The Amazon.com Quarter Two 2023 Financial Results Teleconference began with the Vice President of Investor Relations, Dave Fildes, welcoming everyone to the call. Andy Jassy, the CEO, and Brian Olsavsky, the CFO, are also present to answer questions. The company encourages listeners to have the press release in front of them for metrics and commentary on the quarter. Comparisons will be made against results from the same period in 2022. Forward-looking statements may be made and non-GAAP financial measures discussed. The guidance given is based on the order trends seen so far and appropriate assumptions.

In the second paragraph, Dave discussed the results of the company and the various factors that could affect them, such as foreign exchange rates, economic and geopolitical conditions, customer demand, and spending. He also mentioned that their guidance assumed no additional business acquisitions, restructurings, or legal settlements. Andy then followed up by discussing their efforts to lower their cost to serve in their stores' fulfillment network, which had seen meaningful progress in the second quarter.

Regionalization has led to a 20% reduction in number of touches for delivered packages, a 19% reduction in miles traveled, and a 1,000 basis point increase in deliveries fulfilled within region. Customers care a lot about faster delivery, and Amazon has developed same-day fulfillment facilities in the largest metro areas to facilitate faster delivery and lower transportation costs. The experience has been so positive that they are planning to double the number of these facilities.

Amazon is constantly striving to improve the customer experience by providing fast delivery speeds, low prices, and a wide selection of items. This quarter, they have delivered 1.8 billion units to U.S. Prime members the same or next day, and are growing their selection in everyday essentials. Lowering their cost to serve allows them to invest in speed improvements and add more selection at lower price points.

Amazon Prime offers customers deals and coupons to help them save money, and Amazon Prime Day saw customers purchase 375 million items and save $2.5 billion. AWS remains a leader in the cloud infrastructure market due to its customer focus and orientation, and during the second quarter of 2021, AWS saw its revenue growth rate stabilize at 12% year-over-year. AWS continues to innovate and help customers bring new workloads to the cloud.

AWS is leading the way in a variety of product categories, such as compute, networking, storage, database, data solutions and machine learning. They have rethought their compute capabilities all the way down to the silicon, leading to the creation of AWS' Graviton chips which offer 40% better price performance than other leading x86 processors. Generative AI is also a large opportunity, with AWS investing heavily in the three layers of this technology: the compute required to train foundational models, the development of generative AI applications, and consumer applications. Customers are excited by Amazon EC2 P5 instances powered by NVIDIA H100 GPUs to train large models.

Amazon has developed custom AI chips called Trainium and Inferentia for training and inference, respectively, and Bedrock is a managed service that provides access to large language models from multiple leading companies. Bedrock also allows customers to customize the models with their own data, as well as create generative AI applications and conversational agents. Recently, new capabilities have been added, such as models from Cohere, Anthropic's Claude 2 and Stability AI's Stable Diffusion XL 1.0.

AWS is democratizing access to generative AI by lowering costs and providing access to large language models. AWS is also the home of Amazon CodeWhisperer, an AI-powered coding companion, and is encouraging other companies to build generative AI applications on its platform. AWS has the broadest array of storage, database, analytics, and data management services, making it the ideal platform for customers to bring their generative AI models to the data.

AWS is poised to be customers' long-term partner of choice in generative AI, and Amazon Business is one of their fastest-growing offerings with a $35 billion annual gross sales rate. Buy with Prime has shown a lot of progress, with merchants experiencing a 25% increase in shopper conversion and a 10x increase in orders during Prime Day. Amazon Pharmacy has doubled its active customers in the past year, and RxPass enables Prime members to receive eligible generic medications for just $5 a month. Amazon's grocery business is also continuing to grow.

Andy mentioned that Whole Foods is leading the organic grocery space and is growing at a healthy clip, and Amazon has improved their profitability in the last year. Amazon is also investing in new formats, such as Amazon Fresh, Kuiper, Zoox and Alexa. Additionally, Amazon has been recognized as one of the top companies to grow your career in the United States. Finally, Amazon has seen healthy demand across everyday essentials and customer response to improvements in personalization and enhancements to their website and mobile app.

