Amazon Q2 2024 earnings call: Strong performance across all segments

Amazon is a global technology company that expanded its reach to become a dominant player in e-commerce, cloud computing, digital streaming, and artificial intelligence. It offers a vast array of products and services to businesses and consumers. Its ‘customer obsession’, coupled with innovative technologies, has propelled it to the forefront of the digital economy.

In Q2 2024, Amazon’s overall revenue increased 11% year-on-year to US$148 billion in Q2 2024, excluding the impact of foreign exchange rates. This strong performance was driven by growth across its various segments.

Revenue from AWS grew 18.7% year-on-year to US$26.3 billion in Q2 2024, excluding the impact of foreign exchange, fuelled by increasing demand for both generative and non-generative AI workloads. Despite being the smallest segment in terms of revenue contribution at 16.5%, the AWS segment accounted 69.8% of Amazon’s operating income during the quarter.

Advertising and Prime Video also contributed to Amazon’s overall success. The company’s advertising revenue grew significantly, benefiting from increased sponsored ads and the expansion of Prime Video advertising. Prime Video itself is gaining momentum with original content, live sports, and a growing subscriber base.

Amazon is aggressively investing in AI across its business. The company is leveraging generative AI to enhance customer experiences, optimise operations, and develop new products. From AI-powered shopping assistants to automated quality control in fulfilment centres, Amazon is demonstrating its leadership in AI applications.

North America

Amazon’s e-commerce business continues to anchor on low prices, broad selection, and fast delivery speed. It is investing in expanding its same-day delivery network, automation, and robotics as well as optimising its logistics operations. It continues to regionalise its warehouses and improve inventory management. Consumers increasingly rely on the e-commerce platform for everyday essentials, including non-perishable food, health, beauty, and personal care products.

Prime members spend more and more frequently on Amazon. Amazon is expanding Prime benefits to include free restaurant delivery, prescription drug subscriptions for Medicare members (to expand its pharmacy offerings), and grocery subscriptions to make the subscription service stickier. More than 5 billion orders of Prime customers reached the same day or next day.

In general, average selling prices (ASPs) of goods decreased as consumers opted for lower-priced alternatives. The product mix is currently tilted towards lower-priced items, reflecting a shift in consumer preferences. While demand for certain discretionary high-ticket items like computers, electronics, and TVs persists, it is notably weaker compared to periods of stronger economic conditions. These consumption patterns were also observed in early Q3 2024.

Lower seller fees have significantly driven unit growth in apparel items, especially amid rising competition from Shein and Temu. Additionally, sellers are incentivized to distribute their inventory across multiple Amazon fulfillment centers, helping them reduce costs and improve operational efficiency. This initiative has surpassed expectations.

Despite headwinds from lower ASPs and seller fee adjustments, the company reported strong unit growth, driven by faster delivery speeds and expanded product selection. Seller fees were lower than anticipated following Amazon’s recent adjustments. Overall unit sales increased 11% year-on-year, surpassing revenue growth when accounting for the 100-basis point positive leap day effect. This outcome aligns with CEO Andy Jassy’s expectations and is slightly below Q1 growth.

The operating margin of the North America segment was 5.6%, up 170 basis points year over year and down 20 basis points quarter over quarter. The quarter-on-quarter margin compression was due to investments in projects like Kuiper as well as higher stock-based compensation related expenses in the latest quarter. Capital investments in the first half of 2024 amounted to US$30.5 billion and is expected to increase in the coming six months as Amazon began ramping up its capacity to handle year-end holiday volumes in its fulfilment network. The operating income margin in the coming quarter will also be affected by high marketing spend on its Prime Day in mid-July.

Amazon continues to invest in long-term growth opportunities, including the expansion of its logistics and delivery capabilities through Project Kuiper, an initiative that manufactures satellite and aims to bring broadband internet access to underserved areas. The project is in still its early stages and is progressing as planned in terms of satellite manufacturing and regulatory approvals. The company remains optimistic about the potential of this project to revolutionise connectivity and open new markets.

Amazon’s e-commerce business is a volume business. As it creates the economies of scale by cutting costs and becoming more efficient, it can offer more items with lower ASPs to consumers.

International

Revenue from the international segment grew 6.6% year-on-year or 10% excluding the impact of foreign exchange to US$31.7 billion in Q2 2024. It recorded an operating income of US$273 million in Q2 2024 compared to an operating loss of US$895 million in Q2 2023 and an operating income of US$903 million in the previous quarter.

Amazon will continue to replicate its business strategy in North America across the international segment by expanding its offerings and reducing costs. This segment is progressing and has made strides in terms of profitability. However, Amazon is still not strong in certain regions like Southeast Asia compared to dominant local e-commerce players.

AWS and key analyst questions

AWS continued its growth trajectory and has significant growth potentials. Questions from analysts during the earnings call mostly revolved around this segment. CEO Andy Jassy explained to an analyst that the capacity of AWS is built based on customer demand. He does not think Amazon overinvests in AI. In fact, he would like to have more capacity than the company has today to meet elevated demand and is bullish on the medium to long-term impact of AI on businesses.

Another analyst was concerned about the sustainability of AWS’s growth rate in the future. Jassy pointed out that about 90% of the IT expenditure worldwide is still spent on in-house technology infrastructure. Some companies are moving from on-premises to cloud infrastructure because of cost efficiency, scalability, and productivity, which will benefit AWS. The growth runway of AWS remains intact.

CFO Brian Olsavsky explained to an analyst that the operating income margin of AWS fluctuates from quarter to quarter, depending on the level of investments made. For instance, the margin improved from 24.2% in Q2 2023 to 35.5% in Q2 2024 because of cost reductions and efficiencies. However, the margin dropped from 37.6% in Q1 2024 to 35.5% in Q2 2024 because of a favourable adjustment made to the estimated useful life of servers in the previous quarter.

Amazon has developed its own custom-built chips (Graviton) to enhance AWS performance and reduce costs. This strategic move has yielded significant cost savings for customers (up to 40%) and improved overall performance. As a result, Amazon has strengthened its position in the cloud market and fostered increased customer loyalty.

The fifth perspective

Amazon’s Q2 results highlight its resilience in navigating challenges, seizing growth opportunities, and sustaining a solid financial position. The company is making significant investments in AI across all its business segments, from enhancing customer experiences to boosting operational efficiency. Looking ahead, Amazon remains confident about its future prospects.