Amazon (AMZN) Q4 2019 Earnings Call Transcript
Happy Scribe's Favorites

[00:00:02.04]
Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q4 2019 Financial Results Teleconference. At this time, all participants and I listen only mode. After the presentation, we conduct a question and answer session. Today's call is being recorded. The opening remarks. I'll be turning the call over to the director of Investor Relations, Shelly K. Piper. Please go ahead.

[00:00:24.09]
Hello and welcome to our Q4 2019 Financial Results Conference Call. Joining us today to answer your questions are Brian osofsky, our CFO, and Dave Philes, director of Investor Relations. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2018.

[00:00:57.01]
Our comments and responses to your questions reflect management's views. As of today, January 30th, 2020 only. And we'll include forward looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the S.E.C., including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures in our press release slides accompanying this webcast and our filings with the S.E.C.

[00:01:33.07]
, each of which is posted on our our Web site, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable gap measures. Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and customer spending. World events. The rate of growth of the Internet, online commerce and cloud services.

[00:02:10.04]
And the various factors detailed in our filings with the FCC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements. It's not possible to accurately predict demand for our goods and services, and therefore our actual results could differ materially from our guidance. With that, we'll move to Q&A. Operator Please remind our listeners how to initiate a question at this time.

[00:02:39.05]
We'll be now open the call for questions. We ask each caller, please limit yourself to one question. If you'd like to ask a question, please press star one on your keypad. We asked that when you pose your question, you pick up your handsets to provide optimum sound quality. Once again, to initiate a question, please press star, then one on your touchtone telephone at this time, please hold while we poll for questions. Thank you. Our first question is coming from the line of Heath Terry with Goldman Sachs.

[00:03:06.00]
Please proceed.

[00:03:07.07]
Great. Thanks. Really appreciate.

[00:03:09.03]
This is just on the on the AWP business. As you as you look sort of at the strength that you saw in the quarter, particularly, you know, represented by the the amount of dollars added quarter over quarter. Is there anything in particular that you would you would call out either in terms of specific types of workloads, regions, specific customer types, that that you felt like, you know, drove this strength, particularly relative to the in a directional direction of growth that we were seeing in the earlier parts of the year?

[00:03:42.08]
Hi. No, I would not isolated to any one set of customers or products. So I think it's been pretty broad based and it's kind of the culmination of a lot of work on adding new products and features, adding to our sales and marketing teams and having better penetration in enterprise customers and hitting a lot of very denn different industries. So I think I think that's what you're seeing. You know, we feel that our product set is it leads the market and we add to it a quicker pace than our competition.

[00:04:16.05]
So actually the gap on capacity and features is is growing as we speak. We also think that there is a real network effect when you say W.S., with the millions of active customers and tens of thousands of global partners. And, you know, we continue to expand. We're now in 69 availability zones across 22 geographic regions. So I think it's a combination of increased sales of support. More and better products that hit customers needs and also the geographic expansion is what you're seeing.

[00:04:50.00]
Thank you. Our next question comes from Line of conservation with Robert W. Baird. Please proceed. Great. Thank you. We're just hoping you guys could dis aggregate a bit of strength and sell our services. How much of that was Third Party Marketplace Commission specifically? And are you seeing more of an uptick in some of the other concerns in services? Thank you. And sellers. She has me on seller services. I would say it was just a very strong quarter.

[00:05:16.07]
If that's you're referring to the 31 percent growth in revenue. Was strong on a unit basis. And as you said, there's probably additional strength in FBA, which has higher fees set than M.F.A. does. So but in general, if you step away, I think what you're seeing is more and more participation of third party sellers in our one day delivery program as we move through the year. I was particularly strong in Q4. And I think you'll see that margin moving to 2020.

[00:05:48.05]
Thank you. Our next question comes to our line of Justin Post of Bank of America. Great.

