different product lines that cannot be sorted as we call them. The first two-day Prime shipping offer that we launched many years ago, the huge expansion of our network to include FBA sellers and capacity for them, and recently, the first steps to increase one day and the same day, even whether it is on a much smaller scale.

So it creates a shock to the system. We are working through it now. We expect that we will work through it for several quarters, but when the dust settles, we will regain cost efficiency over time. As far as you asked about specific product lines, there was nothing to share there. We have seen lower ASPs generally in Q2, higher unit growth versus revenue growth in North America, and we may be blending into some lower ASP records when we launch one day, but we haven't yet drawn the overall conclusion .

Operator

Thank you. The next question comes from Heath Terry with Goldman Sachs. Please continue.

Heath Terry

Great. Thanks. Just wondering back on the AWS side of things, can you give us a sense of what you see from a volume perspective? Obviously, price is always a big part of this growth, but just trying to understand if you see similar trends in terms of growth rate decline on the volume side of things.

And so to the extent that I think of the mixture of either income or use within that business. Are there any products or product areas that AI has obviously been a major initiative for you that you see especially out of growth or under growth in relation to the overall business you want to call out?

Brian Olsavsky [19659048] Yes for sure. At the second point, I would say that we see much increased adoption and machine learning services, especially Amazon Sage Maker. We have had tens of thousands of customers now using AWS machine learning services, and we will continue to innovate on behalf of these customers.

We released more than 200 machine learning functions and functions in 2018 alone in this area. Database is also a multi-billion dollar business run by Aurora. So we see a lot of strength. We see a strong growth in use that exceeds income growth as the usual increased pace in corporate migration.

So I would say that on percentage growth again on a dollar basis, it goes very strongly. On percentage growth, we have a very strong growth in the first half of last year. We grew about 50% in the first half of last year. There are some special unique customer volumes that flowed through some customers having really high usage associated with their businesses. But for the most part, we continue to increase the use and expansion of our services with all our customers. So very happy.

Operator

Thank you. The next question is from Justin Post with Merrill Lynch. Please continue.

Justin Post

Big. Couple questions. I suppose the first question only happens with customer behavior when they have a day's availability? I guess units are going up, but can you give us some details of what's happening or a category that switches to a day what's going on?

And the second question, have we heard from some minor checks that some of the smaller sellers move to 3P and do not get one-page orders. Is there any change in your business there to really focus more on third-party business? Thank you.

Brian Olsavsky

Sure. No, we do not have category specifications that we can really share with you today on the go of one day. I said that in general in the second quarter, the unit volume was larger than the revenue volume. So we saw some lower ASPs. But I think what you say is just many more products that come into consideration that are set for our customers.

So things they may not be able to wait for two days can wait a day, and there is a whole separate utility value for the Amazon site. I've noticed it personally myself that just – with one day's shipping, it's here before you know it. So, which categories that hit specifically, we must look over time.

On your comment I guess you meant vendors not merchants but on the move from 1P to 3P, but no, it shouldn't be – I can't highlight any related shift in channel there, but I want to say we stay different if – we are focused on price comfort and choice for our customers. And whether the product is retail or third party offers is not so important to us. As long as it is in stock, as long as it is competitive.

So, as you know, our 3P lineup – our 3P percent of units have increased over time and increased again in this quarter to 54% of the units. We continue to invest very much in our systems for both retail suppliers and also for third-party traders who invest billions of dollars a year on behalf of making Amazon a better place for customers to buy and increasingly not just sales but also third-party party sales.

Especially on Prime Day, I think you'll see we had – in the press release, we had more than $ 2 billion products purchased from small and medium-sized businesses. So when we win, we win together with our supplier partners and also our sales partners.

Operator

Thank you. Next question comes from Jason Helfstein with Oppenheimer. Continue.

