EP138 - Amazon Q2 2018 Earnings Hot Take
This episode is a hot take on Amazon Q2 2018 earnings
Jason & Scot will at eTail East in Boston next week.
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Episode 138 of the Jason & Scot show was recorded on Monday, July 30th 2018.
Join your hosts Jason “Retailgeek” Goldberg, SVP Commerce & Content at SapientRazorfish, and Scot Wingo, Founder and Executive Chairman of Channel Advisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.
New beta feature – Google Automated Transcription of the show:
Jason: [0:25] Welcome to the Jason and Scott show this is episode 138 being recorded on Monday July 30th 2018 I’m your host Jason retailgeek Goldberg and as usual I’m here with your Tahoe Scot Wingo.
Scot: [0:40] Hey Jason are welcome back Jason Scott show listeners well last week the big news in e-commerce was Amazon 2nd quarter results but we didn’t get a chance to cover it live because you were down under.
Jason: [0:55] That I was I was in the future in Australia.
Scot: [0:58] I know he’s not wild you you cross the time zone when you go there and then you lose a day when you come back so yeah it’s very strange.
Jason: [1:07] I assume I’m now even.
Scot: [1:09] Yeah if you if you keep going though One Direction you’ll either turn time backwards like Superman to or I don’t know if you’ll arrive younger than when you left.
Jason: [1:21] Yeah I can certainly use that but I’m not currently that’s not a nephew and I’m currently experiencing.
Scot: [1:27] Cool before we jumped into Amazon’s second quarter deep dive give us some highlights of what you saw in Australia and you know since we’re theming on Amazon here let’s start there Amazon has launched in Australia and I imagine that the Aussies are really fired up about that.
Jason: [1:44] Should I feel like that is the big change last disruption in the local retail Market I would also I also feel like the. The sort of recovery from the global financial crisis has changed circumstances in Australia a little bit but it said it’s an interesting Market.
[2:04] For me it felt a little bit like a Time Warp like I was going back in time a couple years in retail. They’re they’re not as over stored as we are so malls are still like a pretty popular concept like they don’t have too many into the overwhelming majority of malls or sort of the equivalent of what we call in a mall here. And that’s a a growing in popularity shopping concept there in fact like there’s a premise that the. Traditional department stores in in Australia are suffering a little bit because people are choosing. Two shot multiple manufacturer stores in the mall versus going to a department store but overall. It’s a timer for two reasons number one is Scott and I think you already know it’s an odd Market in that a lot of international retailers.
[2:57] Didn’t protect their IP rights in the early days until entrepreneurs from Australia would travel abroad they would see some interesting retail concept. And they would bring it an unlicensed version of it tossed really on their own so you’ll see lots of familiar brands for North American Choppers like Target and Kmart. Woolworths but they’re they’re not and The Branding may even feel very similar to what you would expect in the US. But they’re not in any way related to or associated with the North American companies and in some ways it’s a Bizarro world so. Like you know Kmart is probably more vibrant in Australia than Target for example.
[3:40] Which feels a little bizarre for anyone that you used to North America where that’s that’s definitively not the case so to the retail Brands it takes a little bit of time to get your head around because they’re familiar and yet for him and then you know I think it’s dorkly the market just hasn’t had a lot of competition like most of the Australian retailers have had to compete with each other but there’s not a huge number of them so they. They don’t have direct overlap like you don’t tend to have two or three brands with the same product assortment in the same price point so i q no U tend to have.
[4:13] A retailer in every price point or a category killer in the in the category so you have like an office works. As the category killer for Office Products but they don’t have. A direct competitor like like Office Depot OfficeMax have a Staples here for example and then until recently the the currency exchange rate really sucked in so you didn’t you also didn’t have Australian consumers. Shopping internationally via e-commerce and so really those consumers were kind of locked in the to the local choice there’s no they’re not a lot of international retailers in Market there’s a lot of international Brands and Market but not a lot of. Wholesalers of other people stuff inside so I would argue that the market just didn’t involve really fast and now you got Amazon coming in there I’m which is a big disruption and you have much more favorable exchange rate so you have. Australian consumer shopping tomorrow in Hong Kong and and shopping pesos in in the UK and doing cross-border Commerce and things like that so suddenly there’s a lot of competition suddenly they’re all getting much more heavily disrupted and they’re all trying to figure out a lot of the digital things and Omni Channel things that retard you know we’re more likely to be struggling with you know 2 to 5 years ago here in North America so it’s it’s it’s going to be interesting.