[00:05:54.07]
Thanks. Just wondering if you could go high level. What drove upside to your guidance on revenue in the quarter on the retail side? Anything that you'd really call out. And then on the aid of U.S. investments, you know, obviously he's talked about investments starting in 3Q. Where are you in that investment? Where are your margins are still below peak. Where are you kind of in that investment cycle? Thank you. Sure. Well said. On revenue, we came in at eighty seven point four billion dollars, which exceeded the high end of our range of eighty six and a half billion dollars.

[00:06:27.03]
400 million of roughly $4 million of that was due to foreign exchange. But what we saw was essentially very strong holiday performance from the middle of November on. We also had a very big uptick in and response to the one day availability that's been building through the year. I think Prime been very strong. We know that we I mentioned that we have more than 150 million paid prime members globally now. And we mentioned that we're up. More people join prime in Q4 than any other quarter before.

[00:07:03.03]
So a lot of good momentum there built up on the aggregation of benefits that we continue to to add to the prior program. Most recently, the one day expansion of one day shipping on A.W. US where we are we in the cycle. I talked more in 2018 when the margins in A.W. US were closer to 30 percent. About the efficiency of infrastructure spend and versus prior years. So we continue to since that point, we've continued to add infrastructure capability and to support our global expansion as well.

[00:07:45.08]
But what you're seeing probably more in the margins is the expansion of our sales and marketing effort at some of those courses, as well as price decreases and longer term contracts that we signed with some of our customers, you know, is on our balance sheet that our future commitments on the multi-year deals now stands at $30 billion a year in, and that's up 54 percent year over year. So, you know, there's a lot of good momentum on the enterprise side as well.

[00:08:16.02]
Thank you. Our next question comes from line of Jason Self-esteem with Oppenheimer Company. Thanks, Jeff. After what eight of us, again, never investors have become, I guess, recently concerned just about yet again the slowing of its revenue and margin and whether it's a function of increased competition. So maybe just talk about, you know, how you react and you did talk about spending and sales and price cuts. But if anymore, you can talk about the competitive environment.

[00:08:47.06]
Thank you. Sure. I would probably argue a bit with the growth comments. You know, as we see it here, we grew from a 30 billion dollar revenue run rate at the end of 2018 to $40 billion revenue run rate it to an end of 2019. So we continue to be happy with our top line growth. The in dollar terms as opposed to percentages. We had a larger dollar increase in revenue both year over year and quarter over quarter.

[00:09:13.08]
So we're very happy with the progress of the revenue and our adoption and acceptance by customers. As far as competitors come, competitive set is concerned. We again, we think that we have to start with a very big lead in this space because of our many years of investment, not only in capacity, but also in services and features that we provide to customers. We learned from customers. We've set a great reinvent conference in December where all of it is a great aggregation of partners and customers and developers.

[00:09:55.01]
And at those events, we not only get to present our new products and there are over 100 in that were launched in December. But we also get to hear customer issues and help that helps sign out or educate our forward roadmap. So it's a great shared learning. I think customers react to it. Customers will be at different stages of their adoption curve. There's always different phases for first and moving to the cloud, then organizing on the cloud and then growing further.

[00:10:28.07]
So there's a lot of movement. I've said that repeatedly. I think in the setting that, you know, any quarter, quarter, quarter movement is going to be, you know, a little bumpy. But generally what you're seeing is the convergence of a lot of investment, a lot of operational efficiency and a lot of innovation on behalf of customers. Thank you. Our next question comes from line of Steven Chu credit. So thank you. One of the switch it up a little bit.

[00:10:58.01]
Yes. You guys call this out in your press release, but I wonder if you could talk about your first step. The S.A.T.'s and Michael ACMD, online media. What exactly is involved from a practical perspective, do you need to have a lot of sales folks? And, you know, what can you do to reduce friction between logistics payments to of the other factors there? And second, you know, what are these SMB selling? Like LOL.

[00:11:25.06]
Killing them for years of merchandise that you can get to export to the global buyer base. And do you think this could be content that could be exclusive to Amazon? Thank you. Yes, Stephen. Hey, this is Dave. Thanks for the question. You know, as you said, I think there's some mention is in the release where we're definitely continuing to improve the experience in India for customers and sellers. I'm excited by some of the response we've seen.

