Thank you for standing by. Good day, everyone, and welcome to the amazon.com Q2 2021 Financial Results Teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Mr. Dave Fildes. Please go ahead.

Hello, and welcome to our Q2 2021 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO. 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 2020. Our comments and responses to your questions reflect management's views as of today, July 29, 2021, only, and will 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 SEC, 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 SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP 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, and the various factors detailed in our filings with the SEC. This guidance also reflects our estimates to date regarding the impact of the COVID-19 pandemic on our operations, including those discussed in our filings with the SEC, and is highly dependent on numerous factors that we may not be able to predict or control, including the duration and scope of the pandemic, including any recurrence; actions taken by governments, businesses, and individuals in response to the pandemic; the impact of the pandemic on global and regional economies and economic activity, workforce, staffing, and productivity; and our significant and continuing spending on employee safety measures; our ability to continue operations in affected areas; and consumer demand and spending patterns, as well as the effects on suppliers, creditors, and third-party sellers, all of which are uncertain. 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. And now, I will turn the call over to Brian.

Thank you for joining us today. Before we get to Q&A, I'd like to first thank all of our Prime members, our vendors, our third-party sellers, and my Amazon colleagues, especially the Worldwide Ops team, for a record-breaking Prime Day in June. Third-party sellers, who are mostly comprised of small and medium-sized businesses, were a big contributor to Prime Day's success. The Prime Day event was the biggest two-day period ever for these SMBs in our stores, and our third-party revenue continued to grow significantly faster than our online stores revenue. Third-party units represented 56% of our total paid units in Q2, up from a 53% mix one year ago. Our second quarter net sales were $113 billion, or at about the midpoint of our guidance range. That's a year-over-year increase of 27%, or 24% excluding the impact of foreign exchange, and included the shift of Prime Day into Q2 this year, which added about 400 basis points to the year-over-year growth rate. Q2 of this year was a transition period for many of our customers. As the quarter progressed, people were at home less as restrictions and lockdowns eased in some of our largest geographies, including the U.S. and much of Europe. As a result, while Prime members continued to spend more with us, growth in Prime member spending moderated compared to spending seen during the peak of the pandemic. As you look at our recent revenue growth rates, I want to give you some insight into what we are seeing, as there have been some noticeable intra-quarter changes in our revenue run rate. Prime Day has also been in three different quarters the past three years, so I will normalize for this impact in my growth rate comments. Also, since foreign exchange rates have bounced around, all of my comments exclude foreign exchange. Here’s a quick recap of our growth rates in 2020 and 2021. First, before COVID-19, we had been growing at a revenue growth rate close to 20%. 2019 full-year growth was 22%, and revenue growth for the first two months of 2020 was 21%. Once the pandemic hit and lockdowns began in March 2020, the initial growth rate jumped into the mid-30% range. Q1 of last year ended with a revenue growth rate of 27%. However, our operations network took time to step up to serve this growth in demand due to space constraints and our need to ramp up hiring quickly while prioritizing employee health and safety. By mid-May of last year, we made good progress to open up more capacity by adding hundreds of thousands of employees. This allowed our revenue growth rate to jump to the 35% to 45% range and remained at that level through Q1 of this year when we had 41% growth. In Q2 of this year, we began to compare this high sales period from last year, and the year-over-year revenue growth rate narrowed. It has also narrowed as vaccines became more readily available in many countries and people are getting out of their homes. Since May 15, again, excluding Prime Day, our year-over-year growth rate has dropped into the mid-teens. Our Q3 revenue guidance range of 10% to 16% growth reflects an expected continuation of this trend. Given all this volatility, it is useful to consider the 2-year compounded annual growth rate, which remained strong in the 25% to 30% range. Recall, this compares to our pre-pandemic growth rate of 21%. This reflects the acceleration of Prime membership and Prime member purchase levels over the past 18 months. While I'm not giving forward guidance beyond Q3 of this year, we do expect this pattern of difficult year-over-year revenue comparisons to continue for the next few quarters. As we move forward and start to compare COVID's impact on our revenue growth, we encourage you to also look at the multiyear compounded annual growth rate since the onset of the pandemic to better put this growth in perspective. Now, back to the Q2 highlights. We continue to be very pleased with the Prime member growth and engagement we're seeing. We've been fortunate to welcome more than 50 million new members in the past 18 months, and Prime member benefits usage remains high. That includes continued strong engagement in Prime's family of digital offerings, like Prime Video's original movies. For example, Prime members helped make The Tomorrow War and Tom Clancy's Without Remorse the number one streaming movies on their respective opening weekends. Amazon Advertising is innovating at a fast clip, launching over 40 new features and self-service capabilities in the quarter, making it easier for sellers, companies, and authors to grow their businesses by helping customers discover their brands and products. Other revenue increased 83% year-over-year in Q2, excluding the impact of foreign exchange, driven largely by continued acceleration in our ads business. Moving on to AWS, revenue growth accelerated across a broad range of customers. We see strong growth in enterprises, governments, educational and research institutions, and our start-up and digital native customers. We recently announced new commitments and migrations from customers across a diverse set of major industries, including Swisscom and Bell Canada in Telecom, BMO Financial Group, and Bancolombia in financial services, and Ferrari in automotive. AWS customers recognize that the move to the cloud is very positive for their businesses in the medium and long term. Disruptive economic events like COVID have caused many people to step back and think about how they want to change strategically, and many have come to the conclusion that they do not want to own and run their own data centers. They assume they can save money and gain agility and innovation by moving to AWS. I'll finish up with some comments on our ongoing investments in operations. As we think about the pull-forward in demand we've seen these past 18 months, it has required and will continue to require a significant amount of investment in our fulfillment network. Our teams have done a remarkable job stepping up to serve customers and support our vendors and sellers, and we've worked hard to increase capacity at a rapid rate. For the trailing 12 months ended Q2, Capex and equipment finance leases increased 74% versus the prior trailing 12-month period. And as usual, most of our 2021 spend and building openings are planned in the second half of this year. This is all part of a multi-year investment cycle for us. Unit volumes, while obviously growing at lower rates than last year's large comparison, continue to remain high, and we see strong demand for FBA and third-party sellers. So, there's more work to do, including additional build-outs of our fulfillment centers, as well as our middle mile and last-mile capabilities to support our fast-improving delivery offers for customers. I encourage you to read the business highlights in our press release. It's a diverse collection of efforts supported by many thousands of customer-focused Amazon employees, from Amazon Pharmacy to Business Prime to AWS' plans to add seven new regions to NFL Thursday Night Football starting next year, to the Black Business Accelerator program, to Alexa’s collaboration with Ford Motor Company. We remain heads down, focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for our shareholders. With that, let's move on to Q&A.