Scot: [5:36] Yeah so Channel advisor full disclosure we have an office in Melbourne and it’s a good region for us Amazon coming has been great for us the one thing we’ve seen a ton of is there’s a lot of Chinese Imports and Australia and it frustrates Australians because they have this weird kind of this is kind of topical because the news did this weird thing where you can sell anything and Australia for $1,000 and under and there’s no tariff but then Aussies can’t sell the China without Tara so there’s like this huge disadvantage and it really always frustrates the third-party sellers I know they’re that anything can come into the country for under $1,000 without any kind of a there’s just some guy text benefit almost like they don’t pay Australian tax on it or something and but then they always had a hard time exporting out of Australia so did you hear anything about that or.
Jason: [6:29] Yeah so I feel like there’s a number of those sorts of things and and you know I was really really is part of Asia is it is you know there’s it’s very International population and so there there’s a lot of Asian expats in Australia and said there’s there’s it you know it’s it’s not just proximity to the good deals like there’s a lot of Asian brands did it appeal to a big chunk to the local market in Australia, alright are multi-generations in Australia there is this strong sort of national pride thing so I always feel like. They’re they’re very there they’re more opposed to Outsourcing jobs and their there more favorable to. Meeting RC Brands and products then some other markets in all markets we see. That that does kind of stated preferences you no go away when. When there’s economic pressure so I’m not saying Australians won’t buy cheap goods from China but I’m just saying, they maybe put a little more weight on the local stuff then do Americans for exam.
Scot: [7:44] Call the other thing I’ve noticed in Australia is pretty much everything will kill you did you run into that at all.
Jason: [7:49] I was aware of that but I did not run into that I did not see any vocals boxing with kangaroos. They’re made they’re probably were venomous spiders but I’m happy to report I didn’t see them which is all I care about like I just want to die in my sleep and not be scared the bejesus beforehand. And I was I was mostly in Melbourne and Sydney which are you know big Metropolitan City so I I imagine the density of things that can kill you is more skewed towards public transportation in Alaska Critters.
Scot: [8:23] House on the Gold Coast in like a I thought I’ll go to the beach for half an hour or something and it like every other sign was like no warning Riptides warning sharks warning life threatening jellyfish poison manowar’s warning piranhas like ever in Australia.
Jason: [8:43] No I think it I think it was Jim that fact that there are there are like more deadly species in Australia than anywhere else and I think that’s particularly like the snakes in the venomous spiders and then is you mentioned a lot of the The Aquatic Life.
Scot: [8:56] Yeah they couldn’t tell hundred percent if they’re yanking my chain but the folks in the office for telling me there’s a venomous spider that hangs out in toilets and like all Australians when they go to the toilet they will actually do a visual inspection for this spider because it will actually bite you in the bum and it can kill you if which is like a terrible way to got.
Jason: [9:14] That’s why I don’t know the weather know this but either they were totally yanking your chain or my house were much more happy for me to die. I was not worried about that although I did Quinton Henley I did look in every toilet because I was I was constantly making videos trying to get some that were flush and counterclockwise in it yeah.
Scot: [9:33] Nice but still have to put those on the action.
Jason: [9:38] Exactly yeah the toilet videos yeah I’m pretty sure it’s like cow tipping.
Scot: [9:43] Cool any other exciting Australia highlights.
Jason: [9:48] Nope I mean people are super nice I had a ton of great conversations with retailers and I do think they care a lot about the customer experience and they care about winning in this certavite in competitive market that there now in butt you know just circumstances they they haven’t had the impetus to change quite as quickly as as some other market so.
Scot: [10:11] Well let’s jump right into the big amazon news with the Q2 Deep dive. Amazon news your margin is there.
[10:34] Also serves a lot to go through so we’re going to contact what I call a peel the onion approach and start at the macro-level and then look at the different lines of business with an Amazon we’re going to look at the cloud segment the add business and then the US and international retail businesses as well as the third party Marketplace that’s a lot to cover so let’s jump in from a macro standpoint the big story of Q2 was the bottom line. And in fact the top line was a little bit below and the analyst estimates and part of that was due to there’s a lot of rule changes going on in the world of accounting. Which is causing every company a lot of Heartache intimate with this unfortunately there’s this new accounting principles 606 which is making a. We visit how they look at their different things so Amazon had to move some stuff from 1 P to 3 p which creates a revenue headwind because in 3p they only count about 10% of the revenue because it’s their Commission CNN 1p the count a hundred percent so in fact Amazon actually missed the top line so usually if that happens you see this whole you know crater going to stock but then that didn’t happen here because what happened is operating income blueway expectations so it came in at.
[11:52] 2.98 billion so that’s the third quarter that operating income was over 2 billion and it was just too shy close at 3 billion you know what would that be 2 million short short of that. That’s a 375% year-over-year increase in operating income and then every segment Amazon reports on improved their profitability as well and will cover that as we get in that represents a 5.6% margin and expectations was for 1.7 billion so this was 77% above expectations which of these numbers is you know 1.2 billion dollars more than while she was expecting in his truck that is meant. Amazon is I kind of caught this stair step effect so Amazon will.