[00:11:49.09]
We are continuing to invest meaningfully in digitizing those M.S. and BES, micro and small, medium sized businesses. We did pledge to invest a billion dollars to help digitize traders and those those micro small businesses across India. And we've got a goal of bringing more than 10 million online by 2025. So this billion dollar investment will help to enable $10 billion in cumulative Indian exports by 2025. A lot of, you know, a lot of different facets to those types of investments won't go into too much for specifics.

[00:12:26.00]
But, you know, a lot of work being done there. We're also focused on job job growth, job creation over there. Since we launched over in India in 2013, we've created over seven hundred thousand direct and indirect jobs. So we also recently announced plans to create an additional 1 million jobs in India by 2025. So a lot of I think innovation, ideas, investment, that team over there continues to do a great job locally of taking a lot of the tenants that, you know, we've had in Amazon around innovation building and really run with that over there and done a great job of coming up with some interesting and new services and features that I think are specific to to that region.

[00:13:13.08]
And hopefully, you know, as we continue to do that, we'll keep identifying areas over in India and toolsets features over in India that we can bring back to other regions to help benefit other sellers. And the other Web sites more broadly.

[00:13:26.02]
Thank you. Our next question comes from line of Brian Nowak with Morgan Stanley. Please repeat my question. I have I have to just get the first one. Brian, I think on one of the media interviews talked about how you're becoming more efficient with one day and you can take it with next day delivering data to do so and talked about a billion dollars of costs in the current quarter. Maybe just talk to us about sort of some of the largest qualitative fixed and variable costs sort of still associated with one day and the processes and the opportunities for efficiency to really get that number down as we go through out 2020.

[00:14:02.07]
And then maybe any specific product categories or good categories where you've seen a celebration and demand from one day that you call out.

[00:14:11.08]
Sure. Let me make sure the numbers are understood. We had talked about last year about initial step up in costs of close to $800 million in the second quarter. We saw that carried into Q3 was slightly higher in Q3. And then in Q4 last time I were on this call, I mentioned that we estimated Q4 would be a billion and a half dollar penalty was slightly under that, despite the higher volumes and revenue growth than it was in our guidance.

[00:14:43.01]
And looking ahead to Q1, we estimate approximately a billion dollars of additional costs year over year. And again, that in Q2 will start to lap this. And that doesn't mean that Delta goes to zero. It means that there'll be a step up as we grow and expand on a volume basis. And then we'll see where our rates are on actually delivering and fulfilling one day. So I will keep you posted on our results and and guide in the future as to where, you know, where we see those costs going.

[00:15:16.09]
If you look at the efficiency or the court first, the costs, they generally falling into a few buckets. It's obviously transportation where you're building out new transportation modes, you're adding new delivery partners, you're adding new routes. May times they start with, you know, subscale volumes and, you know, you build them out, you get more efficient, you get more volume, more packaged density, and that that creates efficiency. When we started this again, Q2 of last year, we.

[00:15:48.01]
So how did an abrupt change to our fulfillment network in that, you know, tune for two day delivery on the most part, when you move to one day and a lot of cases it's advantageous from a cost and transportation standpoint. Had that inventory closer to the customer. So we've last year, we're in the middle of that transition. We still are as we shift inventory to be more local to enable local deliveries to hit the shorter cutoff times so that that will continue to become more efficient.

[00:16:20.01]
We do see a we will have to scale our fulfillment center network further. We grew the square footage for fulfillments and transportation by 15 percent each of the last two years. And so we look to look ahead and see a step up in that this year as we as we start to build more capacity for the one day. I haven't guided beyond Q1, but that that's certainly something that will step up. But we get efficiencies as we as we learn and grow and handle more one day volume.

[00:16:51.03]
Third area is foregone ship revenue just simply because we're having free shipment and no nilla charging for it. That unfortunately doesn't leverage, but it we do start to lap it after a while. So. So I would say that, you know, just as we've had other, you know, shocks or our warehouse system over the years, you know, from going to, you know, from media to almost every product you can imagine to having a cycle of increased third party presence in the FBA program.

