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Amazon is a global technology company that operates in various sectors, including e-commerce, cloud computing, and digital streaming. The company organizes its business activities into three main segments: North America, International, and Amazon Web Services (AWS), serving a wide range of customers such as consumers, sellers, developers, enterprises, content creators, advertisers, and employees . Amazon's diverse product lines include online and physical retail stores, third-party seller services, advertising services, subscription services, and AWS, which provides on-demand technology services .
- Online Stores - Offers a wide range of products and digital media content through its e-commerce platform.
- Third-Party Seller Services - Provides a marketplace for sellers, including services like commissions and fulfillment.
- Amazon Web Services (AWS) - Delivers on-demand cloud computing and technology services to businesses and developers.
- Advertising Services - Sells advertising space and services to various clients, enhancing their visibility and reach.
- Subscription Services - Includes offerings like Amazon Prime and digital content subscriptions, providing exclusive benefits and content.
- Physical Stores - Operates retail locations where customers can purchase items directly in-store.
What went well
- Amazon's AWS cloud division is experiencing more demand than it can fulfill, indicating strong growth potential.
- The upcoming release of Trainium2, Amazon's custom AI chip, is generating significant customer interest due to its compelling price-performance, leading Amazon to increase production.
- Amazon has a deep partnership with NVIDIA, being the first to offer H200s in EC2 instances, which strengthens its position in AI and machine learning services.
What went wrong
- AWS is facing capacity constraints due to limited supply of AI chips, potentially hindering growth in cloud services.
- Shift towards lower-priced items may negatively impact revenue growth, as customers focus on lower average selling price (ASP) products, possibly affecting margins.
- Amazon's international segment faces ongoing profitability challenges, with some emerging markets yet to achieve consistent operating profits, potentially weighing on overall financial performance.
Q&A Summary
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AWS Margins and CapEx Plans
Q: What drives 38% AWS margins? CapEx outlook for 2025?
A: AWS margins increased due to accelerating top-line demand, cost control efforts, and extending server useful life adding about 200 basis points of margin year-over-year. CapEx is expected to be $75 billion in 2024, likely more in 2025, mainly for AWS investments driven by generative AI. The AI business is a multibillion-dollar operation growing triple-digit percentages year-over-year and growing 3x faster than AWS did at its stage of evolution. -
Cloud Capacity Constraints and AI Chips
Q: Are you capacity constrained? Impact of new chips on growth?
A: We have more demand than capacity, primarily in chips. Our partnership with NVIDIA, being first to offer H200s in EC2 instances, and our custom silicon Trainium2, ramping up in the next few weeks, will address capacity and are expected to drive growth. Customers are excited about Trainium's price performance, leading us to increase production. -
AI Margins in AWS and Future Potential
Q: How will AI margins compare to current AWS margins?
A: The AI space is earlier stage and margins are currently lower, similar to early AWS margins below 15% in the 2010s. As the market matures, we expect very healthy margins in generative AI. Efficient capacity management will directly impact margins over time. -
International Retail Profitability
Q: Outlook for international retail margins and drivers?
A: International segment operating income was up $1.4 billion versus the prior year due to lower cost to serve, increased advertising contribution, improved selection, and faster delivery speeds. Our goal is to achieve North America-like margins over time, with each country at different stages towards profitability. -
Lower ASP Strategy and Consumer Behavior
Q: Consumer shift to lower-priced items and strategic response?
A: Unit volume grew 12% worldwide. Customers are price-conscious, seeking deals, leading to growth in everyday essentials and lower ASP products. This results in stickier customer relationships, larger baskets, and better ship economics. We're focused on reducing cost to serve to economically supply lower ASP items, unlocking new areas of consumer spend. -
Competition and Amazon's Advantages
Q: How does Amazon's fulfillment compare to store distribution?
A: Competition is healthy, but we have unique advantages: a broader selection, low prices with significant deals, and superior delivery speed. Despite only holding about 1% of the global retail market share, we believe the shift from physical stores (currently 80%-85% of the market) to online will offer significant opportunities. Our customer-centric approach and technological innovation are key differentiators. -
Robotics Investments and Progress
Q: Status of robotics investments in warehouse network?
A: We're rolling out significant new robotics capabilities in stowing, picking, packing, and shipping. A facility in Shreveport, Louisiana launched a few weeks ago is showing encouraging results. Automation allows us to ship faster, more cost-effectively, and enhances safety. AI will play a big role, and we've hired from strong robotics AI organizations to accelerate progress. -
Next-gen Alexa and AI Applications
Q: Outlook for Alexa leveraging AI agents and data?
A: With about 0.5 billion Alexa devices and couple hundred million active endpoints, we're rearchitecting Alexa with next-generation foundational models. We aim to lead in AI assistants capable of not just answering questions but also taking actions for customers, enhancing experiences and potentially driving incremental revenues. -
Third-party Unit Mix Decline
Q: Why did 3P unit mix decline in Q3?
A: Third-party units were 60% in Q3, within the usual 59%-61% range. The slight decline is due to increased sales of everyday essentials, which tend to be fulfilled first-party. Overall, 3P demand and unit volumes remain strong.
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With the significant increase in AI-related workloads driving AWS demand, how is Amazon addressing the current capacity constraints in AWS, especially given the ongoing shortage of high-performance chips like NVIDIA's GPUs, and how might this impact your ability to meet customer demand in the near term?
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AWS operating margins have seen fluctuations due to the level of investments; can you provide more clarity on how the increased spending on AI infrastructure and custom silicon like Trainium and Inferentia will impact AWS profitability in the coming quarters?
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You mentioned a shift towards lower average selling price (ASP) items and consumers being more price-conscious; how does this trend affect your overall retail margins, and what strategies are in place to ensure profitability despite the potential pressure from increased sales of lower ASP products?
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The third-party seller unit mix declined slightly in Q3, which is unusual; can you explain the specific factors contributing to this shift, and what steps are you taking to support third-party sellers and potentially reverse this trend?
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While international segment operating income has improved, emerging markets may still be facing challenges; can you elaborate on the specific initiatives being undertaken to drive profitability in these regions, and what hurdles do you anticipate in aligning international margins with North America over time?
Competitors mentioned in the company's latest 10K filing.
- Physical, e-commerce, and omnichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products Amazon offers and sells to consumers and businesses .
- Publishers, producers, and distributors of physical, digital, and interactive media of all types and all distribution channels .
- Web search engines, comparison shopping websites, social networks, web portals, and other online and app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration with other retailers .
- Companies that provide e-commerce services, including website development and hosting, omnichannel sales, inventory and supply chain management, advertising, fulfillment, customer service, and payment processing .
- Companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline .
- Companies that provide information technology services or products, including on-premises or cloud-based infrastructure and other services .
- Companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices .
- Companies that sell grocery products online and in physical stores .
- Companies that provide advertising services, whether in digital or other formats .