[12:39] You know don’t don’t climb the stair and profits will go down and what they’re doing is this business is very capital expenditure heavy right so you have the big capex is fulfillment centers which are not cheap and data centers which are also not cheap so Amazon and Fortune asked both because derp derp those are the two core pieces of what they’re building so you can imagine the phase where they’ll build like 24 filament centers in 20 distribution centers and the look massively unprofitable but then as those come online and they optimize them and they get capacity then Revenue starts to kind of the the capex stair goes sideways and profit starts to climb and then Amazon will kind of go through another phase of of harvesting.
[13:28] Prophets and then after that they’ll say oh we need more data centers and fulfillment centers and I’ll have to kind of keep chewing away at it so we’re one of those Cycles now I’m that that we’re kind of harvesting investment and what’s interesting is as they’re climbing the stairs every time they take a breather the possibility is going up pretty materially and they’re doing it again such a big number you had so you normally people would scoff at a 5.6% total margin but they’re doing it against a top-line that.
[13:56] Massively large so 3 billion dollars works out of the bottom of that equation which is which is pretty incredible so so that was kind of everyone was pretty kitty about that to see if they know they haven’t level in a very long time. And then there was there’s a nursing backdrop that happened you were not show you sounded like you picked up on this but there’s this this whole kind of thing that’s been out there called Fame search Facebook Amazon Netflix and Google and Google had pretty good results obviously Amazon did and then Netflix kind of had a little bit of a bad results at there they miss their subscriber growth number and then Facebook had a really really really bad week last week so they they had that kind of guy on their conference call so their revenue and profits missed an egg on a conference call and it essentially said look we’re going to reset expectations of Skyway on Washington caught kitchen sink order the stock was immediately down 20% and unfortunate that kind of held there so there was this whole thing coming in so it’s kind of interesting to see Amazon really kind of printer. A quarter and blow errands expectations.
Jason: [15:11] Boxer to put the F into Fang if you will.
Scot: [15:14] Absolutely yes Google kind of mess it up cuz they change their name to alphabet but everyone still calls it thing but it’s it should be either fan or whatever. Santa hat the another kind of interesting tidbit here subscription Services which is where Prime lives are there’s a couple other subscriptions on there that you can buy but that is primarily Prime Revenue. That accelerated to 55% year-over-year growth which was good and then longtime listeners the show will no operating income and revenue are the measuring sticks that most other companies use but Amazon really uses. Cancel that is a lagging indicator and what they really focus on is as more of a Ford indicator and it kind of has to do with the stair step. I love you and I’ll G I introduced that’s free cash flow and what free cash flow does is it it kind of is an earlier way. To the counting rules to kind of predict where.
[16:12] Profitability is going to come in so let’s let me kind of walk you through that I’m going to try that this always gets a little confusing so I think I’ve tried to boil it down here so when you when you just take what I would call.
[16:23] You got to go to this waterfall right so the top of the waterfall you have just pure free cash flow and that was about 22 billion dollars massive amounts free cash flow. Then they go and they invest more Catholics right because Amazon is Never Off This treadmill of investing in capax just the. So this quarter they invested only 11.4 billion and capex just hilarious because that’s probably more than. People are spending in like last 10 years for like most retailers but that’s that’s so is a light investment quarter. Do only 11.4 billion that leaves you with kind of 10.4 billion in free cash flow after the capex Investments then they’ve gone out and they have you know some of these things that they buy they buy outright and other ones they leased land and what not to try to smooth out. Cash outlay for data centers in fulfillment centers along with more with Revenue comes in so they have 6.3 billion of that they paid back in the quarter so really when you get all that out the cord which is free cash flow without lease. When you take out least principal repayments was 4.1 billion so those are kind of the end of the metrics Amazon spends a lot of time thinking about what you could argue is. That biggest number I gave you that 21 billion is really what Amazon focuses on because you know if you kind of go to this.
[17:45] Take a region like the United States there there’s they’re getting to the point where they really don’t have to go that many more fulfillment centers in it and in fact the profitability of the North America really kind of pop this quarter will talk about it because of this they’re essentially it saturation so when you get saturation with some of these things that free cash phone number. The top of that waterfall becomes the number because you pay off the cappex pay off at Lisa’s now you’ve got all these fulfillment centers they’re producing Pan the free cash flow flows all the way to the bottom line so over the long-term you should see that gap between about the three billion dollar operating income in the $22 free cash. 12 close as a market matures that’s what gets Wall Street so.
