Q3 FY2022 Earnings Call
AMZN · Preprocessing Report
2022-10-27
Quality
100%
28
Turns
9
Speakers
5
Sections
6
Exchanges
293
Claims
Quality issues

Entities by group 28

company executives 6
Brian OlsavskypersonDave FildespersonMark MahaneypersonJohn BlackledgepersonDoug AnmuthpersonEric Sheridanperson
sell-side analysts 2
Ross SandlerpersonBrent Thillperson
cloud processor chips 2
GravitonproductGraviton3product
streaming content 1
The Rings of Powerproduct
fulfillment services 1
Fulfillment by Amazon (FBA)product
Ungrouped 16
AmazoncompanyAWScompanyPrime DayeventPrime Early AccesseventBarclayscompanySECcompanyNFL Thursday Night FootballeventCOVID-19otherRiviancompanyre:InventeventUnited StatesotherBaltimore RavenscompanyTampa Bay Buccaneerscompanyx86technologyFabric.comcompanyUkraineother
REPORTING 75PROJECTING 20POSITIONING 104EXPLANATORY 23ANALYST 30

Topics 73

cloud×32cost×16capital expenditure×15prime×11inventory×10productivity×9holiday×9sale×8margin×8customer×7international×7demand×6cash flow×6guidance×5foreign exchange×5device×5advertising×4profitability×4third-party sellers×3operating income×3

Themes 216

growth×5sales growth×3fourth quarter×3prime early access×3q4 guidance×3margin pressure×3historical levels×3guidance×2share of paid units×2cost optimization×2fulfillment and transportation×2technology infrastructure×2experience×2efficiency×2losses×2higher energy expense in aws×2profitability pressure×2prime day sales×2pressure×2improvement×2backlog and revenue divergence×2customer caution×2consumer demand×2trajectory×2forward-looking×1results uncertainty×1financial results×1annual filing×1non-gaap×1investor relations×1reconciliation×1order trends×1macro uncertainty×1demand and macro risks×1internet commerce and cloud×1operational impact on guidance×1restructuring and legal assumptions×1worldwide net sales×1impact on results×1headwind amount×1stores growth×1widest ever×1in-stock recovery×1speed and pricing×1small and medium-sized partners×1marketing and shipping tools×1membership strength×1shopping volume record×1timing×1largest releases ever×1premiere audience×1driven by rings of power×1nfl thursday night football×1upcoming game×1cost control demand×1storage and workload migration×1price performance×1machine learning training×1geographic expansion×1quarterly result×1operations efficiency×1quarter-over-quarter improvement×1cost efficiencies×1future improvement×1content and marketing costs×1closure charges×1investment and hiring×1infrastructure expansion×1expense×1forfeiture rate impact×1overall×1rivian valuation gain×1stock price fluctuations×1capex and finance leases×1full-year guidance×1spending comparison×1challenging environment×1inflationary pressures×1demand slowdown×1broad-based slowdown×1foreign exchange headwinds×1hiring pause and product wind-down×1belt-tightening×1long-term investment balance×1doing more with less×1economic uncertainty×1q4 planning×1holiday sales event×1value creation×1exit velocity×1revenue growth×1income impact×1global reaction×1recovery×1slower growth×1international slowdown×1north america slowdown×1recessionary headwind×1economic weakness×1energy crisis headwind×1customer savings×1cost efficiency×1incremental×1budget pressure×1forecast uncertainty×1re:invent×1attendance×1product and service expansion×1negative generation×1restoration path×1data center and aws ramp×1multiple factors×1trailing-12-month decline×1elevated operations×1network optimization×1pre-pandemic normalization×1supply chain issues×1additional cover×1customer response×1inventory and supply chain pressure×1accounts payable exceeding inventory days×1cycle normalization×1free cash flow impact×1network expansion×1year over year decline×1budget reduction and capacity focus×1working capital and capex efficiency×1income recovery and working capital normalization×1stock-based compensation impact×1margin outlook×1loss drivers×1heavier losses×1company-wide decline×1aws volatility×1aws drivers×1stock-based effect on aws margins×1labor costs in aws×1aws pressure from wage inflation×1price increase×1degradation from higher energy prices×1energy efficiency×1energy cost growth×1higher costs×1unprofitable sales×1use monetization×1capital efficiency×1customer optimization and near-term demand pullback×1customer conversations×1backlog growth versus revenue×1current balance×1year over year growth×1pipeline×1enterprise planning×1quarter-to-quarter growth×1industry softness×1relative strength×1cost cutting×1cost reduction×1optimization×1lower-cost options×1cost-performance×1long-term customer value×1variable costs×1business operations×1long-term adoption×1short-run weakness×1business mix shift×1holiday demand×1p&l impact timeline×1holiday season expectations×1cost structure initiatives×1outlook×1readiness×1product assortment×1in-stock levels×1speed improvement×1holiday shopping×1shopping promotion×1demand outlook×1scenario planning×1value proposition×1effective ads×1consumer spending×1ecosystem tailwinds×1seller availability×1fba sellers×1ready to go×1operations focus×1productivity leverage and inflation×1execution progress×1q1 ramp×1fixed cost leverage×1future capability×1spending plan×1demand and supply balance×1cost pressure×1inflationary environment×1truck utilization and shipping efficiency×1customer impact×1headwinds×1quarterly updates×1clarification×1weakness×1q4 weakness and price concessions×1questioning analyst focus×1context×1sequential improvement guidance×1sequential improvement shortfall×1warehouse buildup×1event preparation and sell-through×1high in-stocks×1high inventory levels×1operational constraints×1space constraints×1forward outlook×1operational improvement×1

