Q2 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- AWS growth is accelerating, driven by sustainable factors such as companies resuming modernization efforts by moving from on-premises to the cloud, increased focus on generative AI, and the fact that 90% of global IT spend is still on-premises, indicating significant growth potential for AWS.
- Amazon's pharmacy business is growing rapidly, with improved customer experience leading to increased customer adoption. The expansion of services like RxPass to Medicare members and same-day delivery of medications in multiple cities demonstrates strong growth and optimism about the business.
- Amazon's investments in AI and machine learning are paying off, with AWS launching more than twice as many machine learning and generative AI features into general availability than all other major cloud providers combined. Services like Amazon Bedrock, with tens of thousands of companies using it, and Amazon Q, which saved the company $260 million and 4,500 developer years, are driving significant customer adoption and cost savings.
- Consumers are trading down to lower-priced products due to macroeconomic pressures, leading to lower average selling prices (ASPs) and potentially impacting revenue growth in higher-margin discretionary categories like electronics and TVs.
- Increased investments in projects like Project Kuiper are raising expenses, and the company is not providing detailed information on these costs, which may pressure margins and profitability.
- Challenges remain in improving North America retail margins back to pre-pandemic levels, with management indicating it will take "work over a long period of time," highlighting potential difficulties in achieving margin expansion.
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AWS Growth Outlook
Q: Is AWS growth acceleration sustainable in the back half?
A: Management believes that while predicting growth rates is challenging, they have seen the lion's share of cost optimization happen, and factors like companies moving from on-premises to the cloud and significant demand in generative AI suggest that AWS has strong growth potential ahead. The business currently has a $105 billion revenue run rate, and about 90% of global IT spend is still on-premises. -
AWS Operating Margins
Q: What drove strong AWS operating margins, and outlook?
A: AWS operating margins improved to the mid-30% range in Q2, up from the mid-20% range last year, driven by cost reductions and efficiencies. An adjustment to server useful life contributed about 200 basis points of margin year-over-year. Management notes margins may fluctuate quarter-to-quarter but continues to work on the cost structure. -
Retail Gross Margins and Cost Management
Q: Were retail gross margins pressured due to discounting or Kuiper?
A: The segment operating margins decreased 20 basis points sequentially from Q1 to Q2, partly due to a $1.8 billion increase in stock-based compensation expense. Retail margins improved despite this, but investments in areas like Project Kuiper led to higher expenses in Q2. Management is focused on expanding margins in the stores business by reducing cost to serve through initiatives like regionalization of the U.S. network. -
AWS Investment in AI and Custom Silicon
Q: Are you overinvesting or underinvesting in AI, and how do you view custom silicon investments?
A: Management explains that while investing significantly in AI infrastructure, they would like to have more capacity due to high demand, believing AI will be a very large business. On custom silicon, their Graviton chips offer 30% to 40% better price performance, and new chips like Trainium and Inferentia are compelling solutions amid GPU supply constraints. They see good return profiles on these investments. -
Macro Trends Impact on Retail Business
Q: Did macro trends impact Q2, and how does that influence Q3 outlook?
A: Consumers continue to be careful with spending, trading down to lower average selling price (ASP) products, and seeking deals. This trend continued into Q2 and is expected to persist into Q3. Despite this, there was very strong unit volume growth, with accelerated North America unit growth when adjusting for leap year. Lower ASP products are a larger mix now. -
Amazon Pharmacy Adoption
Q: What's the status of Amazon Pharmacy adoption beyond early users?
A: The pharmacy business is growing quickly and gaining more resonance with customers, thanks to improvements in customer experience over the last 18 months. Initiatives like expanding the RxPass program to Medicare members, offering up to 60 medications for $5 a month, and launching same-day medication delivery in eight cities are driving growth. Plans are to expand to over a dozen cities by year-end. -
AWS Backlog and Workload Migration
Q: Can you share the AWS backlog number and comment on workload migrations?
A: The AWS backlog at the end of Q2 was $156.6 billion, up 19% year-over-year. Many companies are moving workloads to the cloud in preparation for AI, as effective AI requires well-organized data accessible for model training and application building. The ability to use AI is a significant driver for cloud migration for those yet to move.