In Q2, Amazon saw improvements in macroeconomic indicators across its North America and international segments. It also saw record levels of delivery speed, strong advertising revenue growth, and an increase in third-party unit mix to the highest level ever. In the North America segment, operating margin improved by 620 basis points over 5 quarters due to cost reductions, such as regionalization. In the international segment, Amazon sees more opportunity to drive improved cost efficiencies going forward.

Over the past 3 quarters, the operating margin loss has improved by 590 basis points, with AWS revenue growth stabilizing at 12%. Improvements in North America and international segments have been driven by increased operating income, moderating inflationary pressures, and improved inventory efficiency. This has resulted in positive free cash flow for the fourth sequential quarter.

Brian Olsavsky discussed the company's capital investments, which were $54 billion for the trailing 12-month period ended June 30, and are expected to be slightly more than $50 billion for the full year 2023. He also discussed the company's efforts to improve fulfillment efficiency, with some margin improvements being seen over the last 3 to 5 quarters, though the journey to reclaim the cost structure is still underway.

Amazon Business has been a priority for Andy Jassy and the team for a few years. The goal is to reach $100 billion in sales and bookings. To do this, they are optimizing their fulfillment network to allow customers to get same-day delivery on grocery items, as well as to leverage different grocery formats for pick-up. They are also building out infrastructure that is optimized for the grocery business.

Brian Olsavsky of AWS reported that the growth rate of AWS revenue in the second quarter was 12%, which was lower than the 16% growth in the first quarter. However, the cost optimization work done by customers had moderated and they have started to move into new workloads and new customers. Trends in the second quarter have continued into July, though no specific guidance was given for the third quarter.

Andrew Jassy discussed the success of AWS, noting that the business has grown double digits despite cost optimization initiatives. He also discussed the success of Amazon Business, which has a $35 billion annual run rate for gross sales. Jassy suggested that the team is working to build a $100 billion-plus business over time, with new workloads and functionality coming with generative AI.

Andy Jassy of AWS states that they have had a significant amount of business driven by machine learning and AI for several years, and have had over 20 machine learning services available. However, the potential explosion of generative AI is still in its early stages, and more features and services need to be added to address larger procurement workloads.

Andrew Jassy discusses Amazon's grocery initiative and how it is a combination of building and capitalizing on what is already in place. He explains that Amazon has a large business in nonperishables, such as consumables, canned goods, pet food, beauty, and health, and that they need to have a strong physical presence in order to serve more customers.

Whole Foods has made several adjustments to their business to improve profitability, and Amazon Fresh has been working on a mass physical format for several years. Recently, new formats have been rolled out in Chicago and Southern California stores, with added selection, private brands, third-party brands, a refined decor, dash cards, and self-service checkouts. Amazon Fresh is hoping to find a format that resonates with customers and gives them the confidence to expand more broadly.

Andrew Jassy discussed how Amazon is investing in grocery offerings, delivery services, and AI investments to improve their retail and device network. He also mentioned that they are not going to expand their fresh stores until they have something that is resonant with customers and that they will like the return on invested capital.

Amazon is expanding its same-day facilities, which are smaller and more efficient than regular fulfillment centers, in order to get products to customers quickly and cost-effectively. AI initiatives are being implemented across all of Amazon's businesses to help with cost-efficiency and customer experience. Amazon is hopeful that these initiatives will allow them to get back to pre-COVID margins, and believes there is potential for even more.

Andrew Jassy of AWS believes that the cost optimizations and new workloads will continue to shift in the coming years, leading to double digit revenue growth on an $88 billion revenue run rate. He is confident in the growth of AWS in the medium to long term and is bullish on the demand for generative AI, which will have an impact on the company's capital expense spend.

Dave Fildes thanked the participants for joining the call and asked them to check the investor relations website for a replay of the call. He then concluded the call. In the discussion prior to this, the speaker discussed how AWS requires a lot of capital upfront in order to monetize the services over a long period of time, and estimated the capital expense for generative AI. He noted that they would update this estimate if needed.

This summary was generated with AI and may contain some inaccuracies.