Key Metrics 64

productivity×8margin×8capex×7revenue growth×6profitability×6backlog×6sales growth×5free cash flow×5capital expenditures×4operating margin×4costs×4basis points×3delivery speed×3operating income×3capital investments×3losses×3in-stock levels×3growth rate×2net sales×2paid units sold×2viewers×2sales×2net income×2foreign exchange×2revenue guidance×2income×2weeks of cover×2inventory levels×2revenue growth rate×2headwind×1in-stock rate×1items purchased×1sign-ups×1price performance×1cost savings×1headcount×1stock-based compensation expense×1forfeiture rate×1items ordered×1revenue×1attendance×1capital expenditure×1operating costs×1cost structure×1working capital×1cash conversion cycle×1operating loss×1stock-based compensation×1wage inflation×1price×1energy use×1energy costs×1fuel costs×1customer optimization×1customer pipeline×1cost-performance ratio×1fixed expenses×1demand×1fulfillment capacity×1inflation×1transportation costs×1efficiency×1inventory×1warehouse space×1

Entities 441

Amazon×212Brian Olsavsky×101AWS×40Prime Day×11Dave Fildes×9Ross Sandler×9Prime Early Access×7Mark Mahaney×6Barclays×6SEC×4Brent Thill×4John Blackledge×4The Rings of Power×3NFL Thursday Night Football×3Doug Anmuth×3COVID-19×2Graviton×2Graviton3×2Rivian×2Eric Sheridan×2re:Invent×2United States×1Baltimore Ravens×1Tampa Bay Buccaneers×1x86×1Fabric.com×1Ukraine×1Fulfillment by Amazon (FBA)×1

Business Segments 97

Amazon Web Services×66International×16North America×15

Sectors 179

cloud computing×47consumer internet×45retail×40logistics×9energy×8streaming×5transportation×5consumer electronics×4financial services×4semiconductor×3sports broadcasting×2automotive×2mortgage banking×2digital advertising×1internet of things×1artificial intelligence×1

Regions 28

North America×6Europe×5US×3worldwide×2global×2Asia×2international×2Middle East×1Thailand×1Las Vegas×1Czech×1Japan×1United States×1