[18:28] Not terribly excited about Amazon is these free cash flow numbers are are pretty amazing and Amazon while they’re investing yeah I started that 21.8 billion + free cash flow and ended up with 4 there’s a lot of investment in there like 17 billion dollars with an investment when there’s a day where they’re not making those Investments this is just going to eat a massively kind of cash generating business which was funny we talked about it a lot on the show there still this overwhelming belief out there. That either a olive Amazon is a profitable or that be the retail business is sustained just by the cloud business none of that’s true the retail business on its own as profitable. Especially in North America and international it’s still losing money but that’s because certain markets specifically India Scot amount but I think it’s pretty safe to assume there’s markets like the UK and Europe for their probably look a lot like the US they’re pretty mature but then there’s a lot of markets and I including Australia even yeah I bet Amazon isn’t profitable in Australia so. Just want to make sure we just spelled the you know that that whole incorrect urban legend at Amazon or its retail business are not profit.
Jason: [19:40] Yeah for sure and Scott correct me if I’m wrong in this but. Even if they wanted to keep investing at this same Pace like they’re there is a scale problem right like it is you keep growing that Top Line cash flow that fast like there comes a point when you just can’t make. The capex Investments at that same. At that same growth scale if you well some people would even say like the stair-step isn’t necessarily intentionally that they’re taking profits but just that it it takes them more time to retool and and scale the Investments at the same Pace that they’re there their top line revenue is scaling.
Scot: [20:19] Absolutely let me have some you know so the most exciting line-of-business we’ll talk about is ads and you and I both there are in this world the nice thing about ads is it it doesn’t require any cat that’s right so it’s. It actually possibly could be the most profit line of business that Amazon has and I I think. Even though Amazon is closing are showing Dollar business I think there’s probably the could be a joined our business there that a lot of people haven’t woken up to because unlike all the Amazon other businesses it doesn’t need data centers that doesn’t need for Film It Centers and it rides on top of those so it gets this kind of triple flywheel effect. I’m from those Investments That Amazon’s making.
Jason: [21:04] Death of though this last reporting. You probably didn’t want ads to be the the dominant source of income you had cuz that that probably dancer Facebook Super Bowl.
Scot: [21:14] Yen one one sidebar is a kind of thinking there’s been a lot of interesting writing about this if your Facebook and Twitter is also in the same bucket Netflix will go in and it sits on it stop living subscribers I don’t think those big deal but but the Twitter and Facebook their core bottle is under attack right because you have this whole attention to swinging very far away very far towards privacy with gdpr the whole Cambridge analytica and you know so they’re core model is kind of under attack were there since Lee saying give us your data for free and we’ll monetize it by selling it to other people which which sounds weird when I say it like that that’s perfect what you been doing all this time and you know so you have to I have to imagine somewhere in those boardrooms people like we really need to find an e-commerce leg you know kind of a of Revenue here so I wouldn’t be surprised if we saw Facebooking and Twitter got a lot more serious about e-commerce Revenue because transactional review is way cleaner from political economy misgivings than than address.
Jason: [22:22] Yeah for sure and I mean a ton was written about Facebook but I don’t know if you follow John Oliver he has the Last Week Tonight Show on HBO and he did a hysterical honest version of the Facebook app. That. Can’t completely describe an RPG rated podcast but you can find it all over the internet and it’s it’s definitely worth the watch is pretty funny. But the punchline of the lad is Facebook we own Who You Are.
[23:02] So at the very top line for Amazon the growth was pretty big RightSource 37% year-over-year growth. On the revenue and you don’t remember remedy for for for Amazon doesn’t exactly equate to e-commerce DMV because they they do have some other businesses and in the revenues a mix of one p m 3 p but 37% growth. You know for a company they’re sized you know we always highlight on the show that that the Department of Commerce in comscore sort of estimate all e-commerce growth in North America at about. A 15% growth rate so you you have the the biggest company in the space that represents more than half of all the activity in the space and they’re still growing at more than twice the the average growth rate which is pretty scary.
Scot: [23:57] Yeah a lot of people are starting to kind of wake up to this and you you pricing all the headlines that you know Amazon what’s half of e-commerce and that kind of thing would which is true but if he Commerce is growing it fit. 15% and Amazon phone at 37% then you know next stop 65% $0.75 85% 95% so we will later we’ll see you know eBay group pretty decently like eight 9% but then we’ll always here from Walmart and Target those kind of guys that they’re growing 30% shopify’s gmv is going 30% and it always becomes this kind of question of who is who is growing at negative. And e-commerce to kind of generate this 15% I always come back to that when I when I when I start to hear all these things come out of the quarterly reports I don’t have a great answer for that we’ve talked to folks. Animal I believe the numbers are wrong out there and they don’t trust at 15% so we’ll leave that two listeners kind of decide.
[25:03] The glass little thing on the top level here is at Wall Street.