Thank you. At this time, we will now open the call up for questions. We ask each caller to please limit yourself to one question. Please hold while we poll for questions. Your first question comes from the line of Doug Anmuth with JPMorgan. Please proceed with your question.

Thanks for taking the questions. Brian, I just want to ask two, just going back to the Q2 revenue beyond Prime spend moderating and the reopening, is there anything else you'd point to, in particular, that has kept you in the middle of the range versus obviously where you've been over the last year versus expectations? And I guess, in particular, can you talk about Prime Day relative to your expectations? And then secondly, the BigCommerce partnership, a couple of weeks ago, you seem to have opened up more to working with merchants away from Amazon. Just hoping you could talk more about the multichannel fulfillment opportunity, and do you think you now have the logistics capabilities, and has everything recovered to the point where you can offer these services more to third parties? Thanks.

Sure. Thanks, Doug. Now, as far as the Q2 run rate is concerned, if you look back the last few quarters, we've not done a great job of nailing the impact of COVID. We have generally overperformed our guidance range. I think last quarter we had kept the same process coming off some very high volumes for the last prior four quarters. And really, the only difference I see in Q2 versus Q1, and before is the year-over-year comp, which we had factored in, but also the increase in mobility. I think the impact of people getting vaccinated and getting out in the world, not only shopping offline, but also living life and getting out. It takes away from shopping time. It's a good phenomenon and it's great, and we just have to appropriately gauge our run-rate going forward. So, Prime Day was very successful. We passed the record set in last fall's Prime Day, which was a very different time of year to have Prime Day and started to bump up against early holiday shopping, so we're really pleased. And again, I think it was a great day for third-party sellers as I pointed out.

Doug, on your second question, it's Dave here. I’d just say our focus is really squarely on adding capacity to meet the current high customer demand that Brian talked about in his opening remarks. We're always working to develop new and innovative ways to support partners, SMBs in particular who sell on Amazon, and that includes testing shipping programs and newer initiatives that can help those businesses get packages to customers quickly and reliably. So, continue to see us look for ways to innovate where it's appropriate relative to the customer demand we're already seeing in our network.