Metadata Distributions

Sentiment
positive 81negative 59neutral 112
Temporality
backward 68forward 49current 135
Certainty
definitive 71confident 86moderate 72tentative 23
Magnitude
major 34moderate 149minor 69
Direction
improvement 20decline 17flat 1mixed 4none 210
Time Horizon
immediate 60near_term 122medium_term 22long_term 6unspecified 42
Verifiability
quantitative 58event 12qualitative 182
Analyst Intent
probing 9challenging 1seeking_detail 18seeking_guidance 2

Speakers

Executives
BOBrian OlsavskyCFO
Analysts
BTBrent ThillanalystDADoug AnmuthanalystESEric SheridananalystJBJohn BlackledgeanalystMMMark MahaneyanalystRSRoss Sandleranalyst
Other
DFDave FildesirOPOperatoroperator

Sections

TypeLabelSpeaker
preamblePreambleOperator
prepared_remarksPrepared RemarksBrian Olsavsky, Dave Fildes
qa_sessionQ&A Session—
closing_remarksClosing RemarksDave Fildes
operator_signoffOperator Sign-offOperator

Q&A Exchanges 6

#AnalystFirmTurns
1
ESEric Sheridan
Goldman Sachs3
2
DADoug Anmuth
JPMorgan3
3
MMMark Mahaney
Evercore3
4
BTBrent Thill
Jefferies5
5
JBJohn Blackledge
Cowen3
6
RSRoss Sandler
Barclays6

Claim Taxonomy 252

REPORTING75
resultFinancial outcome for a completed period50
metricNon-financial quantitative fact17
operationalDiscrete completed event8
PROJECTING20
guidanceQuantitative expectation with number + time14
commitmentPromise with binary verifiable outcome4
targetLong-term aspirational quantitative goal2
POSITIONING104
strategyPriority, direction, or initiative66
competitiveCompany's position or advantages1
opportunityMarket condition framed as growth driver6
riskHeadwind, constraint, or uncertainty31
EXPLANATORY23
attributionWhy a specific outcome happened3
contextNon-company macro/industry fact20
FRAMING0
thesisFalsifiable belief about how the world works0
ANALYST30
questionInterrogative seeking information20
observationRestates a fact or data point9
concernFlags a risk or challenge1
estimateAnalyst's own projection or calculation0
sentimentOpinion, praise, or critique0