[25:11] You’re very quickly says wow that was great cue to tell me about Q3 so it’s very much a show me show me kind of a world there I am the do that through guidance so Amazon’s guidance for Q3 was a little light on revenue and I think that this again was due to this kind of Optical news from stuff from 1 P to 3 p but then the prophet guy that gave to Wall Street was wildly ahead of their estimates and this is why you see that world of Wall Street you called us a beat and raised quarter that’s essentially what Amazon did is they not only did they being cute too but they all the analysts had to scramble and go out and say the whole world of profitability Amazon has changed what does that do for our bottles and minute is models are built off of operating income and free cash flow so you know I saw I saw price targets out there 2020 120 200 I think the highest I saw was 2300 I remember right around 2000 is when Amazon it’s $10 so yeah this is the kind of momentum here that that’s pretty interesting to see if this is what catapults Amazon there I don’t think I quite get there but you know when Q3 comes out I think Amazon all indications are from third parties out there that they had a Blow Away Prime day.
[26:33] That could be if they were kind of being raised and 2/3 on top of this and especially on the bottom line then we could get that $20 by Lucy will have to July. So probably be. August 28th 23 or October 22-23 is probably when they’ll announce Q3 and I bet that maybe when we kind of see the first trying to our company.
Jason: [27:01] Yeah and that’s a great reminder to me that we need to get started on the trillion-dollar sound effect that will need for the podcast from them.
Scot: [27:08] Yeah yeah I’ll have Jeff on he’ll be a big celebration party.
Jason: [27:12] Exactly I know he keeps asking but that maybe would be the occasion to finally let him on the show. So one of the businesses in this number is of course the Amazon web services and you know if e-commerce is doing pretty well against its competition amazon-web-services is doing even better right and is you is you mentioned you know one of the two common myths is that this is the only profitable part of Amazon that’s her to carries the retail part as a reminder like this service want and really had like a 7-year Head Start before they developed any serious competition and today you have. Microsoft and Google in particular you know fighting hard to catch up. Spencer literally 7 years behind and I think there’s a Warren Buffett quote you know something to the effect of you really don’t want to spot Jeff Bezos so 7 years head start on anything.
Scot: [28:06] Yes all that was great.
Jason: [28:07] Which is a pretty good quote so you know again the circumstance going into this is.
[28:14] That Amazon web services is way larger than all of their competition combined and so normally you’d expect. That’s great but it should probably be harder for them to keep growing at this pace and the bad news for the competitors is they did keep growing at that pace and in fact there their rate of growth is still slightly accelerating so so they had like 6.1 billion in in revenue for AWS that’s a 49% year-over-year growth. Which is an acceleration of of 100 basis points from q1 and you know that puts them at like at 24 billion dollar.
[28:55] Run rate. And the operating margins are getting better so so operating margins for the quarter went up like a hundred 20 basis points you know so you got margins improving on a big growth when you’re already like the. The huge market leader in so that’s that’s you know pretty impressive and for sure those profit margins. Are much higher than you typically see you in any kind of retail and certainly higher than we see an e-commerce or or Amazon so you know they’ve there pretty consistently in the 20 to 25% operating margins for the for the last three years on on Amazon web services which is much more healthy Marge and then you’re going to see you in a in a retail bit.
Scot: [29:45] Yeah as a is a super geeky a fellow Super Geek guy I saw one analyst it did this kind of cool kind of. Thinking on this Amazon discloses some of the work load data so work load and growing at 49% workloads I think we’re going at like 60 70% so what’s happening is they are getting better at optimizing the data centers and handling those workloads with less capex imagine some that’s Morris law that kind of kicks in their butt yeah I’m sure there’s some technology to I’m sure they’re getting good at your how do you spread these things across the field data centers you know how do you buy more commodity Hardware there’s a lot of rumors that they were going to compete with Cisco because they build your own network they do software kind of networking Stratus infrastructure instead of Hardware so they were so they they were able to handle a tremendous amount of workload growth convert that into Revenue but then increase margins more efficient inside of the data center layer there in end of cloud services they’re providing they’re also seeing really good you know there’s this whole family of things people can use an and you know on the conference call they talked about they don’t get specifics but they said they were very pleased which means.
[31:08] Yeah it kind of Amazon body language must have been more than 10% kind of a thing you know of cloud customers expanding into some of these new Services they have so they have a lot of new scheme was database Technologies bi. Call center Technologies and machine learning and Ai and they still seeing a lot of customers expand into those things which is which is new needs more Revenue per customer as well. I bet they don’t really totally disclose that. On your Warren Buffett quote one analyst had a clever thing it’s not funny they run out of superlatives here so he essentially kind of said I mean dang they they added an Azure I would just Microsoft clouds and a Google Cloud platform just in the last year so they you know they’re just like every quarter they had like four or five JCPenney’s on on the GMC side there they’re laughing those guys so bad that they’re yep there you go over your number added kind of just you know the year of your growth exceeded the two top competitors which is crazy.
