Amazon’s AWS business facing short-term headwinds as companies are cautious on spending

“Many of these AWS customers tell us that they’re not cost-cutting as much as cost-optimizing so they can take their resources and apply them to emerging and inventive new customer experiences they’re planning,” Yassy said in his annual letter to shareholders.

And while such short-term headwinds will soften Amazon’s
AMZN,
-2.09%
growth rate, he said many of the AWS fundamentals are looking good.

“Our new customer pipeline is robust, as are our active migrations,” he wrote. “Many companies use discontinuous periods like this to step back and determine what they strategically want to change, and we find an increasing number of enterprises opting out of managing their own infrastructure, and preferring to move to AWS to enjoy the agility, innovation, cost-efficiency, and security benefits.”

Amazon has taken a deep dive across the company in the past few months, to evaluate each of its businesses long-term potential to drive revenue, operating income, free cash flow and return on invested capital, said the executive.

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That led it to stop pursuing physical stores like the bookstores and 4 Star stores, it closed its Amazon Fabric and Amazon Care efforts, and moved on from certain newer devices. It also cut 2,700 corporate jobs and asked its staff to return to the office at least three days a week.

The company has doubled its fulfillment center footprint to cope with higher demand during the pandemic and built out a last-mile transportation network that now equals UPS’
UPS,
-1.35%
in size.

“Over the last several months, we’ve scrutinized every process path in our fulfillment centers and transportation network and redesigned scores of processes and mechanisms, resulting in steady productivity gains and cost
reductions over the last few quarters,” he said.

See also: Amazon needs to lay off more employees for e-commerce to become ‘meaningfully profitable,’ analysts say

That also included transforming its US fulfillment network from a single one that distributed goods across the country at great cost, to a regional network model involving eight regions serving smaller geographic areas, while retaining the ability to ship nationally when needed.

In grocery, it ended free shipping on all orders over $35. Grocery remains an area where the company needs a bigger physical footprint as most shopping is still done in stores. While Whole Foods is on an “encouraging path,” the company need to find a mass grocery format that is worth expanding broadly.

“Amazon Fresh is the brand we’ve been experimenting with for a few years, and we’re working hard to identify and build the right mass grocery
format for Amazon scale. Grocery is a big growth opportunity for Amazon,” Jassy said.

Amazon is investing heavily in one area that’s become a hot topic, that of Large Language Models, or LLMs, and Generative AI. While machine learning has been a technology viewed as having great promise for decades, it’s only been used by companies in more recent years, driving by a number factors, including access to higher volumes of computing capacity at lower prices.

Read: U.K. regulator launches cloud market investigation into Amazon and Microsoft

Amazon has been working on its own LLMs for some time and expects it will transform and improve almost all customer experiences. The company “will continue to invest substantially in these models across all of our consumer, seller, brand, and creator experiences,” he said.

AWS is offering machine learning chips Trainium and Inferentia to allow small and larger companies train and run their LLMs in production, he said. AWS has also launched an app called CodeWhisperer that generates code suggestions in real time, he said.

“In closing, I’m optimistic that we’ll emerge from this challenging macroeconomic time in a stronger position than when we entered it,” said Jassy.

Amazon currently runs a consumer business worth $434 billion in 2022, but the majority of total market segment share in global retail continues to live in physical stores, at an estimated 80%.

“And, it’s a similar story for Global IT spending, where we have AWS revenue of $80B in 2022, with about 90% of Global IT spending still on-premises and yet to migrate to the cloud,” he said.

Amazon stock has fallen 37% in the last 12 months, while the S&P 500
SPX,
-0.41%
has fallen 8%.