Transcript

Preamble
OP
Operatoroperator
Good day, everyone, and welcome to the Amazon.com Q3 2022 Financial Results Teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Vice President of Investor Relations, Dave Fildes. Thank you, sir. Please go ahead.
Prepared Remarks
DF
Dave FildesirAmazon
Hello, and welcome to our Q3 2022 financial results conference call. Joining us today to answer your questions is Brian Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2021. Our comments and responses to your questions reflect management's view as of today, October 27, 2022 only and will include forward-looking statements. Actual results may differ materially.
Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures in our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website. You will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our guidance incorporates the order trends that we've seen to-date and what we believe today to be appropriate assumptions.
Our results are inherently unpredictable and may be materially affected by many factors, including uncertainty regarding the impacts of the COVID-19 pandemic; fluctuations in foreign exchange rates; changes in global economic and geopolitical conditions; and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce and cloud services, and the various factors detailed in our filings with the SEC. This guidance also reflects our estimates to-date regarding the impact of the COVID-19 pandemic on our operations, including those discussed in our filings with the SEC. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, restructurings, or legal settlements. It's not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance. And now I'll turn the call over to Brian.
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BO
Brian OlsavskyCFOAmazon
Thank you for joining today's call. Before we move to questions, I will make some comments about our Q3 performance and the outlook for Q4.
For 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. Throughout the quarter, our worldwide stores business continued to stay highly focused on our customers and driving the inputs that matter most, which helped to accelerate sales growth in the quarter.
We now offer our widest selection ever. We've taken actions that have driven strong recovery of in-stock rates, and we continue to work on improving delivery speeds, all while ensuring our pricing remains sharp for our customers. Third-party sellers and the products they offer remain an important strength of our offering for consumers, representing 58% of total paid units sold in Q3, the highest percentage ever. It's up from 56% in Q3 of last year. And we're working with these partners, most of whom are small and medium-sized businesses, to build an even stronger offering. We recently hosted Amazon Accelerate, our US conference for selling partners, where we introduced new tools, including new e-mail marketing capabilities, free-to-use shipping software that offers discounted shipping rates and new features and analytics to help sellers better understand and act on conversion-driving content.
This was a big quarter for Prime members. We celebrated our eighth Prime Day in July, which contributed approximately 400 basis points to our Q3 year-over-year sales growth rate. Prime members purchased more than 300 million items worldwide, making it the biggest Prime Day net sales event in Amazon's history. As a reminder, Prime Day occurred in the second quarter of 2021. We also debut the two largest Prime Video releases ever. The Lord of the Rings: The Rings of Power attracted more than 25 million global viewers on its first day. And in the first two months since its launch, Rings of Power has driven more Prime sign-ups globally than any other Amazon Original. NFL Thursday Night Football also premiered in September, averaging more than 15 million viewers during its first broadcast, and driving the three biggest hours of US Prime sign-ups in the history of Amazon. Our next broadcast, the seventh of the 15-game schedule, kicks off in a few hours, with the Ravens visiting the Buccaneers.
We also saw good growth in our advertising offerings where sales grew 30% year-over-year, excluding the impact of foreign exchange as vendors and sellers have embraced our portfolio of products, which allow advertisers to build general awareness and/or drive sales of a specific product. In AWS, net sales increased to $20.5 billion in Q3, up 28% year-over-year, excluding the impact of foreign exchange, and now representing an annualized sales run rate of $82 billion. 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. The breadth and depth of our service offerings enable us to help them do things like move storage to lower-priced tiers options and shift workloads to our Graviton chips. Graviton3 processors delivered 40% better price performance than comparable x86-based instances. And our teams across AWS continue to work relentlessly to expand that breadth and depth, including recent launches of new EC2 machine learning training instances in AWS IoT fleet-wise. And we continue to expand the AWS infrastructure footprint to support customers with the launch of the AWS Middle East region in August and the recent announcement to launch AWS Asia Pacific region in Thailand.
