Amazon delivered the brightest earnings report in the FAAMG, but it has nothing to do with the big model.
On August 4, Amazon released its financial report for the second quarter of 2023. During the period, Amazon’s revenue was US$134.4 billion, an increase of nearly 11%, reversing the continuous single-digit growth in the past year; net profit turned around year-on-year, reaching US$6.7 billion. After the financial report was released, Amazon rose by 8.27%, and its market value increased by nearly 120 billion US dollars.
In terms of specific business, the North American business contributed 61% of the revenue, with a revenue of 82.5 billion US dollars; followed by the AWS business contributed 22% of the revenue, with a revenue of 29.7 billion US dollars; finally, the international business contributed 17% of the revenue, Revenue of $22.1 billion. Among the individual items, the advertising business became the fastest-growing business type, with revenue of 10.68 billion US dollars, a year-on-year increase of 22%. The growth rate was faster than the 3.2% and 12% of Google and Facebook in the same quarter.
Judging from the feedback of this financial report, the new head Andy Jassy has achieved initial results from a series of measures such as layoffs, cost reductions, and North American retail adjustments implemented last fall. However, it is worth noting that although AWS cloud business sales increased by 12%, the growth rate has declined for six consecutive quarters.
Microsoft’s cloud business also showed a slowdown in last week’s financial report. This shows that the current trend of technology companies reducing cloud spending remains unchanged. Under the new paradigm revolution brought about by large models, the giants are also stepping up their layout for a new round of competition in the future.
Amazon is no exception, with the CEO now directly leading a new team developing key AI projects, including a more capable base model. It is also reported that Amazon is also launching a new ChatGPT-like project to make the previous voice assistant Alexa more intelligent.
01 Keys to Amazon’s recovery: Cost reduction and efficiency increase + e-commerce change
The brightest thing about Amazon this season is the substantial increase in profits, which is directly related to a series of cost-cutting and efficiency-enhancing measures taken by the new CEO after taking office.
In the second quarter of 2023, Amazon reversed the losses of the past few quarters. Not only did the net profit turn around, but the operating profit also increased from US$3.3 billion in the same period last year to US$7.68 billion, an increase of more than double.
From the end of last year to the beginning of this year, during the wave of layoffs in Silicon Valley, Amazon laid off a total of 27,000 employees, becoming the technology giant with the most layoffs. The layoffs are still continuing. Hundreds of Amazon Fresh (Amazon Fresh) employees across the United States learned through a conference call that the company is still laying off workers; while current employees said that offline stores are often short of staff. That’s because Amazon is laying off workers while shrinking the business and halting store expansion.
Amazon Fresh is a new business started by Amazon in 2020, similar to “Hema Fresh”, which provides delivery of agricultural products, meat, seafood, dairy products and groceries by opening offline physical stores. However, due to profit pressure, the expansion of offline stores stopped at the beginning of this year. CEO Jassy made it clear that the company will not open Fresh stores until it reassesses its grocery store model.
While stopping the expansion of physical stores, Amazon is also reducing the cost of store service. The way is to decentralize the distribution and transportation network. Amazon executives said at the earnings conference that its goal is to transform the network of store distribution and transportation from a national network to eight independent regions, each of which builds inventory to serve its area. “It makes it faster and cheaper to deliver products to customers.” When the transportation distance is shorter and the transportation cost is more fixed, the cost can be effectively controlled.
According to the data disclosed at the earnings conference call, compared with the centralized network, since the establishment of the regional network, the number of packages provided has decreased by 20%, the mileage for delivering packages has decreased by 19%, and the number of sites providing packages in the region has increased by 1,000 . Domestic delivery accounted for 76%.
In addition to basic retail, Amazon is also expanding revenue from other service types. In the third quarter, products from independent merchants accounted for 60% of sales, the highest data ever, driving revenue from seller services; in addition, the annual sales of Amazon Business products, which provide convenient procurement for corporate customers, governments and organizations, reached 35 billion U.S. dollars, has accumulated 6 million customers, the official said “is one of the fastest growing products”, and the business’s goal is “more than 100 billion U.S. dollars.”
02 Cloud business: Difficult to maintain growth, Layout the future with AI
For the 12% growth rate of the AWS cloud business growth rate decline, the financial report gave its own explanation for this data. The realization of double-digit growth in a business with an annual revenue scale of 80 billion is based on two realities. First, overall technology companies are optimizing expenditures and saving cloud computing expenses. Under this premise, Amazon has acquired new customers and developed new business to grow.
In April, for large models, Amazon launched a new service platform, Amazon Bedrock, and launched the Amazon Titan large language model, as well as the AI coding assistant Amazon CodeWhisperer.
Through Amazon Bedrock, enterprises can directly call the basic models from startups such as AI21 Labs, Anthropic, Stability AI, and Titan series Amazon through APIs, and combine private data to create personalized use cases. The tool stack required in the process can rely on AWS Achieve full hosting. AI21 Labs, Anthropic, and Stability AI are all startups invested by Amazon, and they also use Amazon’s cloud services to train basic models.
However, when it comes to the cloud computing business outlook for the next quarter, the attitude shown at the financial report is uncertain about how much AI will monetize this business. “It’s still very early, and I expect this number to be large, and it will be large in the future.” This is consistent with Microsoft’s attitude revealed on the earnings call: AI’s business growth for cloud computing will be gradual.
This also reflects the reality of mass adoption of fundamental use cases by enterprise customers. In terms of industrial practice, mature use cases have not yet occurred on a large scale. Whether it is embedded in the production process or enterprise-level deployment, it is still in the exploratory stage.
And Amazon itself has not slowed down its investment in new technologies. According to recent news, at the end of June, Rohit Prasad, chief scientist and senior vice president of Alexa, was transferred to a new position, leading a team to train a general-purpose large language model and reporting directly to CEO Andy Jassy. The CEO wrote in an internal letter that “this time we will concentrate our superior resources to build the most ambitious big language model.”
In addition to building a more capable basic model, Amazon invested 100 million US dollars to establish the Cheng AI Innovation Center, and formed a team of experts for the basic model to focus on helping customers use generative AI products. Alexa, the voice assistant of the previous generation, will also become a new strategy in the era of large models. After giving Alexa personality and intelligence with model capabilities, it will undoubtedly bring more possibilities to Amazon.
Looking ahead to the next quarter, Amazon expects third-quarter revenue of between $138 billion and $143 billion, a growth rate between 9% and 13%. In the face of uncertain present and definite trends, for Amazon, steadiness and endurance are the most needed.