Amazon continues to make AWS a capex priority as ‘the benefit of cloud computing is really showing up right now,’ said the CFO
Amazon on Thursday announced financial results for its third fiscal quarter, which ended on September 30, 2022. The company reported revenue of $127.1 billion for the quarter, with adjusted earnings per share (EPS) of 28 cents. The company’s guidance for its fourth quarter came in under analyst expectations, however — Amazon is expecting Q4 to yield $140-148 billion in revenue, while analysts predicted $155 billion. That, combined with weaker than expected results from Amazon Web Services (AWS), sent Amazon stock tumbling in after-hours trading on Thursday.
Amazon CFO Brian Olsavsky led Amazon’s call with analysts with some frank talk about the current state of the economy and its impact on Amazon’s business now and going forward. Olsavsky led with a preamble that made it clear the company underestimated foreign exchange headwinds going into the quarter.
“In the third quarter, worldwide net sales were $127.1 billion, representing an increase of 19% year over year, excluding approximately 460 basis points of unfavorable impact from changes in foreign exchange rates. As the dollar continued to strengthen during the quarter, the foreign exchange impact was higher than the 390 basis point impact we had incorporated into our Q3 guidance. This represents a headwind of approximately $900 million, more than we initially guided to,” he said.
Inflation, rising energy costs and their effect on consumer and enterprise spending were all top of mind for Olsavsky as well. That’s hurt Amazon’s sales growth, he said, “as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend.”
Slowing sales and the strong dollar will continue to impact Amazon’s business in the fourth quarter, he said.
“As we’ve done at similar times in our history, we’re also taking actions to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere,” said Olsavsky
Amazon Web Services (AWS) net sales increased 28% year over year, generating $20.5 billion for the company, but that’s still lower than analysts expected. Regarding AWS, Olsavsky said, “With the ongoing macroeconomic uncertainties, we’ve seen an uptick in AWS customers focused on controlling costs. And we’re proactively working to help customers cost optimize, just as we’ve done throughout AWS’ history, especially in periods of economic uncertainty.”
Part of that mitigation effort, Olsavsky said, involved moving AWS customers to servers running Amazon’s own Graviton3 processors. Amazon has long touted the efficiency and performance of its Graviton processors compared to Intel’s heavy data center iron. Olsavsky claimed that Graviton3, the latest generation of AWS’s server CPUs, deliver 40% better price performance than comparable Intel x86-based instances.
Amazon continues major AWS investments
He also emphasized AWS’s continued worldwide growth, with the launch of a new Middle East region in the UAE and plans to launch a Thailand region in Bangkok. AWS has pledged $5 billion over the next 15 years to help develop Thai infrastructure, high-tech job training and tech-related local entrepreneurship.
AWS’ continued growth is a big factor in Amazon’s capital spending, which Olsavsky said will be “broadly in line” with the $60 billion it spent in 2021. Of that, the company has earmarked a “$10 billion year-over-year increase in technology infrastructure, primarily to support the rapid growth, innovation and continued expansion of our AWS footprint.”
Olsavsky told an analyst after his prepared remarks that Amazon had “a doubling of the network, had very high capex the last two years.” Despite that, Amazon made deep cuts to about one-third of its original 2022 capital spending budget, he added, “while still focusing our capital dollars really on the AWS business” and capacity for the company’s stores business.
Improving the energy efficiency of AWS facilities is an increasing area of focus, Olsavsky told an analyst.
“[Energy] prices have up more than two times over the last couple of years and contribute to about 200 basis point degradation versus two years ago. So we’re fighting through some of that as well, which is a new thing for the AWS business. But we’ll continue to look for ways to optimize our operations to use less energy,” he said.
That energy efficiency can also benefit AWS customers’ bottom lines, Olsavsky told another analyst.
“They can manage workloads better. They can switch to lower-cost products that have different performance profiles. They can switch to Graviton chips that have higher cost performance ratios,” he said.
Periods of economic uncertainty drive long-term cloud computing adoption rates, Olsavsky said.
“We think the benefit of cloud computing is really showing up right now because we allow customers to turn what can normally be a fixed expense into a variable expense, and they can let us manage the highs and lows of inflation and other cost of electricity and everything else,” he said.
