Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q3 2017 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'll be turning the call over to the Director of Investor Relations, Dave Fildes. Please go ahead.
Hello. Welcome to our Q3 2017 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 2016. Our comments and responses to your questions reflect management's views as of today, October 26th, 2017, 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, 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 fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, 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. Our guidance also assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements.
It's not possible to accurately predict the demand for our goods and services. Therefore, our actual results could differ materially from our guidance. With that, we will move to Q&A. Operator, please remind our listeners how to initiate a question.
At this time, we will open up the call for questions. We ask each caller, please limit yourself to one question. If you would like to ask a question, please press star one on your keypad. We ask that when you pose your question, you pick up your handset to provide optimum sound quality. Once again, to initiate a question, please press star, then one on your touchtone telephone at this time. Please hold while we poll for questions. Thank you. Our first question comes from the line of Justin Post with Merrill Lynch. Please proceed with your question.
Great. I guess I'll just start with, can you give us your thoughts on the Whole Foods Market integration, how you see that contributing to the bottom line over time? On a quick balance sheet note, we obviously saw the strong AWS results, but unearned revenue doesn't seem to be growing at the rate it was in the past. Maybe comment a little bit on the unearned revenue growth on the balance sheet, why it might be slower than the past. Thank you.
Yeah, thanks, Justin. This is Dave. I'd also point you to beyond the balance sheet, there's some disclosure around options to unearned revenue as part of the cash flow statement. When you look at that for the three months ended, up around 34%, 35%, and historically what we've seen with unearned revenue is a big and a leading contributor to that is Prime membership. Signing up, paying $99 up front, and having that amortized. That continues to be the biggest absolute contributor to what you see there. The other area that's been growing over the past few years is Amazon Web Services, pieces like reserved instances where those customers can pay for services upfront in some cases and discounts over a multi-year period. What we're seeing more recently, I think, is on the Prime piece.
We launched a month-to-month Prime last year. If you think about how that works, customers are paying $10.99 per month as they go, there's less that's deferred. That's, I think, one of a number of factors. There's obviously other mixed factors going in there besides the pieces that I just mentioned, but we have seen that monthly Prime has been a good driver of getting more members into the program. That's part of what you're seeing.
On your question about Whole Foods, we're really excited to have them as part of the team now after the acquisition in late August. What you see in the financial results for this quarter, it's shown actually in the new physical stores revenue component, $1.3 billion of revenue, $21 million of operating income, and that's where you'll be seeing Whole Foods revenue showing up. In addition, that class of revenue, physical stores revenue, is going to be where we're going to book any sales where the customer physically selects an item in a store. It also includes, or does include, our Amazon Books. If you step back on Whole Foods, again, I think we've had busy months since we've joined forces, offering lower prices on a range of key grocery items in the stores, launching the Whole Foods private label products on Amazon.
We've done technical work to make Prime the Whole Foods customer rewards program, and we'll have that coming out in the future. We've added Amazon Lockers to select Whole Foods stores. Lots of activity, lots of energy, and we're real excited to show customers what's possible when we join forces here.
Thank you. Our next question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed with your question.
Great. I guess I'll ask two as well. The first one is, that was a bit of unusual upside to your guidance, even stripping out Whole Foods. What's most surprised you in the quarter? You've been pretty consistent in how you reported versus your guide, something unusual happened, or somewhat unusual happened. What would you attribute that to?
Sure. In Q3, yes. I would say we had a very strong Prime Day. As you know, we talked about that on the last call, but it really carried into the quarter. We had a record day for sign-ups for free trials for Prime and Prime Day globally. Had a very strong Prime Day, in particular internationally. It really got a lot more traction in the third year that we've had it. I would point mostly to those factors. It was also a very strong quarter for AWS. Revenue growth was the same as Q2, and now we're at an $18 billion run rate. Whereas last quarter, when I had this call, we were at $16 billion. Very pleased with the customer response in the AWS business as well. Usage growth is actually growing a lot higher than revenue growth.
Particularly pleased with the new customers that we've added and the additional workloads that we've picked up from existing customers.