Now, let's shift to operating income. During the quarter, we reported $2.5 billion in operating income. Turning first to our North America and international segments, during the quarter, we generated over $1 billion in operations cost improvements driven by higher leverage of our fixed cost base and continued productivity improvements in our fulfillment and transportation networks. This represents a solid improvement in productivity quarter-over-quarter, though not quite as much as we had planned. We are encouraged by the progress made during the quarter, but we recognize there's still a lot of opportunity to continue to improve productivity and drive cost efficiencies throughout our networks. We have identified initiatives that the teams continue to work hard on, and we expect to see further improvement in the quarters ahead. Another impact to operating income was the step-up in Prime Video content and marketing costs in Q3, primarily driven by the global premiere of the Rings of Power and the launch of the NFL Thursday Night Football package in the United States.
Our results were also negatively impacted by non-recurring charges related to the closure of certain businesses and products such as Amazon Care, Fabric.com and Amazon Explore. We continue to ramp up our investments in AWS, adding product builders and sales and professional services headcount to help customers save money, invent more quickly in their businesses and transition to the cloud. We're also continuing to invest in new infrastructure to meet capacity needs, expanding to new geographic regions, developing new services and iterating quickly to enhance existing services.
Overall stock-based compensation expense was $5.6 billion in Q3, up from $5.2 billion in the second quarter. This increase was primarily driven by a reduction in the estimated forfeiture rate on certain unvested stock awards. We reported overall net income of $2.9 billion in the third quarter. While we primarily focus our comments on operating income, I'd point out that this net income includes a pretax valuation gain of $1.1 billion included in non-operating income from the common stock investment in Rivian Automotive. As we've noted in recent quarters, the impact of this investment to our income statement is driven by quarter-to-quarter fluctuations in Rivian's stock price.
Now let's discuss capital investments, which is the combination of CapEx plus equipment finance leases. For the full year 2022, we expect to incur approximately $60 billion in capital investments, which is broadly in line with what we spent in 2021. This represents an estimated reduction in fulfillment and transportation capital investments of approximately $10 billion compared to last year, as we've continued to moderate our build expectations to better align with demand. And this is offset by an approximately $10 billion year-over-year increase in technology infrastructure, primarily to support the rapid growth, innovation and continued expansion of our AWS footprint.
We also provided our fourth quarter financial guidance as part of our earnings release. While we are encouraged by our progress across the business, macroeconomic environment remains challenging worldwide. The continuing impacts of broad-scale inflation, heightened fuel prices and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend. As the third quarter progressed, we saw moderating sales growth across many of our businesses as well as the increased foreign currency headwinds, I mentioned earlier, and we expect these impacts to persist throughout the fourth quarter. 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. We aim to strike the right balance between investing for our customers for the long-term, while driving operational efficiency improvements and accomplishing more with less. When faced with an uncertain economy or some kind of discontinuous event, customers tend to double-down on companies that they believe have the best customer experience and that take care of them the best. And that is where our efforts remain focused. As we head into the fourth quarter, we are ready to make this a great holiday season for our customers. We kicked off the season a few weeks ago with our first-ever Prime Early Access sales event where tens of millions of Prime members shopped and ordered more than 100 million items from Amazon's selling partners. We remain heads-down focused on driving a fantastic customer experience, and we believe putting customers first is the only reliable way to create lasting value for shareholders. Thanks. And with that, let's move on to your questions.
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Q&A Session
Q&A 1/6
OP
Operatoroperator
Thank you. At this time, we will now open the call up for questions. [Operator Instructions] Our first question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question.
ES
Eric SheridananalystGoldman Sachs
Thanks for taking the question. Brian, maybe I'll just ask a two-parter with respect to the revenue guide for Q4. Can you help us better understand some of the comments you made around the exit velocity, specifically with respect to the US e-commerce business or the AWS business and how that might inform, some of the lower-than-seasonal trends that seem to be implied in the Q4 guide, specifically with respect to either optimizations on the AWS side or changes in consumption behavior on the US e-commerce side? Thanks so much.
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BO
Brian OlsavskyCFOAmazon
Sure thing, Eric. Thanks for your question. As I look ahead to guidance for Q4, I think the biggest individual factor is still going to be foreign exchange. This guidance includes 460 basis points of unfavorable impact year-over-year. FX is a bigger issue for us on our revenue growth in dollars than it is on our income. It actually has a slight favorability due to the investments we're making internationally. But put that aside for a moment. What we saw in Q3 was a really strong July with a great reaction to Prime Day globally.