Jason: [32:12] Yeah yes it it’s pretty scary. And I hesitate to even call it a stumble the one slight bit of negative PR I’ve seen lately has to do with one of those AI Services they have a facial recognition service and there was a little bit of a stir somebody use the Amazon facial recognition search service and ran it against Congress and it said Miss identified like a hundred and fifty of the congressman as. Criminals and like I’m not sure anyone did the fact-checking like it’s possible that that just true it sounds like to me but.
[32:49] I’m assuming from the articles that that was a mistake like that really has nothing to do with Amazon web services it’s kind of the state of the. The technology in the databases that all these guys used to train facial recognition. But I did see them get some slightly negative Buzz there and then of course it is interesting retailers the one segment where you would expect. Ews to have a little bit of head winds because Amazon is such a successful retailer if you are another big retailer that’s fine cloud services. It wouldn’t be surprising to see them you know Skip Amazon even though they are the dominant player and we are starting to see that a little bit like it was more of a press release than. Then any actual activity but on Friday this year Walmart announced a big partnership with Microsoft Azure for data services and I you know I presume that was designed to. Somehow take some of the steam out of prime day which. Unite I would argue wasn’t wasn’t very successful and then I know Google Cloud platform Services just had their annual conference and one of the big announcement today or was that that apparently for some time Target has been. One of the main tenants on Google Cloud platform services so so it is too we’re starting to see some of the big retailers adopt some of the other class but your point like. And not in the overall economic picture it’s it’s not making you in that tiny little dent.
[34:18] So moving on to another business that’s not as big as Amazon web services but pretty interesting is the emerging advertising business on Amazon and so you know what is regular listener I don’t know there’s a bunch of different formats of of marketing opportunities that sellers can buy on the Amazon platform to improve visibility for their product in so that that generates advertising revenue for Amazon in Scot keep me honest here but they they want that Revenue into a kind of miscellaneous bucket they call other revenue and I I think we’re all. Largely assuming that the bulk of of quote-unquote other revenue is this ad business but it but there are some other pieces of. Of Revenue in that bucket as well do I have that right.
Scot: [35:09] You do and it’s kind of confusing so they they give you some tidbits on revenue and break out ads inside of other and then like I mentioned subscription services but because those things aren’t going quote material part of Amazon’s business the SEC doesn’t require to break him out and that in their entirety so ads end up being in North American International but AWS is all the way out because it’s pulled out as its own kind of operating its own p&l if you also unlike line business ads we only know the Top Line we don’t know the profitability I think we all assume it’s probably.
Jason: [35:43] It’s hard for it not to be very profitable yeah.
Scot: [35:46] What is the extent there is no expenses psych are there are you at the traffic in the it just kind of like almost pure profit I would imagine so so yeah you’re right.
Jason: [35:56] So that so the number for that other Revenue grew a hundred and 29% so so she use year-over-year growth and I think cow and came out and said that their estimate for the annual revenue from this advertising service is now 8.6 billion in for 2018 and you know when they start a forecast that out there there forecast says forecasting that that could be a 37 billion dollar business by 2023 which is the acceleration over. Over their previous estimate from just a couple months ago.
Scot: [36:35] Yeah that’s a Facebook so this business will grow to be a Facebook by 2023 in 5 years and he had to nudge their numbers up because it’s outperforming what what they’re saying they’re so.
Jason: [36:46] Now we used to say.
Scot: [36:48] An Amazon fashion day could pull that in a year you know someone for years they could have added a Facebook.
Jason: [36:52] Yeah now generally when people tell that story they remind you that that that’s a 2017 or 2018 Facebook and the 2023 Facebook will probably also be a lot larger but that’s may be less obvious this this week than it was last week so that is certainly interesting not really related to their their announcement that there is other data out there to just sort of highlight. What at what an interesting business this is you know if you’re doing a search on Amazon platform. By definition you have really high purchase intent so the ads on that platform. Are are likely to have a directors are much more likely to have a direct response then adds on almost any other other advertising vehicle. And so you know Merkel consolidate the data from other clients. Every quarter and they publish this this great compendium of a marketing stats and they would they were talking a little bit about the efficacy of like one of those signature ad formats on Amazon which is the Amazon headline search ads there’s an ad. It shows up at the top of a search and they’re saying that like comparing that to a Google pla which is one of the the most Commerce friendly. Appointments on Google that Amazon headline search get 42% more clicks and convert 3 1/2 times better than Google play so that’s.