Briefly on the international retail, that growth also by itself was intrinsically stronger than you've seen in a while. Any particular geographic markets you would call out there?
Yeah. It was pretty strong across the board. We had the impact of Souq.com, obviously, this quarter internationally. The Diwali holiday in India was a few days earlier, which maybe pushed some sales into Q3 versus Q4. Generally, it was the strength of Prime Day internationally, and it carried through the quarter. Generally, I would point to the increased selection. A lot of the building blocks that we've been working on, all the Prime benefits, advancements in free shipping offers or faster shipping offers, the Prime benefits which drive engagement, of course, adding selection, adding Fulfilled by Amazon partners, and the selection that they bring. Again, I wouldn't point to anything other than the Prime Day pickup, but it was stronger than probably I anticipated.
Okay. Thank you, Brian.
Thank you. Our next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question.
Thanks for taking my questions. I have two. Just on Whole Foods again, was wondering, could you talk about one or two of the biggest surprises you've seen so far? Then maybe just the strategic opportunities you see of having a brick-and-mortar presence as you look to continue to grow your overall business. The second one on the subscription revenue, you accelerated to 59%. Could you just talk about which countries or which regions are driving that? Maybe talk a little bit about the growth or the cadence of what's happening in the U.S., your oldest market? Thanks.
Sure. On Whole Foods, I would say it is early. August 28th was the close date, and what I could tell you is I've been in meetings with John Mackey and his team, and they're very like-minded with us, customer-obsessed, ready to work together to continue their mission, and expand on the offerings that we can offer customers. The other things I mentioned, price reductions early on, selling their products on amazon.com, and also installing Amazon Lockers. I think over time you'll see more cooperation and working together between Amazon Fresh, Prime Now, and Whole Foods as we can explore different ways to serve the customer. That's kind of the early report on Whole Foods. Far so good, and we're thrilled to finally be working together after the summer of closing the deal. On subscription revenue, let me just remember your question there.
We had essentially 59% growth, as you said, 600 basis points higher than Q2. In this line item is certainly the fees associated with Amazon Prime, and also it's where a lot of our subscription services for digital music, digital video, audiobooks, e-books. There's some moving parts in there. The growth in Prime has been fairly consistent over the last recent quarters in Prime memberships. As I said, we had the largest new sign-ups on Prime Day for the Prime program. The monthly program is gaining traction as an attractive option for a lot of people. Again, on the other subscription services, Music especially, it works just so well with our Echo device that we're seeing a lot of growth in that area as we increase the number of Echo devices and customers using the Echo devices.
Thank you. Our next question comes from the line of Eric Sheridan with UBS. Please proceed with your question.
Thanks for taking the question. In the comment in the release on seasonal workers, that looks roughly flat year-on-year. Wanted to know if you could understand a little bit more about the trajectory around the workers needed to fulfill seasonal holiday demand, and what that might also mean for automation or efficiency benefits you're getting inside your fulfillment centers. Thanks so much.
This is Dave. I think we put out a release, I think earlier this quarter, talking about 120,000 operations folks to bring into our fulfillment centers this year. We're continuing to hire and hire across a number of locations. We talked earlier this year about expecting to see roughly or greater than 30% square footage growth in operations. We're certainly hiring to support that. More of these facilities do have Amazon Robotics, and certainly that helps with the efficiencies there, but it requires a tremendous effort from a number of our folks as well. We'll continue to hire there. While we're on this subject of headcount grew 77% year-over-year in the quarter. That includes the impact of the Whole Foods and Souq acquisitions. Without that headcount, the base Amazon grew 47%, which is still up from 42% in Q2.
A lot of the additional pickup in Q3 was tied to our ramp for the holidays. We continue to hire a lot of software engineers. We continue to hire a lot of sales reps. It's tied directly to our major investment areas of AWS, Prime Video, and Devices.
Thank you. Our next question comes from the line of Doug Anmuth with J.P. Morgan. Please proceed with your question.
Thanks for taking the question. Brian, I was hoping you could help us understand how, at this point, you're prioritizing expansion into new product categories. In particular, there's a lot of talk now about potentially using Whole Foods stores for a physical pharmacy presence, and also that you've perhaps gotten approvals across multiple states in that category. Can you just help us understand the approach in general to new categories, and pharmacy in particular? Thank you.