Your next question comes from the line of Colin Sebastian with Baird. Please proceed with your question.

Thanks very much, guys. I guess sort of masked in the headline results is actually pretty solid performance in the higher margin segments of the business, including third-party services, subscriptions, AWS, and advertising. And then I think that was evident in gross margin as well. I guess my question is whether there is any deliberate shift towards these services or is that just more of an output of somewhat weaker trends you saw after mid-May? And then secondly, is Prime Day still a once-per-year phenomenon or would you consider separate events spread out during the same year to capitalize on different seasonal trends? Thanks.

I don't have any announcements regarding your second question today. Our trend has typically been to hold the event once a year, although it has shifted between quarters over the past three years. Regarding the higher-margin areas, I would like to think that it's a strategy, but if we look at the specifics, the third-party businesses continue to strengthen within our FBA program. The sellers have been excellent at expanding their valuable selection, which supports our overall system. The percentage of units from third-party sellers increased from 53% last year to 56%, showing a consistent trend. The third-party sellers are performing well, and we appreciate that. In terms of advertising, it plays a significant role in our overall model. We attract traffic for our consumer business, and if we manage advertising effectively, it enhances the experience for both customers and sellers. Our goal is to ensure it's relevant and enriches the shopping experience, making it easier for customers to discover products they may not have found otherwise. When it comes to AWS, it's a distinct segment of our business, having been developed over the past 15 years. Our scale and experience are invaluable. In the last quarter, AWS achieved its highest revenue growth both quarter-over-quarter and year-over-year in our history, reaching an annualized run rate of $59 billion, up from $43 billion a year ago. These are strong performance indicators, and we focus on enhancing our products and capabilities while collaborating with customers to address their needs. This aligns well with the increasing push from many companies to transition to the cloud, as they choose to partner with us for the long term, and we are proud to be that choice.

Your next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.

Thank you for taking my questions. I have two, one is a bit detailed and the other is more general. The detailed question is about fulfillment costs per unit which were quite high in the second quarter compared to normal seasonal patterns. Can you explain what is causing that? Is it due to new infrastructure, increased square footage, or were there any inefficiencies during that quarter in fulfillment? The broader question relates to your comments from the last quarter regarding same-day delivery in Europe. There have been some reports about it. How should we view the potential expansion of a same-day service as part of your current investment strategy to maintain and grow your market share in grocery and consumables? Thank you.

Sure. Thank you. On the fulfillment side, there are several developments. We are significantly increasing our capacity. Over the last two years, the volume of units fulfilled by Amazon, including both retail and FBA, has doubled. Additionally, our delivery segment has more than doubled as well. This indicates strong, ongoing demand that we are still working to meet from last year. Our capital expenditure and equipment lease growth year-over-year is 74% as of June, compared to 38% the previous year. We are actively adding capacity, most of which is expected to come to fruition in the second half of the year. As many of you know, when we increase capacity, it involves significant costs related to hiring, training, and initializing operations at our warehouses and delivery stations. Typically, it takes a few years to optimize these assets. In the past 18 months alone, we've nearly doubled our network size and our fulfillment and operations teams are diligently working to manage these costs. Additionally, wage pressures have become more apparent. We moved our usual October wage increase to May and are investing heavily in signing bonuses and incentives. Despite achieving strong staffing levels, it comes at a significant cost given the highly competitive labor market, which is a major factor contributing to the inflationary pressures we are experiencing in the business.

Brian, on the second point just around speed, as we've talked about many times, customers respond well to fast, high-quality delivery and of course, back in 2019, we were talking at that time about expanding the one-day delivery in the U.S. in Europe. One-day delivery as part of Prime in most of those sizable European countries where we operate has been standard for many years. We're investing in the transportation network to support the demands, a significant part of the capital investments we've been talking about for the past few years, and certainly since the pandemic's start, has been to support those efforts in middle and last-mile capacity to keep pace and support that demand. So here that work is not done yet. We're continuing to expand. You'll see that investment throughout 2021. And that growing transportation network will support faster delivery times for customers. One-day delivery is improving in the U.S., as well as same-day delivery, where it makes sense and where the network is growing there. So we'll have to continue to see how we go, but we are focused on those data points. And we're also focused on improving delivery precision as a way of improving the quality of the overall offering.

Your next question comes from line of Youssef Squali with Truist Securities. Please proceed with your question.