[00:17:23.01]
Now to one day, you know, we have we have a history here where we can look for opportunities to be more efficient and lower the cost, any costs, penalties as we move forward. Thank you. Our next question comes from China. Dan Simon with BMO Capital Markets. Please proceed. Thanks for taking the question, guys. Brian, just to follow up on one day shipping, you noted that you begin to lap the beginning of the initiative here in the second quarter and that naturally costs can flow up with volumes.

[00:17:54.08]
But just to be clear, would you is the idea here as we anniversary it, that sort of incremental expansion of one day shipping, either regionally or certain SKUs is functionally finished? I just to make sure I understand that properly. And then just reconceive the other number reported. Just any color within there on the advertising business. And in particular, we'd love to hear an update just a bit on some of your brand initiatives there. I know that probably wasn't the focus in the holiday season, but that seems to be an important growing part.

[00:18:23.06]
Thank you. Sure. Let me start on the one day say, yes, we do see expansion of the one day program as we move through the year. We've been expanding since we started this effort in Q2 of last year. Expansion means additional cities, additional routes, additional zip codes, but more. I think what you'll see more in 2020 is also an Internet, more effort internationally and more costs internationally. We have greatly improved our selection of one day in particular in Europe and Japan.

[00:18:58.03]
We started with higher one day percentage of our shipments in those geographies, but we do have take steps and we are taking steps to increase that. And we expect that to be, you know, it's start to be a little more balanced cost globally as we move into 2020. Yeah. Dan, in terms of your question around brands, you know, you were focused on deff, certainly brands as an advertising customer set and a lot of focus on providing the products and tools that are going to help customers and really inspire them.

[00:19:31.00]
So, you know, things that we're really excited about, stores so a brand can customize a curated, a multi-page store, it allows them to better tell customers who they are and share their story so we can help deepen the brand engagement, the customer loyalty through through that type of option. Some other things like posts which helps customers discover products and brands. And it's through a curated feed that features the brand's lifestyle content and it's a on a on a mobile detail page.

[00:20:02.01]
And, you know, there's international expansion in some other areas. I think, you know, broadly with advertising, so much of this is about, you know, you know, having developing great relationships with these advertisers. I think they appreciate the fidelity we can provide around shopping outcomes where we're uniquely positioned to do this, given given our retail business. While the advertising business, I rather, I should say other other revenue, that line item grew about 41 percent year over year.

[00:20:30.04]
Advertising is the biggest piece of that. That line item is growing at about the same rate of advertising. Revenue is as a subset. We're growing at about the same rate year over year in the fourth quarter as it did in the third quarter.

[00:20:46.02]
Thank you. Our next question comes your line of Eric Sheridan with CBS. Thanks for taking the question, maybe a two part question on eight of us. Can you call down the depreciation change with respect to the US going forward? Just wanted to better understand some of the decisions that were made on useful life that drove that decision and how they think about that. From a modeling perspective going forward. And then the second part would be what does that mean in terms of the way you're thinking about forward CapEx cycles for the native U.S.

[00:21:18.02]
business? If you're assuming useful life is is moving out, maybe then prior assumptions. Thanks so much. Sure. Thanks for bringing that up. So, you know, we as a practice my monitor and review the useful life of our depreciable assets on a regular basis to make sure our financial statements reflect our best estimate of how long the assets are going to be used in operations. And we're in Q4 and we've been looking at it at a in the off season fulfillment centers and also ewr us annually as we as we looked in to four of 2019.

[00:21:55.02]
We believe it's there's a enough trend now to show that the useful life is exceeding four years. We have been at for servers and we had been depreciating them over three years. So we are going to start depreciating them on a four year basis. It doesn't unwind any depreciation that's already been booked. It just takes the asset from its current state status and extends the depreciation period and then new assets will be put into play. It will extend out for four years instead of three.