Jason Helfstein

Thank you. So in the release you commented on car and Alexa, something you would like to elaborate a little more that looks like it's a very interesting opportunity? And then with regard to India, there were two comments in the release, but something you can comment on that way to get past some of the issues that had affected the business lately? I know you're past it now. Thanks.

Brian Olsavsky

Yes. Let me start with India. So yes, continue to see growth in programs for both sellers – for our salespeople and delivery partners. Over the past 18 months, we've doubled the number of paid Prime members, which we are very happy about. We have invested heavily in our global sales program, which helps Indian sellers not only reach customers in India, but also in other geographies around the world.

We started Amazon Flex in India, helping our local partners deliver packages, giving them jobs, increasing our sales capacity for salespeople and increasing our delivery speed. So it's a win-win.

We have also introduced package-free shipping program in nine cities. This is going to be a big part of our shipment zero program, a vision of making all of the Amazon shipping network carbon zero.

On the government side, our engagement with the Indian government makes us optimistic about cooperation and cooperation to seek a stable predictable policy that allows us to continue investing in our technology and infrastructure. And it also helps us create jobs and scale local businesses.

So we think there is a lot of common purpose there and a good quarter where we look forward to the Diwali holiday this year. The events we have for Diwali were all in the fourth quarter last year. Some of them are in the third quarter of this year based on the time of the holiday. So it is included in our international – excuse me, the income growth level for the quarter.

Dave Fildes

Yes, Jason. This is Dave. Just quickly on the Alexa point and auto, Alexa is really a more and more place. I think the point you're probably referring to is that we now see hundreds of third-party devices with Alexa embedded. So it runs the spectrum from smart thermostat and another smart home device, headphones, but also vehicles.

So we've seen many good partnerships and arrangements with companies like BMW and Mini and not just in the US, but also in places like Europe. So much of this is, of course, just about the great power of Alexa and being able to offer even greater comfort and touch points where customers can interact with it, and we see a lot of speed in using and how customers interact with Alexa.

But also when you look at the broader environment of third-party devices, devices we roll out in all the things that are – we see a lot of good speed there. And I think it's supported by the fact that Alexa is always smarter and that customers enjoy the benefit of the enhanced experience.

Operator

Thank you. The next question comes from Youssef Squali with SunTrust. Continue.

Youssef Squali

Great. Thank you. Two quick questions for me. Can you quantify the cost of a day's shipping to Q3 guidance just like what you did in 4Q also with the $ 800 million? And if they planets, how do they think about it, as we map it over the next few quarters?

And then you have made a very exciting procurement, seismic acquisition once back. I just wonder how it fits into the overall strategy? And is the idea of ​​trying to build a double-click like-minded model, sorry to use that platform? Thanks.

Brian Olsavsky

Hey, Youssef. Let me start your question one day. I do not break the specific cost this quarter as I did last year – last quarter. Some of this is because it is very difficult to find exactly the lines between one-day and other cost issues. So we always work within an area. We are confident that we were close, but just above the $ 800 million estimate in Q2.

And as said, this will take several quarters to play out. We had a meaningful boost in North America in Q2, and it was accelerating through the quarter. We see more costs in the third quarter. We'll see about the fourth quarter when we speak, and everything we know about or expect about the 3rd quarter is embedded in our guidance.

So I wouldn't break out the dollar rate. I will tell you at the end of the quarter what we look at the costs and how it looks for the 4th quarter as well. And the other thing I want to point out on the track is that we just get started in international, and most of this work lies ahead of us even though the speed ticking a bit in Q1 – excuse me Q2 but – and will do it even more in 3 quarter in future quarters.

Dave Fildes

Yes. And just look at Seismic quickly. We are pleased to have acquired the Seismic ad server and then Seismic's dynamic creative optimization or DCO. Customers will be able to continue to use the proven products and services. We invest in the long-term success of Seismic. And again, Amazon advertising and Seismic have many mutual customers, so we know how valued these sound solutions are for the customer base.

