Amazon Earnings: Customer Demand, AWS, Rivian, Inflation and Advertising

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."

"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 made good progress in Q2."

"Customer demand does remain strong. We're seeing, again, continued strength in Prime purchases, Prime commitment levels of usage -- benefits being used, et cetera."

AWS:?

"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."

"AWS operating income was $5.7 billion in Q2. As a reminder, this includes a portion of our seasonal Q2 step-up in stock-based compensation expense. AWS results included a greater mix of these costs, reflecting wage inflation in high-demand areas, including engineers and other tech workers as well as increasing technology infrastructure investment to support long-term growth."

"On the bridge to Q2 to Q3, so again, you have the -- mentioned 3 items, ops improvement that we see of $1.5 billion and offsetting that is increased costs in AWS as we build out depreciation. We also are adding -- continuing to add people in that space, product engineers, sales people, customer support. Speaking more broadly, we know AWS is a huge opportunity. It's early days in the adoption curve for companies and governments. And we invest with that confidence in mind. And customers have responded and we're going to keep investing there."

Net loss and Rivian:

?"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."

Inflation:?

"For example, the cost to ship in overseas containers more than doubled compared to pre-pandemic rates. And the cost of fuel is approximately 1.5x 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."

"Inflationary pressures remained at elevated levels in Q2, similar to what we saw in Q1. These include pressures from higher fuel, trucking, air and ocean shipping rates, which we expect will continue into Q3. We made strides to improve fulfillment network productivity in Q2. Staffing levels were more in line with rising Q2 demand, and we saw better optimization of our fulfillment network. On the transportation side, we continue to improve delivery, route density and improve package deliveries per hour. We are encouraged by the progress during the quarter and see opportunity to further improve in the second half of the year."

"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 of -- 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."

"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."

Advertising:

"I'll just add a little more on advertising because you're probably wondering again about softness -- potential for softness in that or macroeconomic factors. Right now, we still see strong advertising growth. Again, it's got to be a positive both for the customer and for the brand. I think our advantage is that we have highly efficient advertising. People are advertising at the point where customers have their credit cards out and are ready to make a purchase. It's also very measurable. And when people are looking -- if companies are looking to potentially streamline or optimize their advertising spend, we think our products compete very well in that regard, in addition to maybe longer-term things like brand building and brings new selection to bear in front of customers."

*All statements are by Amazon CFO Brian Olsavsky.

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