[00:22:27.02]
And we'll continue to revisit this. I do want to point out this not just an accounting related change, it's rather a reflection of the work that we've done to make our server capacity last longer. We've been operating at scale for over 13 years in this business and we continue to refine our software to run more efficiently on the hardware. It then lowers stress and extends the useful life both for the servers that we used in the age of U.S. business and also the servers that we use to support our own Amazon businesses.

[00:22:58.01]
So, you know, and despite that, we still we give eight of those customers. And actually because of this, eight of his customers continue to access to the latest technologies more quickly than ever before. So we are essentially reflecting the fact that we have gotten better at extending the useful life here and now building that into our financials moving forward. Yes, you're right. It should also impact our need and our timing of capital. I would say that it's also been part of the reason that we've been able to keep capital relatively under in check the last two years in the in the infrastructure area.

[00:23:38.00]
But it's it's $800 sees me, 800 million dollar lower depreciation expense in the quarter. And it will be consistent. It will change quarter quarter. We'll we'll we'll update you. But as you can see in our financial statements, it's about $2.3 billion impact. Q To us 2020. Yeah. Understood. Just kind of on the modeling point to on that that a hundred million dollars is in Q1. We do think that the that accounting impact effectively we expect it that amount will will do decrease as we go through the year.

[00:24:14.09]
And it's you know, it's tech infrastructure assets. So it's very I should say the servers, our tech infrastructure assets. So when you think about segments, the majority of these relate to the AWP segment. Thank you. Our next question comes from line of Ron Christie with campaign securities. You bet. Thanks for taking the question. I want to ask a little bit more about the holiday season, given the beat on the top line and see if there's any way to quantify maybe the impact from the shortened holiday shopping season.

[00:24:44.06]
I mean, it doesn't seem like much, just given the better results in online sales and retail third party seller services. But any way to think about the six last days and also you mentioned last quarter, you know, an impact from the Japanese consumption tax. Any sort of impact, did that go according to plan or any thoughts there would be helpful. Thank you. Yes. First of all, on the there are two items we discussed last quarter with the Japan consumption tax raising from 8 percent to 10 percent effective October 1st.

[00:25:12.07]
The net result was a pull forward of some purchases by Japanese customers into Q3 and also some negative elasticity effects post October 1st. The other item was Davoli timing. The Indian holiday, which is has a very large swing factor on international revenues. Is it moved more into the third quarter this year versus twenty nineteen versus twenty eighteen? So it was a help to Q3 and a penalty to Q4. Those two items impacted the Q4 growth rate negatively by about 300 basis points.

[00:25:49.08]
That was our estimate and we believe that was the actual outcome on that. On the international and the national segment. 'scuse me. Yeah. Sorry. The first question was of the holiday season. Yeah, we don't see that as a factor actually. And I mentioned that last call as it wasn't incorporated into our guidance in a negative fashion. The way we look at it and we we believe it works, at least in our business, is that, you know, customers will have a holiday budget and they will spend it between generally the middle of November.

[00:26:27.05]
It's creeping up to the early part of November through the holiday season. And we do see obviously spikes in Black Friday and Cyber Monday. And we also see relative tick up in trends as we get closer to the to the holiday and the ship before the shipping thresholds cut off. So there's a polarization of tends to be a polarization to early shipping season, early purchase and late purchases. But as far as the six days that the shorter time period between Thanksgiving and the Christmas holiday, we we don't see an impact on that.

[00:27:03.01]
Perhaps it's a bigger issue for stores and foot traffic, but we don't notice it in our business.

[00:27:10.00]
Thank you. Our next question comes from line of Doug, and that's with JP Morgan. Taking. Thanks for taking the question. I just want to shift gears to grocery. I mean, he added amazonfresh into prime removing the previous fourteen ninety nine a month component. They're putting it into prime. You talked about the the 2000 U.S. cities and towns with two hour delivery. Yes. Talk about what the early impact there is a 1 million kind of fresh into prime at this point.