[38:18] You know partly a definition of the of the shopping traffic than Amazon gets versus the more you know browsing and in general information traffic that the Google gets butt. You know if if their revenue gets anywhere like Amazon or Facebook’s advertising Revenue it’s. Its Revenue that has a much clearer Roi for the ad purchaser. Then some of that that the ads that are purchased on the other platforms where you have to believe that influences eventually going to translate to purchases. So I think that’s that’s super interesting, and then you know somewhat in line with the other digital ad platforms like Google and Facebook is becoming increasingly clear that Amazon’s very interested in fostering a direct relationship with the big ass fenders and they’re really trying to bypass the traditional agencies so you know I work for one of those agencies like that’s you know definitely not good news for that sort of old app Revenue stream for the big big digital agencies as it increasingly seems obvious that you know if there’s only a handful of these big digital advertising platforms they make themselves really friendly today advertisers that you know they can make it difficult for the for middleman to add much value.
Scot: [39:38] Free Colts those are the that’s the cloud in the ad highlights Witcher are in a driving substantial beats here and then let’s dig in the retail side 2 on the third-party side revenue from third-party seller Services grew 36% year-over-year which is down slightly from which it was about 40% of year ago so you know just kind of scale kind of slowing down I think but again you have third parties are growing 36% year-over-year is not too shabby in a world of 15% and in fact when you think about it if third prettiest girl.
[40:15] That fast then overall online sales for Amazon were about 18% first party is growing for a bit slower so the third party part of Amazon is growing substantially Amazon does report the unit volume mix and the unit volume mix hit a new high water mark and Q2 of 53% it was interesting it it kind of when you look at it overtime at q117 and it kind of this equilibrium of 50% and it stayed in that range all the way through 2017 and then here and 2018 it’s really kind of started to ramp up I think some of that was a couple things so I think Amazon always loves for 3p to go through FBA if possible cuz that’s the best user experience and it so I think Amazon and in 17 had vastly underestimated the the popularity of FBA with third parties so they built a lot of fulfillment centers globally in Parsippany us to kind of catch up so it feels to me it didn’t seem time they had some policies to kind of help drain some of the slower moving stuff out of a PA so I feel like the kind of used 2017 as a catch-up to get.
[41:27] APA right sized again counties in that stair step method ology profits took a hit from that and now we’re really seeing creepy ramp up because I think there’s a lot more room in that PA to drive things I do my own proprietary analysis of this and one I kind of peel apart the quarter I end up with first party at 37.6 billion 71 billion for third-party so third-party is getting to be almost as twice as big as first party so it’s your time looking at. 6030 Castle Cliff there I mean 6535 and I have three pgmp growing at 27% and 1p growing at 12% so this move between one p3p delete this a little bit but adding those together to get 108 billion dollars of gmv for the quarter which I think is the right way to think of Amazon and that puts them at a you know north of a 400 billion gmv run rate. Which is essentially the size of Walmart we can compare Amazon’s GMB to Walmart retail sales which I think is the right comparison there. On the US side to side Jason or you want me to jump into that.
Jason: [42:43] Sure I’ll hit the top on and you can add any any color but North American revenues continue to be really strong so that there were 32.2 billion for the quarter that’s a 44% year-over-year increase and I I think that basically hit the Wall Street expectation but they you know again you don’t improve the operating margin I think they beat their. Their consensus estimates for the operating margin so again fast expected grossing growth in North America and North America has been properly 17 consecutive quarters or.
Scot: [43:31] Yeah but I’ve lost track to being sweet.
Jason: [43:34] Yes but so it’s something something in that range. Where you at we’re going to call it a 12 consecutive quarters of profitable growth in North America so going back to positive profit in North America so that’s you know going back to the the sort of old wives tale that they’re not profitable the retail business in North America on its own is a profitable business it’s growing robustly it’s not super high margin as. You know most most retail is not super high margin but there’s not very many retards in North America that it wouldn’t take the last the last 11 quarters for for Amazon’s business so North America is a very robust retail business.
Scot: [44:28] Yeah and if you look at the operating margin for that segment again operating margin is really a trailing indicator free free cash flow would be better but they don’t break it out by a segment cuz you’re not required to file SEC but it improved from 3.7% bottom line profitability 5.7 in Washi parlance that’s a 200 basis point increase which is pretty material on a quarter to quarter so you’re really starting to see them. Squeeze some some benefit there. Some of that is coming from the ad Revenue so that again the ad revenue does getting mixed into this North America piano AWS isn’t cuz it said separate Simon so it is in their hind it’s helping but it’s maybe a third of the profit comes from that business. But I don’t think it’s fair to separate that because those two things are very much more intimately connected than AWS is essentially.
Jason: [45:24] Yeah and that I mean reminder that the ad business wouldn’t exist if they weren’t retailer driving a bunch of traffic to that site to shop for Stuff.
Scot: [45:35] You want to do International.