So we are looking forward to working with that team and we will share more updates as we invent and create new opportunities to serve advertisers in the future.

Operator

Thank you. Next question comes from Mark Mahaney with RBC Capital Markets. Continue. Sir, your line is live.

Mark Mahaney

Sorry. Hey Brian, can you talk a little about the elasticity you see – do you expect to look in international markets with a day's development? And I just – the comment in the press release about this acceleration from one day, sounds good. It is a little surprising that you would see the reaction so quickly. But maybe this really is – well, you obviously see it. You are sure you will also see it when you roll out into international markets if you can just comment on it? Thanks.

Brian Olsavsky

Sure. The proportion of one day's shipping is, of course, higher in international at first in many of our countries. So we want to – we expect it to be very valuable to customers when we make choices in that one-day category. But we think the greatest elasticity is probably in North America where the standard has been two-day shipping for Prime.

So yes, I want to say, you are facing – you see it every time you go to our site. It is automatically built-in. You're surprised at the speed. It's not like you need to search a day's shipping specifically to find out what's available. It grows and it is pervasive.

So I think what's going on, once again it strengthens your buying decision, it strengthens the need not to have to go somewhere else to buy a product because you need it quickly. So I think it will be part of your routine. It's at least what we see in North America. And we hope again when we build this capacity for more and more regions and more and more postal codes and add more and more selection that everyone will see the same as we already see in larger cities.

However, I would like to add a point because when we talk about operating revenue both in Q2 and Q3 and we are talking about the costs and penalties for a day, I would like to point out that there are some other investment areas that definitely happen here. Looking at the second quarter, our marketing costs increased 48% year over year, and it's a combination of a few things.

First, we continue to add the AWS sales and marketing team. We see a great opportunity there to help customers engage in our services and migrate to our products. So we continue to expand our sales force and marketing programs. We also add more and more advertising when we roll out devices and Prime Video – new Prime Video content especially internationally.

So we see higher marketing costs. We also see a higher equity-based compensation cost. This was an increase of 36% from the previous year. And you will see that our share increased by 13% from the previous year.

So when you look at some of our fastest growing areas, things like Alexa and AWS and also team learning machines and other technical high-end projects, the technical share actually increased twice as much or almost double of it based on the total number of employees. So there are many moving parts within our number, but there is a very strong investment going on in AWS devices and videos in particular.

Operator

Thank you. The next question comes from Ross Sandler with Barclays. Continue.

Ross Sandler

Hey guys, just two questions. North America's retail acceleration was 3.5 points, and you mentioned that international is about one. So can we ascribe the difference to one day? Or did another organic acceleration happen in North America except for the transition to one day?

And since Brian related to that investment question, the operating margin of the AWS fell slightly. I know they had a tough comp. But what you want to call away from the employees you just mentioned might have been bulky in the AWS quarter? Thanks.

Brian Olsavsky

Sure. Let me start with the second question. So yes – sorry, the operating margin in AWS, just like the turnover rate, is such a fast growing business with different times for investment and global expansion in marketing investments and other infrastructure that will vary quarter by quarter. [19659099] We had one – we have come across a period where we remember less investment in infrastructure for both AWS and Amazon if you remember it last year. I haven't got the number right in front of me, but anyway we grew financial leases, which is actually our props for capital contract for infrastructure by 9% in the first quarter, and that was 10% the whole year that went off the year in 2017 where we had a growth of 69%. So we had that dynamic.

The subsequent 12-month growth in this figure is 21% after the second quarter. So it's increased from 9% to 21%. So we start to see what I mentioned in previous conversations that the investment will step up in 2019, then began to see it in the second quarter. But the biggest, I would say, the greatest effect of this operating profit, was the addition of sales and marketing personnel in AWS and also to a lesser extent the share-based compensation, which certainly hits all our businesses.