And the resumption of things like in-stock rates are starting to come back, and delivery speed was coming back. And that continued through the quarter, but growth rates started to slow a bit. And primarily in the consumer stores business, it was in international. North America, obviously, it was strong, but it started to slow a bit. But it was mostly in international where we saw the biggest impact, and we think that is tied to a tougher recessionary environment there. Compared to the US, it's worse in Europe right now.
The Ukraine war and the energy crisis issues have really compounded in that geography. But when I talk about enterprise customers in AWS, yes, we've been working with customers to lower their bills. Just like all companies, they want to lower their spend when they're faced with uncertainty in the market. I would say one that's real valuable points about cloud computing is that it's turning fixed cost into variable for many of our customers, and we help them save money either through alternative services or Graviton3 chips. There's many ways that we have to help them lower their spending and still get great cost performance ratios. So what we're really excited about the business, both in the long term and even in the short run, you noticed we've added $4.5 billion to the $16 billion base we had of revenue last Q3, so the business is growing in absolute dollars at a really good clip. We do see some of the consumers are cutting their budgets and trying to save money in the short run. I would say that although we had a 28% growth rate for the quarter for AWS, the back end of the quarter, we were more in the mid-20% growth rate. So we've carried that forecast through to the fourth quarter.
We're not sure how it's going to play out, but that's generally our assumption. We're excited about the re:Invent conference that's coming up in late November. We expect to have over 40,000 people in Las Vegas and many more tuning in virtually. So continue to drive value for customers with new products, new services and, lately also, additional ways for them to manage their budgets and optimize in what is shaping up as a tough economy.
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Q&A 2/6
OP
Operatoroperator
Thank you. Our next question is from Doug Anmuth with JPMorgan. Please proceed with your question.
DA
Doug AnmuthanalystJPMorgan
Great. Thanks for taking the question. Brian, free cash flow generation has always been Amazon's focus in the past, but that went negative last year and likely this year as well. Can you just talk about the path to restoring meaningful free cash flow? And do you think that CapEx tied to data centers and the AWS ramp can ultimately step back, similar to what we've seen recently with fulfillment and transport? Thanks.
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Brian OlsavskyCFOAmazon
Yeah. I think if you look at our free cash flow, there's multiple factors here.
One is the drop-off in income for the trailing 12 months versus the 12 months before it, and a lot of that is driven to things that we've talked about on these calls. Ops cost, we're still not in a — our network doubled over the last 2.5 years. While we're making strides in productivity and network optimization, we still work to do there. So we have to get our cost structure back to pre-pandemic levels in a lot of areas of the company and mostly in operations.
There's a unique thing going on with inventory right now because we have a lot of weeks of cover mainly due to supply chain issues coming out of Asia primarily and we're seeing with our sellers, too. We just have additional weeks of cover. We think our model reacts quickly to customer demand. This is more about the other side of the equation, the supply chain and having more in stock. So what the issue there is that we generally have a favorable working capital impact from accounts payable that is more days than our inventory.
That's been flipping the last year, and we expect that to normalize as we move into 2023. And then CapEx is a big driver. We had, again, a doubling of the network, had very high CapEx the last two years. You'll see that we've lowered CapEx year-over-year. We probably cut about one-third of our budget from what we originally thought for 2022 while still focusing our capital dollars really on the AWS business and increasing customer demand or capacity for increasing customer demand in our stores business. So we're working hard on all those dimensions. And we expect, as we see a recovery in income generation, normalization of the inventory versus accounts payable cycle and efficiency in our CapEx spend, we intend to flip those numbers around.
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Q&A 3/6
OP
Operatoroperator
And our next question comes from the line of Mark Mahaney with Evercore. Please proceed with your question.
MM
Mark MahaneyanalystEvercore
Let me ask two profit questions.
AWS margins were a little lower than we would have thought. Is that just a reflection of the full quarter impact of that stock-based compensation granted to those employees earlier in the year? Is that the new normal for AWS margins? And then international losses also were a little bit heavier than we thought, just talk about what drove those losses. And is that also the new normal for that segment? Thank you.
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BO
Brian OlsavskyCFOAmazon
Sure. Let me start with AWS. So we did see a deceleration or a drop in op margin sequentially quarter-over-quarter. The broad disclaimer on AWS margins is that they will fluctuate over time as we balance investments versus renegotiating pricing with the long-term customer commitments, all as headwinds to the business, offset by increasing productivity and efficiencies in our data centers, which drive profitability. So there's moving parts there. I'd say what's happening lately is, yes, the stock-based comp. We have seen inflation in our wages this year and particularly on our Czech employees is heavily concentrated in AWS.