Jason: [45:37] No I’m going to toss it to you for the cool accent.
Scot: [45:41] Yeah yeah thanks crikey so. On the international side if there’s any kind of blemish on this quarter it was International and then maybe the Top Line kind of being a little light but I think people kind of get the Top Line being of 1 Peter 3 p move and it is. Truck drives Rockville police they’re okay with it so he International Group 21% year-over-year was largely due.
[46:08] A launch last year sometime that there anyways I’m so they had a tough comp in in a Wall Street. ABS line but so is a little bit of white on the top line from what people were expecting it again on the bottom line it was good it was pretty strong so International has a loss so it is she won the last was 4.2% and then this quarter it was 3.4% so again kind of a really nice quarter-on-quarter Improvement but this is clearly a part of Amazon that’s losing money and yeah for those folks that really want to find a piece of you found it so the international business of Amazon’s losing money right now it is improving its profitability pretty dramatically quarter-on-quarter so and Q4 it was down 5% in a lost 5% and then yeah back in the 2017 it lost as much as 7% so it’s really kind of cut the losses and half in less than a year and you know I think we’ll see this at this kind of pace you could see International get profitable. If you stretch get there in 18 but maybe by mid 1990 you know if Amazon opens up Brazil in a more serious way there’s a lot of countries that are not in and or they do some Acquisitions so they’ve added some things like sukur that. Could make it kind of go negative again they they will do that because I see it is as such a big opportunity.
Jason: [47:30] Yeah and I would just remind people of your thinking about this in terms of a traditional retailer very few retailers that are wholesalers of other people’s stuff that sell third-party product had been very successful at expanding internationally so lots of retailers have success in their home Market they say hey what time you getting getting saturation here we should expand in some other markets to grow our our total addressable market and they start opening stores in other markets and more often than not they fail utterly or at the very least aren’t profitable and so like I would argue if you pull Brandon manufactures out that sell their own stuff the the majority of retailers International operations are unprofitable and some much more wildly so than Amazon right I think an Amazon case what we’re still seeing is is an investment that hasn’t paid off yet but there’s you know every reason to believe that it could just be early in the investment cycle and I I think that compares favorably to a lot of traditional retail competitors.
Scot: [48:35] Yeah and the last thing here you know what Amazon is really good at is seeing something work in one market and rolling it out rap play the others I don’t know I haven’t tracked person where they are on the ad but I’m sure like in Australia they don’t have the ad platform active yet because they’re trying to get third parties ramped up but you know what you can Dad is there seeing the ad platform work really well in North America I’m pretty sure it’s it’s. Parody Future parody in England but I don’t think the rest of Europe is really been aggressively sold that and then countries like India you know where the the type of a model this kind of hybrid ad and Marketplace model is is much more prevalent in Asian Alibaba really kind of I read this whole concept you can see you know you can see International almost getting prop on the back of rolling that ad platform out in a in an aggressive way and getting it into all these countries where it’s not and then getting it penetrated more intended the countries where it already is an English and whatnot so that’ll be interesting to watch. It could even further because they don’t kind of tell us the breakdown of of that other line you’re my bet be it’s probably 80 or 90% North America and very small International and I would imagine the international side to be as big as a North America side just kind of just naturally so that ad business we could be vastly under sizing that add business even that kind of like that’s Facebook scale that the people are saying.
Jason: [50:04] Yeah and I I mean I would argue that the ad business is as robust as it’s getting it’s still pretty immature even in North America so there’s there’s certainly lots of room there but you know this this whole metaphor of a flywheel like the one downside of a flywheel is it’s hard to start pedaling in the beginning until you get the momentum right and. Why can’t a lot of these markets they’re still doing that initial pedaling like in Australia they really just want Prime so you know a lot of the synergies that that all of these different systems than Amazon launches that ultimately turn into this you know Juggernaut platform ekosistem. You know aren’t in play as much in some of these new international countries as have already played out in North America and so like overtime.
[50:50] They look those things could get fired up you know they can pour gas on Prime sign ups and in Australia for example. And Scot it’s going to shock you but it does happen again and we have used up all of our allotted time we are at minute 50 of our 30-minute highlight show if you want to continue but it was all valuable stuff and I know all the Whismur stuck with us so if you want to continue the conversation or do you want to know what Scott would have talked about it I gave him 10 more minutes you can jump over to Facebook and drop us a question and we’re happy to have a dialogue there as always Aviv that this episode was helpful to you we sure would appreciate it if you jump on iTunes and give us that 5-star review.
Scot: [51:35] Next to join us are one we are going to be at Etail and Boston ETL East sews drop us a message to Vitas Facebook as whatever your preferred method of communioncation isn’t would love to meet up with some are there.
Jason: [51:49] That would be awesome and until next time happy commercing.