Your comment On income growth difference, I mean that there are so many different factors that occur in all countries that are difficult to compare North America with internationally. But I would say that we attributed a good portion of the revenue growth rate from 17% in Q1 to 20% in Q2 to the roll-out of one day and its impact.

If there are other things, apparently we are continuing to add selections, and we again have many engagement points from customers through Prime Benefits and video and entities that certainly contribute to our revenue increase in our inventory of Prime members. But if we were to point out one thing in Q1 that is different – Q2 excuse me, it's different, it was obviously the start of – and stepped up in one day's shipments.

Operator

Thank you. The next question comes from Mark May with Citi. Satisfied continue.

Mark May

Thank you for taking my question. I appreciate it. First, I assume as an organizational question, but some of the feedback I have heard from the ecosystem is that it seems that the combination of the way Amazon's organized internally and only rapid growth in the advertising business 1P, 3P which at times is indicative of the type of these teams Internally not always in line, and maybe it creates some problems.

And just wondering first, do you generally agree with this? And if so, what does the company do to better optimize these increasingly related features that may not have been previously organized internally that way?

And secondly, in terms of subscription revenue, where are we in relation to the benefits of the announcement of price increases announced last year and rolled over to existing members over the past year, and will have some significant impact on growth in the third quarter of the rear half? Thanks.

Brian Olsavsky

Sure. So I guess your first question is about advertiser coordination with teams that interact with vendors and sellers, maybe that's what you meant?

Mark May

Exactly. Yes.

Brian Olsavsky

Ok. Yes, first of all I want to say that we are primarily customer focused, but we need good coordination across our teams, and we are growing fast and adding new things. So there is always learning that we have it, and therefore we say that there is still day one here. But we try to minimize the negative impact on any supplier or seller out there.

So I can't comment on anything for sure – about exactly what issues you might be talking about. We have teams dedicated to the seller experience and the supplier experience, and we think they do a good job of selling the whole package of products including advertising – with the advertising teams on Amazon.

But as you say, they are individually round and they can meet at different points, and sometimes certain vendors who might come out of hand can be synchronized. But hopefully it is a temporary condition.

On subscription revenue, yes, we – you remember we raised the price of Prime in the US in June from $ 99 to $ 119. So the biggest impact – beneficial effect from the least from a subscription revenue point of view would have occurred in the following four quarters, less in Q2, more in Q3 and Q2 this year.

So, yes, it will be a factor we compensate for the next 12 months. It is offset by the growth of the Prime program itself and the expansion of the Prime Benefits or Prime program globally. You can see – may have seen that we have launched Prime in the United Arab Emirates this quarter. So that's nothing – it's something we've certainly seen earlier with the time of price increases, but it's built into the Q3 guide I've given.

Operator

Thank you. The next question comes from Colin Sebastian with Robert W. Baird. Please continue.

Colin Sebastian

Great. Thanks. I suppose first is curious about just a follow-up of the ASP comments if it was – that changes within the same categories or just lower ASPs entails diversification into new categories. But my main question is just to look ahead of the holiday, given some of the moving parts and 3PL and the shipping ecosystem, and of course with the transition to a day, you are sure there is enough capacity from your own first-party logistics as well as third-party partners to meet the seasonal demand, and should we now expect a faster ramp in Amazon Air as a means of moving cargo between fulfillment centers? Thanks.

Brian Olsavsky

Yes. So I would say the first time we started discussing the roll-out of a day, our first thoughts went to the 4th quarter of this year and our ability to vacation and as much as Q2 and Q3. So we are confident that we will have the ability to handle seasonal demand. We work very hard to expand one day's capacity, add carriers, add delivery partners to our own AMZL capability, and make our partners expand their capabilities.

So we feel good with the 4th quarter. It is a bit early to discuss it now, but we certainly had a very good test on Prime Day. It was the two biggest days we have ever had. A lot of good work went into Prime Day, a lot of benefit to the customers, a lot of benefit to our sales partners, the small business dealers too. So it was a good test for us.