[00:27:41.00]
And then just how you're thinking about your grocery strategy as your position now. Thanks. Sure. Thanks for your question. So early results are good. We are grocery delivery orders from the combination of amazonfresh and Whole Foods market more than doubled in the fourth quarter year over year. So we believe customers are starting to notice and take advantage of this. Well, you wanted to take we will see where people's tastes and preferences will take them of where whether they go to the store or a Whole Foods market store where they use prime now or Amazon delivery for their groceries.

[00:28:20.08]
Right now, we're really just testing and reacting to the customer demand and the customer's preferences. And we'll do so, you know, for the foreseeable future.

[00:28:32.03]
Thank you. Our final question will come from the line of Mark Mahaney with RBC Capital Market. Please proceed. OK. Thanks for including with enough to go out. Three quick on. Just talk a little bit more about gross margins in the quarter you had the year over year trend was negative last quarter, but it turned reversed and was up this quarter. So is there any unusual factors you'd want to call out there? Second, the I don't read over a lot into your guidance, but all every year for the last five years, you've always guided to operating margin, operating profit down sequentially.

[00:29:04.03]
Any you maybe delivered better than apertures guided down this year in your high end of your range is actually above what you obviously did in the fourth quarter. Are you just trying to remind people, tell people, educate people on how the mix shift in the business towards NWS in advertising is just changing the profit profile of the business. So any more color there? And then last one since Sunday is coming up. I know you talked about the AWP customers and you mentioned the Seattle Seahawks, but what about the forty Niners?

[00:29:30.02]
Thanks. Good luck. Forty Niners. Yeah, I'll get that out there first. Good luck. Kinzie, the chiefs fans weren't different. Let me start with your second one and grow or sorry, the service gross margin. Yeah. So, you know, I don't think of anything too surprising cause there I think, you know, we continue to see some good growth in the third party business. You saw that accelerate some. You know, we're continuing to see that trend of more FBA sellers signing and taking a larger percentage of the total 3P mix of units that are Salter's.

[00:30:03.07]
So that continues to do well. And as Brad mentioned earlier, we think, you know, some of that has to do with the program keeps getting better with faster shipping and whatnot. We've invested many billions of dollars in that program to make it even better for for sellers. A.W. has had a strong quarter, of course, so that helps on the gross margin side as well. And then, you know, in transportation, I think you saw the the outbound shipping costs did grow around 43 percent year over year.

[00:30:30.05]
So certainly up a good deal versus the trend line we saw in 2018. But of course, that's that's reflective of one day. And, you know, overall relative to our expectations, as Brian said, with the 1.5 billion we guided to, we came in a bit under that. And so some of that was was certainly part of some some better than expected Tranz efficiencies. And on the comment on seasonality of guidance in Q1, that I think the historic trend of peaking a bit and operating income in Q4 and then stepping down in Q1 has been broken up a little bit as we've had the balance of A.W.

[00:31:07.01]
us and some other things. But if you actually look back to Q1 of last year, it was the highest operating income, a quarter on record. And that's one of the makes it difficult comp this year because we had the. If you remember the slowdown in expenditures in twenty eighteen in things like fixed the adding of headcount, warehouse space infrastructure costs not to zero but like down off of prior investment levels in 2016, 2017. A lot of that continued that cost baseline continued into Q1 of 2019.

[00:31:44.09]
And it actually was a superefficient quarter from a coston and profit standpoint Q2 of last year. We started to again make larger investments, particularly in one day. And so, you know, that's now something that is lapping in Q1 of this year. We didn't really have one day in Q1 of last year. But so I think there's you know, it's hard to draw those parallels between quarters anymore. I will, though, mentioned the. We do have the eight hundred million dollars of lower depreciation from our extension of our server useful lives, which is part of the range that we gave you of three to $4.2 billion.

[00:32:29.04]
Thanks for joining us today on the call and for your questions. A replay will be available on our Investor Relations Web site, at least through the end of the quarter. We appreciate your interest in Amazon. And we look forward to talking with you again next quarter.