I can't confirm or deny any of the rumors related to pharmacy or anything else. I will say we do see a lot of opportunity with Whole Foods. As I said, there'll be a lot of work together between Prime Now, Amazon Fresh, Whole Foods, Whole Foods products on the Amazon site, Amazon Lockers at the Whole Foods stores. There'll be a lot of integration, a lot of touch points, and a lot of working together as we go forward. We think we'll be also developing new store formats and everything else, just as we have talked about in the past before Whole Foods, Amazon bookstores, Amazon Go, and the opportunity that that technology presents. We have on-campus bookstores. We're experimenting with a lot of formats.
I think that Whole Foods really gives us a vast head start on that, and a great base, and a great team to work with who has a lot of history. They probably have 10 to 20 years of learnings that we don't have and wouldn't have. We're really excited about that, and I think working together, we'll bring our different strengths to the table and really be able to build on behalf of customers.
Great. Thank you, Brian.
Thank you. Our next question comes from the line of Mark May with Citi. Please proceed with your question.
Thank you. The other category, which includes advertising, accelerated to 58% in the quarter. I think the common view there is that that's a fairly high-margin business, certainly higher than corporate average. Is there any reason why that isn't the right assumption to make? Essentially, what impact is the growth in the ad business having on the company's overall profitability? In terms of the increased losses in the international retail segment of the business, can you provide some color around how much of that's being driven by Amazon launching into new markets, which I know you continue to do, versus investing more heavily in existing markets?
Sure. Let me start with the other revenue. You're right. Other revenue grew 58% in the quarter, and that includes advertising services and other things such as our co-branded credit card agreements. Advertising revenue continues to grow very quickly, and its year-over-year growth rate is actually faster than the other revenue line item that you see there. I would say generally, we're very pleased with the advertising business. Our goal here is to be helpful to consumers and help them make better shopping and selection choices, while also providing and giving them targeted recommendations. Making it helpful for customers rather than intrusive. We believe that by creating that relevant and engaging advertising experience with the customers, it'll also maximize success for our advertisers.
It's an important part of the flywheel, so it's the traffic and the customers, and especially the Prime customers that come to the site are really the ones that we can use to help them select items, and use advertising to help make their decisions more informed when they're picking products. On the international, yeah, I can't split the effects. I will tell you again, it is international expansion, and primarily in India, where we're continuing to add benefits. We launched Prime there a year ago, if you remember, and we've had more Prime members join in India than any other country in the first 12 months. We have free shipping on 10 million items there, and we're continuing to add benefits. Prime Video, Amazon Family. We had the first Prime Day there this year. Prime Music, Amazon Business is also expanding in India.
A lot of positive momentum and investment going on in India. Very pleased with that. We also recently announced Echo and Alexa are available in India. That should be well-received by the Indian consumer base. Excluding India and Souq, the rest is the Prime benefits and the continued growth in the other countries that we've been in for a while. Continue to roll out Prime Now and Amazon Fresh. In video, we launched, if you remember, in Q4 of last year, we launched Prime Video in over 200 countries globally. Continue to build up not only the offerings, but also the engagement that we see from those Prime customers. Becoming more engaged, and we're also doing the basic blocking, tackling of adding selection, especially FBA selection, increasing free shipping offers and also speed of shipping offers. There's a lot of different influences there.
You saw the growth rate. We believe that it's resonating with customers. We will continue to invest and think that we have a good path forward.
Thank you. Our next question comes from the line of Ross Sandler with Barclays. Please proceed with your question.
Hey, guys. Two questions. There's been some news flow recently about Brazil expansion. Can you just talk about how Brazil compares to maybe some of the other international markets that you're investing in? What level of investment should we expect in Brazil, maybe relative to like an Australia or an India? The follow-up on the Whole Foods. Do you feel like the store footprint at 460-odd stores is adequate? Or any color on plans to expand either the Whole Foods store footprint or the Amazon bookstores or those other ones you mentioned? Thank you.