And sorry, your question about low ASP, I think we still find out. I mean they – what I respond to is the high unit growth in relation to good income growth, but the unit growth grew faster. I'm always a bit varied to put too much into the device growth number.

As I have spoken in other quarters, there is a number that excludes AWS subscription services, advertising and Whole Foods, which are some of the fastest growing areas and we also – actively sell subscription services such as Kindle Unlimited and Amazon Music Unlimited, who can cannibalize unit sales. So there are many moving parts, usually headwind to the unit growth number, but again satisfied with the 800 basis point quarter over the quarter quarter of it.

Operator

Thank you. The next question comes from Brent Thill with Jefferies. Continue.

Brent Thill

Thank you. Brian only on the revenue guide for the next quarter, it is significant below where many of us are. I'm curious if you could just talk about spending changes and the success of a day just doubled, or just going through the next quarter? Thank you.

Brian Olsavsky

Yes, sure. Then again, the largest individual item is one day's shipping. Som jeg sa tidligere hadde vi et meningsfullt steg opp i forsendelser i 2. kvartal mot Q1, men vi er fortsatt på vei og Q3 vil være et steg oppover Q2 i Nord-Amerika, og vi får se mer i internasjonalt. Så det er – den økningen i en dags forsendelse og alle de tilhørende kostnadene for ekstra transport og få kapasitet på plass. As I mentioned earlier new costs and things like expanding inventory, getting it closer to the customer.

Just a lot of things moving — a lot of moving parts in the fulfillment center world right now and our transport networks. So that is the biggest individual contributor but as I mentioned in Q2's results, some of the investments in marketing, the step up in infrastructure spending that should continue.

We certainly have a lot of areas where we continue to invest not the least of which is our AWS business, devices, video, the global expansion of a lot of our Prime Benefits and things like stores and grocery delivery through Whole Foods, Prime Now and AmazonFresh.

So I would say, yes, we had — as we've mentioned the last couple of calls, we had some lessening of expenses in some key areas last year, mostly tied to headcount growth, infrastructure and fulfillment capacity.

We expected a step up in 2019. We didn't see as much of it in Q1, mainly because of the timing of the seasonality of the year and getting things going. We’re seeing more of it in Q2 and we'll see it through the remainder of the year.

Operator

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

Eric Sheridan

Thanks so much. Maybe a few small questions on the advertising side of the business if I can. How much of the advertising business would you be willing to say is driven by domestic sellers and domestic brands versus the international side?

Two, how do you think about the video ad revenue opportunity? We continue to hear from a lot of people in the advertising industry that you might be a bigger player in video advertising later this year or more into next year, how do you think about making investments against that possibility or even just possibility of being a driver in your platform overall? Thanks so much for the color guys.

Dave Fildes

Yes, Eric this is Dave. I think started with the video advertising that one focus areas for us is expanding our video and over the top offerings for brands. We've taken some steps with live sports and then IMDb TV, but we'll continue to do things like add more OTT video supply, just things like Amazon Publisher service integrations and simplifying access for third-party apps and add more inventory through things like Fire TV apps and IMDb TV. So some interesting areas that we're continue to put a lot of focus into.

Now the first part of your question, in terms of geographical mix, I mean, fair to assume that like a lot of our business, advertising in the North America segment is the bigger piece of that, but I think we're really excited about the international opportunity.

A lot of the tools that we've rolled out introduced in places like the United States aren't available in many of the international regions. And so, it's a matter of continuing to work with advertisers and brands and kind of buildup, not only awareness but just how those — add things like sponsored products interact with customers and how they receive — building up the things we talk about many times here around improving relevancy on each of those geographic websites is an important thing that we're measuring. So, expected to continue see us look for new ways to be able to roll that out.

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, at least through the end of the quarter. We appreciate your interest in Amazon and look forward to talking with you again next quarter.


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