Amazon is growing rapidly and profitably with services
Amazon picked up growth for Q2/2023 as the company increased its growth to 10,3%. This is only the second time Amazon has grown by more than 10% in the last seven quarters. The growth was driven by the service segment of the business, which grew by 16,5%. However, the growth of the service segment has declined for the last three quarters.
The uptick in growth for the company came from the product sales side of the business. A year ago, the product sales declined by -2,5% compared to this year when the product sales grew by 4,3%.
The growth of the service business reinforces the long-held belief that Amazon has turned itself from a retailer to an online retail infrastructure provider. As a retailer, Amazon is almost the same as Costco. Overall, Amazon is practically double the size of Costco as a company.
North America back to profitability
More notable from this quarter than the improved growth is the increase in profitability. The company was able to more than double the Operating income from the last year to $7,7 billion this year.
The profitability was most probably driven by the service segment more than the retail segment. Of the services, AWS brought in 70% of the profits. However, that was slightly down from the last year. More importantly, North America was able to return to profitability with a $3,2 billion profit. The International business kept losing money.
A big part of North America’s improved profitability has been transitioning one single national fulfilment network to eight separate regions besides the traditional cost-cutting measures. During the investor call, CEO Andy Jassey spent considerable time emphasising the importance of the transition.
“Regionalization is working and has delivered a 20% reduction in number of touches for our delivered package, a 19% reduction in miles traveled to deliver packages to customers and more than 1,000 basis point increase in deliveries fulfilled within region, which is now at 76%. Regionalization is working and has delivered a 20% reduction in number of touches for our delivered package, a 19% reduction in miles traveled to deliver packages to customers and more than 1,000 basis point increase in deliveries fulfilled within region, which is now at 76%.”
In terms of growth between the business segments, they are all converging towards the same level of 10%. The International business has increased its growth towards the 10% mark, whereas AWS has seen a declining growth rate. The last two quarters have been the first ones when AWS has grown below 20% per quarter. One has to remember that AWS is also a $85 billion run rate business with 20+% Operating margins.
Services for the marketplace grow the fastest
Despite AWS being the most significant part of the service businesses within Amazon, the other service businesses keep thriving. Especially notable is the 3rd party service business. It is 50% bigger in revenues than AWS. Despite that, it continues to grow by about 18% per quarter.
The subscription business (Prime) is approaching $40 billion in annual revenues but plateauing in growth to around 13-14% per quarter.
The most publicly discussed part of the Amazon service business portfolio is the Advertising business. It continued to grow by more than 20%. This quarter was the first when the Ads business recorded a Last Twelve Month (LTM) revenue of more than $40 billion. Quite an astonishing growth, as five years ago, the Ads business recorded only $7 billion in revenues.
There has been a lot of debate about whether the Advertising business is already more profitable than AWS. Currently, Ads are less than 50% of the AWS revenue. However, there has been speculation that the Ads business would operate at a much higher Operating margin than the 24% of AWS. If the Ads business had Operating margins approaching 50%, it would probably already generate more Operating income for Amazon than AWS.