Thank you very much. I have two questions. One, within online stores, was there any particular area of softness during the quarter? I'm just thinking about maybe some product categories that may have come back, or actually the opposite, may have gone down, the demand for with the reopening that you can maybe highlight. And then as you look beyond Q3 and Q4, what kind of growth assumptions for e-commerce or just in general for the next couple of years, are you guys working with to build your budget and events against the opportunity? I'm just thinking, are you guys assuming that e-commerce growth remains or it goes back to pre-COVID levels or stays at an elevated level?

Sure. Let me start with the revenue from our online store. You can expect a growth rate of 13% in Q2 compared to last year's revenue growth rate of 24% when adjusted for foreign exchange. Last year in Q2, our online stores grew by 49%, but we faced limitations in our warehouse stock. As you may recall, we had to limit space for many third-party sellers alongside our retail offerings. Early in Q2 last year, the mix leaned more towards retail, then shifted back to a more balanced approach that has been typical in the past. Regarding forward investment, let me clarify. Demand volumes on our Amazon Fulfilled Network have doubled over the past two years. We are not quite where we aspire to be on several fronts. After managing Q4 last year, we have been catching up since the pandemic began. However, we faced space limitations, which have improved but were a significant issue last year. Additionally, our one-day delivery percentage has declined and has not returned to pre-pandemic levels in the United States, though it is improving in Europe. In the U.S., while it's getting better, it hasn't yet reached the pre-pandemic standards, indicating we still have potential for growth. Regarding the retention of purchases, there were certainly many items bought last year that haven’t repeated for many retailers, such as early consumables like gloves and cleaning supplies, as well as home office equipment. You can likely identify items in your own purchase history that you won't buy again annually. Nevertheless, there has been a robust shift towards online shopping. We've gained more Prime members, and those members have significantly increased their purchases with us, which aligns with our strategy and is a positive indicator. It shows we're providing more options that meet their needs. Even in Q2, while purchase rates are starting to normalize, Prime member purchases grew year-over-year on a per-member basis, even if not at the same high rate as in the previous three to four quarters. This is encouraging, and we're pleased with the level of engagement and retention among Prime members. Overall, this presents a very positive narrative, showing considerable acceleration in our model. However, we have to take into account some comparison challenges, and it may be useful to look at a two-year compound annual growth rate for a clearer assessment of our progress, especially with the fluctuation of Prime Day. I hope this addresses your question.

Your next question comes from the line of Stephen Ju with Credit Suisse. Please proceed with your question.

Thank you so much. Brian, it seems like the pandemic has touched off what looks like a greater urgency among SMBs to accelerate their presence online, and I was wondering if your third-party marketplace platform is seeing perhaps a faster influx of more sellers or emerging brands. And following up on the labor market commentary there, do you think you will see any incremental headwinds hiring the necessary people for performance centers this year? Thanks.

Dave here. I'll address the first question regarding small and medium-sized businesses. We've experienced a 20-year journey in developing services that align with our business and also focusing on offering them to sellers, particularly SMBs, over time. Notable examples include FBA and various other features. What you see now is essentially a continuation of that effort by our teams in areas like logistics and brand representation. More recently, we've been able to enhance our advertising features for all our selling partners. This is a significant focus for us. While I don’t have anything specific for the near term, I do expect to see continued strong momentum in terms of units, as we report quarterly that about 56% of our total paid units come from third-party sellers, which is up approximately 300 basis points from last year. So, we anticipate ongoing efforts in FBA worldwide for sellers and the growth of other SMB features.

And on the labor comment, we can't predict too far in the future. We've got labor estimate in our Q3 guidance, I would say it's a bit of a complicated mix of economic growth and industries opening up, government payments in some areas that may impact people's working, and then whether or not children are back at school fully in the fall. So there's a lot of dynamics we do count on having more employees in Q3 and Q4, as you know, from our ramp-up to the holidays. So I would probably count on wage pressure remaining for the immediate future.

Our next question comes from the line of Ron Josey with JMP. Please proceed with your question.

Thank you for taking my question. I wanted to inquire about international operating income. The results show that it is consistently performing positively now. Could you share more details about what is driving this? Is it primarily due to the completion of major builds, leading to efficiencies in fulfillment centers, and should we expect this trend to continue? Or are there other factors contributing to the positive international operating income? Thank you.