Yeah, Ross, thanks for the question. This is Dave. On Brazil, just briefly, we did recently expand and add an electronics category there in Brazil. It's a third-party marketplace offering. You may recall we've been in Brazil for a number of years now. Initially launched with really a Kindle and e-books offering, without the sort of physical categories, and more recently added physical books, again, a third-party marketplace offering. I think we're excited about the electronics getting out there. There's a wide variety of products included in that category, smartphones, tablets, cameras, TVs, what have you. I think really excited to get that technology out there for Brazilians. I think, beyond that, we'll really just focus on those categories and growing selection there, but I can't speculate on what we might do in the future there.
On Whole Foods, yes, I believe the total is 465 stores, or thereabouts. We have 12 bookstores now. We are adding a few more in the near future in California, Washington, D.C., and Austin. You'll see more expansion from us. We're not ready to announce what that'll look like. We're working with the Whole Foods team on how many more stores we might have in that area. Still early, those plans will develop over time.
Thank you. Our next question comes from the line of Heath Terry with Goldman Sachs. Please proceed with your question.
Great. Thanks, Brian. I understand you can't comment on rumors one way or the other, but curious, as you think about categories like healthcare, obviously you guys are already in healthcare to some degree through Amazon Business, can you give us a bit of a status update on what you do have out there now, and particularly how the company and management thinks about entering more regulated businesses over time? How you would approach that versus a standard category that you might go into, or maybe, again, knowing you can't comment on rumors, how you have approached that in the past or in other markets? Then, to the extent that we're thinking about AWS growth in the fourth quarter, you guys are lapping the price cuts from last year, obviously have about an 800 basis point easier comp Q3 to Q4.
Taking those two things into consideration, how should we think about AWS growth through the end of the year?
Yeah, Heath, this is Dave. I'll take that first question in relation to healthcare. I think, where you're seeing us do some work in that, I think is on the areas of Amazon Business, and that's really just from the standpoint of there are many different types of businesses that we can serve with that offering, and we're in our third year now. So, there's a lot of different sectors, whether they're hospitals, educational institution, labs, government agencies. There's a lot of different shapes and sizes across industries that we can serve with that.
I think what you're seeing us do is really focus on services that meet those businesses, multi-user accounts, improving our approval workflow tools, and just more recently, we introduced Amazon Business for Business Prime Shipping, which we think will be a great way for businesses to use Business customers that have multi-user accounts, and that's in the U.S. and in Germany. I think it's part of that offering, and we'll really have to see how that evolves. The other side too is certainly healthcare is one of many sectors as part of Amazon Web Services that are important customers that we're focusing on and building tools for. Probably nothing specific to call out on that one, but that's a lot of what you're seeing from us today.
Yeah. On AWS, we don't provide segment-level estimates. We did consider in our guidance the impact of the price cuts last year. You're right, we had a number of price cuts timed to about around December 1st of last year. That certainly had an impact on Q4 of last year. Again, price cuts, and not only price cuts, but new products that have lower average cost and can cannibalize more expensive products, is pretty much a part of our business all the time in AWS. We're looking forward to a strong Q4, and re:Invent is in December, the end of November, early December, so that is also an exciting time of year for the AWS business.
Thank you. Our next question comes from the line of Scott Devitt with Stifel. Please proceed with your question.
Hi, thanks. I had two, please. The first, Prime Now, Fresh, Prime Pantry, and Whole Foods, they're all distinct offerings, but it does seem like there's natural overlap with the potential to be further connected, and I was just wondering if you could just speak to how we should think about those four as distinct product offerings in the future versus being more integrated and possibly even, in some cases, eliminated to remove overlap from a customer experience standpoint. Secondly, given the recent management changes in video, Brian, I was just wondering if you could speak to any strategic shifts in video or changes in the pace of content portfolio build in coming years. Thank you.
Sure. Let me start with video. I just want to be clear, we're going to continue to invest in video, and increase that investment in 2018. Why are we going to do that? It's because the video business is having great results with our most important customer base, which is our Prime customers. It continues to drive better conversion of free trials, higher membership renewal rates for existing subscribers, and higher overall engagement. We're seeing the engagement go up year after year in video and also music, and a lot of the other Prime benefits. We also know Prime members who watch video also spend more on Amazon. We have a lot of data.
