Capital investment will continue to grow, but Amazon will be more cautious (according to phone meeting minutes).

The minutes of Amazon's Q2 2022 earnings conference call are as follows. For a detailed financial report critique, please refer to " Iron-fisted layoffs of 100,000 troops, Amazon finally "recovered".

I. Management Report:

1. Excluding the adverse impact of exchange rates, total revenue in the quarter increased by around 10% year-on-year. The exchange rate factors dragged down 320 basis points, larger than the 200 basis points negative impact we expected in our 2Q guidance. Additionally, last year's Prime Day was in the second quarter, which also resulted in a 400 basis point high base for revenue growth last year.

2. The uneconomical fixed cost caused by excessive expansion will end in 2Q. As our capacity utilization improves and we slow down the expansion of our capacity, the company's operating leverage will improve in the second half of the year.

3. The operating profit margin of AWS business in this quarter has declined compared to the previous quarter. One of the reasons is that the company had generated more share-based compensation expenses this quarter, of which AWS accounted for a considerable proportion. In addition, inflation has led to an increase in engineer salaries and the growth of equipment investment has also resulted in a decline in AWS profit.

4. For the 3Q guidance, the revenue growth rate guidance includes the adverse impact of exchange rates, which is expected to be 390 basis points. Exchange rates have not had a significant impact on operating profit.

In 3Q, fulfilment costs will improve by $1.5 billion quarter-on-quarter, but most of it will be offset by increased investment in AWS business and digital content for Prime members.

II. Q&A

Q: How do you view the tempo and intensity of capital investment in the fourth quarter and next year?

A: The capital expenditure for the full year of 2022 will increase slightly compared to that of 2021, 40% of which will be invested in warehouses and logistics facilities to support growth after 2023.

In addition, the company will increase the investment in human resources for AWS business, including engineers, salespeople, and customer service staff.

Q: How is the new signing growth rate of AWS business?

A: The growth rate of AWS contract backlog was 65% (compared to 68% in the previous quarter) this quarter, with an average remaining contract term of 3.9 years.

AWS currently has 84 service areas in 26 regions and the company will add 24 new service areas in 8 regions in the future.

Q: How is the performance of e-commerce advertising business in North America and internationally? How is the progress in other advertising categories?

A: The company did not provide a detailed breakdown, but e-commerce advertising mostly comes from North America, with some contribution from international business. The company is actively expanding the richness of advertising products, such as TV terminal advertising, and advertising in streaming media content such as Freevee and Twitch.

In addition, due to macroeconomic weakness, enterprises have a greater demand for advertisements that can directly convert into revenue, so Amazon's e-commerce advertising performance is stronger than the industry. Q: The proportion of third-party sales this season has reached a new high. How does the company prioritize between 1P/3P businesses?

A: The company does not care whether customers purchase goods from 1P or 3P, and providing customers with the best price and a wider selection is the company's top priority. 3P merchants allow Amazon to offer customers more choices.

Q: What is the impact of exchange rate factors on this season's international retail business?

Of the $1.7 billion loss in international retail business this season, $230 million came from the adverse impact of exchange rate.

In relatively mature international markets such as the United Kingdom and Japan, the company will continue to drive profit growth. In developing markets such as South America, India, and the Middle East, the company will continue to invest and grow local content production to promote scale growth.

Q: What is the impact of measures such as raising Prime membership fees and increasing the realization rate of third-party merchants on the business? Is it enough to offset inflation?

A: After the price increase of Prime membership, both new members and retention of old members performed well, better than expected. Mainly because membership services, quick advantages and streaming content are more abundant.

The increase in fees charged to third-party sellers cannot fully cover the cost increase caused by inflation, and the company does not want to transfer 100% of inflation pressure to sellers.

Q: What is the progress of the Buy with Prime business?

A: Currently, this business is still in the trial stage, and only invites FBA merchants who have already used the service in the US stock market to join the trial. In the future, the trial will gradually expand, and consider opening the business to non-FBA merchants.

Q: The number of company employees has greatly decreased this quarter. Can it meet the peak demand during future holidays?

A: Even after layoffs, the company's current number of employees has increased by about 190,000 compared to the same period last year, and is about twice the level before the 2020 epidemic. As the holiday peak approaches, the company will increase its manpower reasonably.

Q: The company's equity incentive expense confirmed this quarter is lower than expected. Has the company deliberately slowed down its hiring pace? Has the recruitment pace for engineers slowed down?

The reason why the equity cost this season is lower than expected is mainly because the number of employees who chose to exercise stock options is less than expected. The company's recruitment of technical staff such as engineers is steadily progressing, and the company also needs to consider the factor of wage inflation.

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