So that's one element of it. We're also seeing energy costs that are materially higher than they had in pre-pandemic, electricity and the impact of natural gas pricing. So those prices have up more than 2x over the last couple of years and contribute to about 200 basis point degradation versus 2 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. And as we scale, we'll outrun that growth trajectory.
On international, international is always a mix of profitability in more established countries of Europe and Japan, offset by emerging countries and investments in Prime benefits. I think the biggest issue quarter-over-quarter, the increase in losses versus Q2 was tied to some additional operating costs in Europe. We've seen higher fuel costs there, even more certainly in the United States. And Prime Day always has lesser profitability because there's just a lot of deals. And it's a bit of margin from Prime Day in both North America and international. So a big part of that is device sales. And again, we sell a lot of devices during our Prime Day events.
We don't make money on the device. We make money on the use of the device. So that always can end up hurting profitability in the quarter. So there are some contributing things. As far as new normal, we're working very hard to make sure that current profitability is not the new normal, and we'll see how quickly we can make improvements. A lot of the improvements that I talked about on a macro level, capital efficiency, operations improvements are as important internationally as they are in North America.
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Q&A 4/6
OP
Operatoroperator
And our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
BT
Brent ThillanalystJefferies
Brian, on AWS, I'm just curious when you talk about optimizing and efficiency, can you talk to what you're seeing from your customers why perhaps you're seeing such a big pullback in terms of near-term demand? How would you characterize those conversations? And I think the other question is related to backlog. Backlog has been running 60-plus percent, so the divergence between revenue and backlog is pretty large. Everyone's asking, how do you describe that divergence?
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Brian OlsavskyCFOAmazon
Let me have Dave answer the backlog question first.
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Dave FildesirAmazon
Yeah.
It's Dave here. So I think our current backlog balance for Q3 is $104 billion. So it's about a little less than 60%, I think about 57% up year-over-year. And the new customer pipeline is healthy. I think with a lot of enterprises and customers, they're continuing to put plans in place. I think Brian will talk a little bit about some of the cost optimization in a second. Backlog growth, this figure, it can fluctuate quarter-to-quarter because it is dependent on the commitments that you sign in the period and how those adjust but, yes, $104.3 billion for the end of Q3.
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Brian OlsavskyCFOAmazon
Yes. And your first question about cost optimization, first, there are some industries that have lower demand that's showing up in our volumes as probably like other companies as well, things like financial services, the mortgage business being down, cryptocurrencies being down. We're very strong in some of those industries, and that's part of it. But basically, what we see is customers are looking to save money versus their committed spend. We have options for them to do that. 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. So, all really good things for the customer and for Amazon long-term. Again, 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. And they can get about to do their business using our services in a very highly secure way. So, I think just like in 2020, these time periods are good for long-term adoption on cloud computing. But the offset in the short run is that some companies have demand that drops. I think what was different in 2020 was there were companies that went down and there's companies that went up quite a bit that were servicing high volumes during the pandemic. So, that dynamic is not in place right now, and I think everyone is just cautious and they want to, again, watch their spend. And as CFO, I appreciate that, and we're doing the same thing here at Amazon.
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Q&A 5/6
OP
Operatoroperator
And our next question comes from the line of John Blackledge with Cowen. Please proceed with your question.
JB
John BlackledgeanalystCowen
That's great. Thanks. Two questions. First, could you provide some more details on the cost structure initiatives, and when we could see those initiatives hitting the P&L? And then second, on the holiday season. It's a bit implicit in your guide and remarks thus far, but just curious of your expectations for consumer demand this holiday season versus last year. Thank you.
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Brian OlsavskyCFOAmazon
Sure. Let me start with the holiday. So, we're ready to roll. We've got the best selection we've ever had. In-stock levels are really high. Delivery speeds are getting very close to where we want them to be.
And we're ready to have a really good holiday season with our consumers this year. And the Prime Early Access sale, I think, created great value for consumers. It allowed them to get a jump on some of their purchases for the holiday and also just find some great deals. So, we're happy with that effort. And the teams that put that together worked very hard this year to hold two large Prime events within four months. So, we're very optimistic about the holiday. But we're realistic that there's various factors weighing on people's wallets, and we're not quite sure how strong holiday spending will be versus last year. And we're ready for a variety of outcomes.
