Amazon.com, Inc.

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q4 2021 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 Director of Investor Relations, Dave Files. Please go ahead.

Hello, and welcome to our Q4 2021 Financial Results Conference Call. Joining us today to answer your questions is Brian Olsoski, 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 2020. Our comments and responses to your questions reflect management's views as of today. February 3, 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 conditions and customer demand and spending, inflation, 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 impacts 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.

Thank you for joining us today. Let me start by once again acknowledging and thanking our employees around the world for their efforts. This was the second holiday season during this pandemic. and it required exceptional collaboration and coordination among our employees and business partners to prioritize both safety and customer experience. The team did a great job at delivering for customers this holiday. Now let's discuss our fourth quarter financial results. For the fourth quarter, net sales were $137.4 billion, an increase of 10% year-over-year, excluding the impact of foreign exchange. We continue to focus on offering the best experience for our customers across our businesses. On the consumer side, we welcome millions of new Prime members in both the United States and international during the quarter, while continuing to see consistently high member renewal rates across geographies. Our third-party sellers, in particular, benefited from strong customer demand this holiday season. 3P sellers provided 56% of all unit sales in the quarter, the highest fourth-quarter mix ever. And AWS saw a continuation of the strong usage and revenue growth we've seen throughout 2021. AWS added more revenue year over year than any quarter in its history. It is now a $71 billion annualized run rate business, up from $51 billion run rate one year ago. Even on a large base, revenue increased 40% year over year. As I've mentioned in prior calls, we also encourage you to look at the multi-year compounded annual revenue growth rate since the onset of the pandemic to better put this revenue growth in perspective. Despite lapping 2020's extraordinary sales growth, we continue to see an increase in customer demand and sales during the remainder of 2021, even as the economy opened back up. For Q4, Amazon's two-year annual compounded growth rate was 25%, excluding impacts from foreign exchange, consistent with our rate in the third quarter. We've invested significantly to keep pace with this demand, including nearly doubling our operations capacity in the past two years, expanding our fulfillment center footprint while adding significant transportation assets to ensure fast on-time delivery. There are now 1.6 million Amazon employees worldwide, also doubling in the two-year period. Our fourth quarter operating income was $3.5 billion. As we mentioned in the last earnings call, we did see more than $4 billion in costs from inflationary pressures and lost productivity and disruption in our operations. The inflation primarily relates to wage increases and incentives in our operations, as well as higher pricing from third-party carriers supporting our fulfillment network. Lost productivity and network disruptions were driven primarily by labor capacity constraints due to challenges in staffing up our facilities for peak. This was driven by the very tight labor market in the second half of 2021 and more recently by the emergence of the Omicron variant. We do expect these cost challenges to persist into Q1, albeit adjusted for lower seasonal volumes relative to the fourth quarter. Our results also include approximately $1 billion year-over-year negative impact from lower fixed cost leverage in our fulfillment network. Recall that we saw very high unit volumes for most of 2020 and the first half of 2021, and our fulfillment network was running at close to 100% capacity during this time. Now with more normal fulfillment capacity, our operating leverage decreases versus the comparable prior year periods. We'll expect to continue to see some negative year-over-year impact from this in Q1 of 2022. While we navigate these near-term headwinds, the fundamentals of our retail business are strong, and we're optimistic about a number of growth businesses and a strong innovation pipeline. AWS delivered another strong quarter of growth as enterprises and developers continued to look to AWS for critical, innovative cloud solutions. Now at a $71 billion annualized revenue run rate, AWS revenue grew 40% every year in Q4, our fourth consecutive quarter of revenue growth rate acceleration. We hosted our 10th reInvent conference in the quarter, welcoming 26,000 in-person attendees and hundreds of thousands who attended virtually. reInvent remains a highlight of the year for us, because it's a great opportunity to introduce new services while engaging with customers and partners to better inform where we should be focusing next. We announced more than 115 new services and features during the event, as businesses spanning all major industries continue to choose AWS as their technology provider to speed up innovation in their organizations. In the past quarter alone, NASDAQ announced a multi-year partnership to migrate its North America markets to AWS, including their matching engine, Best Buy selected AWS as its preferred cloud provider for cloud infrastructure services. Meta, the parent company of Facebook, Instagram, and WhatsApp, selected AWS as its long-term strategic cloud provider to accelerate artificial intelligence research and development. And Stellantis, the parent company of Chrysler, Dodge, Fiat, Jeep, and Ram, selected AWS as its preferred global cloud provider for vehicle platforms to accelerate new digital products and upskills global workforce. You can find more examples in our earnings release of how the world's largest companies such as Adidas, Goldman Sachs, Pfizer, Rivian, and more are using AWS to transform their businesses. Overall net income was $14.4 billion in the fourth quarter. While we normally focus our comments on operating income, I'd point out that this net income includes a pre-tax valuation gain of $11.8 billion related to our common stock investment in Rivian Automotive, which completed its initial public offering in November. Before we move to Q&A, there are three additional items I'll mention related to our disclosures. First, we are now separating advertising services revenue from other revenue as part of our revenue disclosures by groups of similar products and services. This updated presentation is provided in supplemental financial information included in our earnings release. We're excited to continue innovating in areas like sponsored ads, streaming video, and measurement. Of course, advertising only works if we make it useful for Amazon customers. And when we create great customer experiences, we deliver better outcomes for brands. Second, we're prospectively updating the useful life of our servers and networking equipment beginning in January. As a practice, we monitor and review the useful lives of our depreciable assets on a regular basis to make sure that our financial statements reflect our best estimate of how long the assets are going to be used in operations. We are increasing the useful life for servers from four years to five years and network equipment from five years to six years. As a result, our first quarter guidance includes an approximate $1 billion of lower depreciation expense. We expect the quarterly impact of this change to decrease throughout the year. Although we're calling out and counting change here, this really reflects a tremendous team effort by AWS to make our server and network equipment last longer. We've been operating at scale for over 15 years, and we continue to refine our software to run more efficiently on the hardware. This then lowers stress on the hardware and extends the useful life both for the assets that we use to support AWS's external customers as well as those used to support our own internal Amazon businesses. And finally, we will increase the price of Prime in the United States in Q1. We continue to make Prime better. In recent years, we've added more product selection available with fast, free, unlimited shipping, more exclusive deals and discounts, and more high-quality entertainment, including TV, movies, music, and books. Since 2018, Prime Video has tripled the number of Amazon originals. And this September, Prime Video will also release the highly anticipated The Lord of the Rings, The Rings of Power, and become the exclusive home of Thursday Night Football as part of an historic 11-year agreement with the National Football League. Since 2018, in the U.S., availability of same-day delivery has expanded from 48 metropolitan areas to more than 90. Items available for Prime free shipping have increased over 50%. And members have saved billions of dollars shopping on Prime Days. This is all on top of new program benefits like prescription savings and fast free delivery from Amazon Pharmacy and the continually growing Amazon Music Catalog for Prime members, as well as Prime Reading and Prime Gaming. With the continued expansion of Prime member benefits and the increased member usage that we've seen, as well as the rise in wages and transportation costs, Amazon will increase the price of a Prime membership in the United States with the monthly price going from $12.99 to $14.99 and the annual membership going from $119 to $139. This is our first price increase since 2018. For new Prime members, the price change will go into effect on February 18th. For current Prime members, the new price will apply after March 25th on the date of their next renewal.