Sure, Ron, thank you for your question. We have seen strong international results over the past five quarters, particularly with positive operating income, which had not been the trend prior to the second quarter of last year. The main factors contributing to this are the acceleration of growth, as we have essentially projected our growth two years ahead based on our current assets. Although this adds a lot of stress, it allows us to leverage those assets. Our fulfillment centers and operations have been operating at peak capacity since May of last year, and while they are starting to ease a bit, there is still a strong underlying performance. We continue to invest in international expansion, having recently added Portugal as a Prime country. We are also investing in Brazil, India, the Middle East, and several other countries. Overall, we are seeing strong performance in established markets like Europe and Japan. It's a mixed picture, but currently, the performance is very robust. Favorable foreign exchange rates over the last few quarters have also been beneficial. We are pleased with the results from our international teams. Our investment plans focus on long-term profitability, and we are providing advanced Prime benefits in many of these countries as they follow a similar growth trajectory to that of the U.S. This involves forward investments in Prime benefits, especially in areas like video, which resonate with customers, are beneficial for the Prime program, and can eventually develop into strong businesses.

Our next question comes from Jason Helfstein with Oppenheimer. Please proceed with your question.

Thanks. I have a question about Amazon, specifically AWS. You experienced 10% sequential growth this quarter, consistent with the previous quarter. Was there anything related to the reopening that contributed to AWS's exceptionally strong performance in the second quarter, or should we consider this a typical quarter with a good growth rhythm for the business? Additionally, regarding your comment about maintaining pace, is there any throttling of FBA occurring due to capacity limitations, or are you suggesting that you might be losing market share to other sellers who can deliver items to customers more quickly, given the ongoing logistical challenges? Thank you.

Hi, Jason. Thank you. Let me address your second question. My comments were focused on the throttling of space last year, which affected our vendors, retail business, and third-party business, particularly pronounced in Q2 of last year, especially in April and early May, as we worked to become fully staffed in a safe way and expand our capacity. In Q4, we handled volumes that were significantly higher year-over-year, with a growth rate of 42%. This is atypical and even more pronounced during peak periods when we experience the highest volumes of the year. What I meant to convey is that our space planning and throttling for pricing was not an approach we preferred. We believe we were not the only ones facing this issue, which is why we are rapidly expanding our networks. While it's challenging to move quickly, we are doing so as fast as possible, with substantial new capacity being added in the second half of the year. Regarding AWS growth, if you examine the run rate from last year, we saw a 33% growth rate in Q1, which decreased to 29, 29, and 28 in the following three quarters. There are always various year-over-year dynamics, but last year saw many companies trying to cut spending and operate more efficiently due to unpredictable demand. We worked diligently with our customers to help them adjust their demand for AWS services to align with new demand patterns. We also supported rapid scaling for companies like Netflix, who appreciated our assistance in meeting their volume needs quickly. Overall, we believe this quarter showed strong performance, and we observe positive trends with new contracts and clients either signing up for AWS, accelerating their move to the Cloud, or establishing longer-term contracts with us.

Our final question will come from Justin Post with Bank of America. Please proceed with your question.

Great. No one's really mentioned the CEO change, so I was wondering if there are any changes in direction, investment philosophies, or more integration of AWS that we should be aware of related to that change? Also, AWS margins showed strong revenues, but the margins decreased quarter-over-quarter. Can you remind us what drives some of that margin fluctuation? Thank you.

Sure. Let me address the second question first. There are various pressures influencing the operating margins of AWS. We're seeing growth that enables us to better utilize our assets, along with improved efficiency of our servers and sales force. These factors are advantageous. However, we are also facing pricing pressures from both price reductions and long-term contracts with major clients. Additionally, as we expand our sales force and build infrastructure for new global regions, these margins may fluctuate. We're pleased with the margins in Q2, although foreign exchange had a negative impact of about 150 basis points. Still, a margin of 28.3 is strong for this business. We are aware that these margins will vary as we invest and strive to efficiently scale our operations. Regarding the leadership transition, Andy has quickly gotten to work, maintaining our commitment to high customer experience standards, operational excellence, creativity, and the willingness to take risks, which are hallmarks of Amazon. The handoff has gone smoothly, and Jeff, while moving to the role of Executive Chairman, remains actively involved, particularly in significant decisions. We also welcome Adam Selipsky to AWS, who brings valuable experience and knowledge from his history with Amazon and his time as an external CEO, enhancing our leadership. Overall, we are confident in this transition and anticipate that Andy will contribute his positive perspective and forward-looking focus to keep Amazon thriving and delighting our customers.

Thanks for joining us today on the call and for your questions. A replay will be available on our IR website for at least 3 months. We appreciate your interest in Amazon and we look forward to talking with you again next quarter.