That's the advantage we have is that we see the viewing patterns, and we also see the sales patterns, so we can tie the two together and understand which video resonates with Prime members, which video doesn't, and make mid-course corrections. We always do that. We're always changing the emphasis, and looking for those more impactful shows, more shows that resonate better with our customer base, and things they want to see. That'll always be an important part of our Prime offer, and we'll continue to use the data that we have to make better and better decisions about where to invest our dollars in Prime Video. We remain very bullish on the video business, and we're looking forward to a lot of interesting new projects back end of this year, and also lined up into next year. On the second comment was, oh, the overlap. Yes.
Yeah, Whole Foods, I think I mentioned this earlier, but we definitely see commonality and overlap with the Whole Foods business as well as Amazon in total, but specifically Prime Now, and also Amazon Fresh. We're going to work to see how we expand those offerings, and in some cases combine them. We're not sure how it'll play out, but we're going to cooperate across those different customer touchpoints, and try and make them better for customers. We know customers are going to buy, just like in the physical world, sometimes you go to a convenience store, sometimes you go to a supermarket, sometimes you go to a superstore. Sometimes you need things within an hour, sometimes you can wait days for shipment.
There's no one paradigm for all customer engagement, and we're looking for the ones that resonate best with customers, and we're going to continue to work on those.
Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Please proceed with your question.
Thanks. I'll actually ask two if I can. Just any way you can comment on the increase in Whole Foods traffic after the close? Second, talk about your desire to have an ad-supported business on Fire TV or through Prime Video. Thank you.
Let me start on traffic. We're not disclosing traffic figures. Whole Foods will be issuing a final 10-K early next month, you'll see a better perspective on the entire quarter. The four-week period that you see running through the Amazon P&L this quarter is pretty hard to draw conclusions on other than revenue at this point. Dave, you have more on the-
Yeah. Jason, this is Dave. On the ad-supported question, I think what you've seen to date is really, particularly as you're looking as a customer, as a Prime Video member, and watching content, we view that as you've paid into that service and able to watch those shows ad-free. There may be instances where you're viewing a first episode, and there's an ad leading into that if it's the first free episode. Generally like to have that as customers have paid into that program, and they'll be able to enjoy that without interruption.
Thank you. Our final question comes from the line of Ronald Josey with JMP Securities. Please proceed with your question.
Great. Thanks for the question. Just wanted to ask about delivery. Just over the last several months, we've seen a lot of announcements and products around delivery options between lockers, the testing of the Kohl's partnership, Whole Foods, obviously Amazon Key came out recently. Just want to better understand this investment. Is this a result of, or the thesis that more options could drive, obviously, more sales? On the flip side, do you think you're losing sales by not having those options? Thank you.
Probably a little of both. We think that, especially as we get into more and more Amazon Logistics deliveries, we're going to experiment with different ways to deliver things that make it easier on consumers, things that cut down on potential theft on doorsteps. Really, it's mostly about increasing convenience for them. Yeah. I think that's right, in terms of overall investments there. The other investments obviously are on the, maybe the bigger things are like planes and transportation capacity in general. There, our philosophy is, again, we are going to watch out for our customers. We're going to build capacity that gives them great service 12 months a year, but particularly at holidays, by investing in those transportation options. We do so at same cost parity, I would say, at the very minimum.
It also allows us to do interesting things like extend cutoff times for customers, enable Sunday delivery, enable better weekend delivery. We've seen a lot of benefits, just the ability to stretch the order cutoff from what once was 3:00 P.M. in the afternoon to midnight, has huge benefits for both the customer and also for Amazon. It results in incremental sales, and it also builds that trust that when you need something, Amazon's going to be there for you. I need to remind you that the Thursday Night Football game will start in two hours and 20 minutes.
On that, thanks for joining us on the call today and for your questions. A replay will be available on our investor relations website, at least through the end of the quarter.
We appreciate your interest in Amazon and look forward to talking with you again next quarter.