AMZN • 10-Q • Q1 2023 • Positive

Amazon Shows Resilience as AWS Growth Slows and North America Margins Recover

April 28, 2023 • 1 min read

TL;DR

Amazon delivered 9% YoY revenue growth to $127.4B while demonstrating significant operating leverage improvement. AWS growth decelerated to 16% YoY from 37% last year amid enterprise cost optimization, but North America segment returned to profitability with $3.8B in operating income. Operating cash flow surged 38% to $54.3B TTM, reflecting improved inventory management and reduced capex intensity. Macro headwinds and cloud spending optimization are expected to persist through Q2 2023, though re

Financial Performance Overview: Consolidated revenue grew 9% YoY (11% FX-neutral) to $127.4B, with North America leading at 11% growth to $76.9B. Operating income surged to $4.8B from a $3.7B loss year ago, driven by North America's $3.8B profit versus prior year's $1.6B loss. AWS growth moderated to 16% but maintained strong 24% operating margin. International losses narrowed significantly to $1.2B from $1.3B prior year, showing operational discipline amid currency headwinds.
Strategic Initiatives and Operational Changes: Management has executed significant cost optimization initiatives, reducing workforce by 27,000 positions and rationalizing fulfillment network capacity. Third-party seller mix reached 59% of units, reflecting continued marketplace emphasis. AWS continues multi-year customer commitments while offering cost optimization tools, trading near-term growth for customer retention. Advertising revenue grew 23% YoY to $9.5B, becoming an increasingly material profit driver.
Market Position and Competitive Dynamics: AWS maintains clear market leadership with $88B run-rate revenue despite growth moderation and increased competition from Microsoft Azure. Retail segments gained share in key markets through improved price competitiveness and delivery speed. Prime member engagement strengthened with digital content consumption up 24% YoY. International segment showing signs of stabilization in key European and Japanese markets despite currency headwinds.
Operational Efficiency and Profitability: Operating margin improved 670 basis points YoY to 3.8% driven by fulfillment network optimization, headcount reduction, and improved inventory management. Free cash flow deficit narrowed significantly to -$3.3B TTM from -$18.6B prior year. Capital expenditure intensity moderating with purchases of property and equipment down slightly to $57.6B TTM. Principal finance lease repayments declined 38% YoY reflecting reduced data center expansion pace.
Growth Catalysts and Material Risks: Near-term growth moderation expected in AWS as enterprise customers optimize spending, though long-term cloud adoption trends remain intact. Retail segments face consumer spending uncertainty but benefit from ecommerce share gains and advertising growth. Key risks include cloud competition intensity, regulatory scrutiny, and macroeconomic headwinds affecting consumer/enterprise spending. Management focused on operational efficiency while maintaining customer experience investments.

Revenue

$127.4B ( YoY, FX-neutral) with AWS at $21.4B ( YoY)

↑ +9%

Rd Spend

$20.7B TTM ( YoY), of revenue

↑ +12%

Net Income

$3.2B vs -$3.8B YoY

Gross Margin

(+160bps YoY) driven by mix shift and efficiency

↑ 46.7%

Free Cash Flow

-$3.3B TTM (improved from -$18.6B YoY)

Operating Margin

3.8% (+670bps YoY) reflecting cost optimization

Growth Indicators

Prime members stable with strong engagement

Arr Or Bookings ↑AWS $88B run-rate (+16% YoY)

Retention Metrics Prime renewal rates remain high, specific numbers not disclosed

Key Risks

AWS growth deceleration amid enterprise spending optimization and competition
Macro headwinds affecting consumer and enterprise spending patterns
Regulatory scrutiny intensifying globally
Currency volatility impacting international results

Key Opportunities

Healthcare expansion through One Medical with $4T+ TAM
International ecommerce penetration headroom, particularly in emerging markets
Advertising business expansion through new inventory and targeting capabilities
Grocery market penetration through omnichannel strategy

Bottom Line

Amazon's Q1 results demonstrate successful execution of operational efficiency initiatives while maintaining strategic investments for long-term growth. The significant improvement in North America profitability and narrowing losses internationally suggest sustainable margin expansion potential, though AWS growth moderation bears watching. Management's balanced approach to growth and profitability represents a mature evolution of strategy, with high-margin revenue streams like advertising and third-party services becoming increasingly material. Key metrics to watch include AWS growth rates, retail margin sustainability, and advertising revenue acceleration. The contrarian insight is that AWS growth deceleration may actually reflect strengthening competitive position through customer relationship deepening, despite market concerns about cloud competition.