But we know the consumers when they're looking for good deals, and that positions us well. Advertisers are looking for effective advertising. And our advertising is at the point where consumers are ready to spend. So we have a lot of advantages that we feel that will help both consumers and also our partners like sellers and advertisers. So the seller in-stock is very high. We've had great in-stocks from our FBA sellers.
And so we're ready to go. And we're very optimistic about the fourth quarter, just realistic about whether we may have a range of outcomes that we just have to be ready for when we are.
On the cost structure initiatives, I think you're primarily talking about the operations world. We made — there's three large buckets there, as I've said in the past, productivity, fixed cost leverage and inflation. On productivity, made good strides, but there's still a lot of work to do there and we know the job ahead of us. It's hard to improve productivity much in the fourth quarter, because it's just a period of like maximum stress on the operations, and we're trying to fulfill every order in a very quick way. But we're — our goal is to leave ourselves in a really good, strong condition for a fast start on a lot of initiatives in Q1 of next year.
On fixed cost leverage, we've taken steps to alter our forward plan and take CapEx out. A lot of the CapEx we spend in any given year is feeding future years' capability. And we've tightened that up.
We feel good about the arc of demand versus supply that we have in our fulfillment and transportation area. Inflation is a wildcard. We do as much as we can to save money in an inflationary environment. We've looked to make sure that our trucks are fully utilized as best we can, preventing long-zone shipments, things that like use a lot of fuel or use a lot of trucking or use a lot of shipments from other parts of the world. So we're working under the umbrella of not having it impact the customer. We're working very hard to save that. Those challenges will be there through the end of the year, and we'll be working on them definitely in the first half of next year as well. So we'll keep you posted as we have these quarterly calls on our progress and where we see opportunities.
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Q&A 6/6
OP
Operatoroperator
And our final question will come from the line of Ross Sandler with Barclays. Please proceed with your question.
RS
Ross SandleranalystBarclays
Hey, guys.
Just two clarifications on what you just said. So, first, on retail, you did see some good efficiency gains in 3Q, and you talked about $1.5 billion. As we look forward, if those three areas you just mentioned do turn favorable, how quickly do you think you could get back to kind of historical North America retail operating margins? Is that 1 year, two years?
Any time frame on that? And then, on AWS, you said the back half of 3Q was a mid-20s run rate. One of your prominent peers was talking about incremental macro weakness in 4Q. So could you just talk about, are you expecting the same thing in 4Q, or are some of the price concessions you already made in 3Q kind of getting in front of that? Thank you.
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Brian OlsavskyCFOAmazon
Was that second question on AWS, Ross?
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Ross SandleranalystBarclays
Yes, AWS trajectory. Exactly.
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Brian OlsavskyCFOAmazon
Okay. Let me start with the efficiency. I just outlined a lot of it in the prior answer. But just to clarify, we were aiming for about $1.5 billion improvements sequentially versus Q2 and Q3. We feel like we came up about $0.5 billion short on that.
Primarily — mostly in our productivity we have a lot of — with the Prime Day and the preparations for the Prime Early Access event, we have been running with very high inventory levels in our warehouses. But our inventory and our sellers, as we get ready for those events, paid off in the events themselves. In-stocks have been at really high levels. But in that environment, it's a little harder to work on.
There's, blockages to making improvement in productivity. There's a lot of extra work when you have space constraints. But we will continue that fight.
And while I can't forecast into 2023 yet, and I'm not really only talking about Q4. My message is that we have work to do in 2023, that we are aware of and working on today. Dave, do you want to take that question on AWS?
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Dave FildesirAmazon
Yeah, this is Dave. Ross, you were just asking around AWS. There's nothing really I'd add to what Brian had already said other than he's spoken about. We've seen the year-over-year growth rate come down as the third quarter progressed and exited in sort of the mid-20s growth rate. And so that's informed how we're thinking about the guidance ranges heading into the fourth quarter, but nothing else to add on that.
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Closing Remarks
DF
Dave FildesirAmazon
End of Q&A: Thanks for joining us on the call today and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon. And we look forward to talking with you again next quarter.
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Operator Sign-off
OP
Operatoroperator
Thank you everyone. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a great day.