Amazon.com, Inc. (AMZN) Q2 2020 Earnings Call Transcript

Amazon.com, Inc. (NASDAQ: AMZN) Q2 2020 earnings call dated July 30, 2020

Corporate Participants:

Dave Fildes — Director of Investor Relations

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Analysts:

Eric Sheridan — UBS — Analyst

Mark Mahaney — RBC Capital Markets — Analyst

Brian Nowak — Morgan Stanley — Analyst

Doug Anmuth — JPMorgan — Analyst

Ross Sandler — Barclays — Analyst

Brent Thill — Jefferies — Analyst

Aaron Kessler — Raymond James — Analyst

Justin Post — Bank of America — Analyst

Presentation:

Operator

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Q2 2020 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 Director of Investor Relations, Dave Fildes. Please go ahead.

Dave Fildes — Director of Investor Relations

Hello and welcome to our Q2 2020 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 2019.

Our comments and responses to your questions reflect management’s views as of today, July 30, 2020 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 the 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.

Also read: Key quarterly highlights from Amazon’s Q2 results

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 filing with the SEC. This guidance also reflects our estimates today regarding the impact of the COVID-19 pandemic on our operations, including those discussed in our filing with the SEC, and is highly dependent on numerous factors that we may not be able to predict or control, including: the duration and scope of the pandemic, including any recurrence; actions taken by governments, businesses and individuals in response to the pandemic; the impact of the pandemic on global and regional economies and economic activity, workforce staffing and productivity, and our significant and continuing spending on employee safety measures; our ability to continue operations in affected areas; and consumer demand and spending patterns, as well as the effects on suppliers, creditors and third-party sellers, all of which are uncertain. 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 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.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Thank you for joining us today. I’d like to start by thanking and recognizing the contributions of hundreds of thousands of Amazon employees and delivery partners and hundreds of thousands of small and medium-size businesses who are working hard to serve our customers all around the world in these uncertain times. Amazon’s second quarter was another highly unusual quarter. As I mentioned on our last earnings call, we began to see a significant increase in customer demand beginning in early March, and demand remained elevated throughout Q2. Strong early demand in groceries and consumable products continued into Q2, while demand increased during the quarter in our other major product categories like hardlines and softlines. At the same time, we continued to focus on stepped-up employee safety, particularly in our fulfillment and logistics operations, to help ensure the safety and well-being of our employees and partners. In Q2, we incurred more than $4 billion of COVID-related expenses, getting products to customers and keeping employees safe. The largest portion of these costs related to compensation for our front line employees, including higher hourly wages through the end of May and a more than $500 million thank you bonus in June.

We also experienced productivity headwinds in our facilities. This included changes to over 150 of our processes to provide for social distancing, as well as costs to onboard and train over 175,000 new employees who were hired to meet the higher customer demand. This $4 billion also included investments in personal protective equipment for employees and enhanced cleaning for our facilities.

Our consolidated revenue and operating income significantly exceeded the top end of our guidance range. Strong top line performance was driven by increased consumer demand, led by Prime members. We continued to see high Prime member engagement throughout the quarter. Prime members shop more often with larger basket sizes. Worldwide streaming video hours doubled year-over-year, driven largely by Prime Video. We’re reaching more customers with our grocery offerings. Online grocery sales tripled year-over-year. Existing Prime member renewal rates improved and the Prime member growth rate accelerated both in the US and worldwide.

Our 3P sellers, who are largely comprised of small and medium-size businesses, also stepped up to help make more selection available for customers. And as a result, these small and medium-size businesses have seen significant growth in their sales. Our third-party seller services revenue grew faster than online stores revenue in Q2, with strong growth in both Fulfillment by Amazon and merchant fulfilled, or MFN, seller sales. Third-party units continue to represent more than half of overall unit volume, helped by improved quarter-over-quarter growth in active sellers. We are more committed than ever to supporting the success the hundreds of thousands of small and medium-size businesses to sell their products in Amazon stores. We were able to meet this heightened demand because we were also able to open up more fulfillment network capacity as the quarter progressed with faster delivery across more selection.

I’d point to a few capacity improvements that have allowed us to enhance throughput. First, our regular headcount grew 34% year-over-year as of the end of Q2 and continues to grow. We welcomed more than 175,000 new employees in March and April. Many of them were displaced from other jobs in the economy. As we’ve seen, demand remained high. We are in the process of bringing 125,000 of these employees into regular full-time positions. I would also note that Amazon has created more jobs over the last decade than any other company, and we are proud that we’re continuing to create good jobs with industry-leading wages and great benefits during this challenging time. Our combined number of regular and seasonal employees is currently over 1 million.

We’ve also been able to expand the output in our existing facilities, as we’ve had time to implement, learn and iterate on the new process paths we put in place. Additionally, as a reminder, Q2 is typically our lightest volume quarter for the retail business. That’s not the case this year. But what that has meant is that we can flex into space normally used for second half peak demand. This led to strong operating leverage in Q2. As we move towards the peak in the second half of the year, we will ramp up our space needs even further, and we’ll be adding significant fulfillment center and transportation capacity in the second half of the year.

Turning to AWS, this is now a $43 billion annualized run rate business, up nearly $10 billion in run rate in the last 12 month. Customer usage remains strong, although growth varies across industries as a result of COVID-19 crisis.

Lastly, I’ll touch upon our Q3 guidance, which we provided as part of our earnings release. A few additional data points on this guidance. We expect to incur more than $2 billion in COVID-related expenses in Q3 to help keep employees safe, including continued investment in social distancing, PP&E and testing. Costs are expected to be lower than in Q2, primarily due to better cost efficiency at the high demand levels we are seeing. In addition, I’ll remind you that the third quarter is typically when we open the majority of our new fulfillment network capacity, and we expect the same this year.

We continue to invest meaningfully, including $9.4 billion in capex and finance leases in Q2 alone, an increase of 65% year-over-year, primarily driven by investments in our fulfillment and logistics footprint. Once these buildings open, they are a headwinds to profitability as they ramp up and we prepare for Q4 peak. In 2019, we increased network square footage by approximately 15%. This year, we expect a meaningfully higher year-over-year square footage growth of approximately 50%. This includes strong growth in new fulfillment center space, as well as sort centers and delivery stations. We expect the majority of this capacity come online in late Q3 and into Q4.

Lastly, we plan to host Prime Day in Q4 this year rather than Q3 as it has been in prior years. The one exception is Amazon India, which will host Prime Day on August 6 and August 7.

In summary, we know that people are relying on online shopping more than ever during this unprecedented time, and we’re working hard to add capacity to serve customers. We are extremely grateful to our employees across Amazon for continuously stepping up to meet the needs of customers.

With that, let’s move on to Q&A.

Questions and Answers:

 

Operator

[Operator Instructions] Your first question comes from the line of Eric Sheridan with UBS. Please proceed with your question.

Eric Sheridan — UBS — Analyst

Thank you so much for taking the question. Maybe I could just dive in on the normalized trend you’re seeing as you exit June and get into July. You’ve made a push into essentials and de-emphasized non-essentials, as we talked about in the last earnings call. Where are we in terms of the Company getting the mix between essential versus non-essentials right in terms of offering to customers? Where are you in terms of returning to normal on next-day and two-day shipping initiatives to drive Prime? If there was any color on the state of affairs with either of those by region of the world, that would be great. Thank you so much.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Sure, Eric. Thanks for your question. So first on the trend. So, if you remember, as we exited Q1 and spoke at the end of April, we had taken a lot of steps in March and April to, first, limit the incoming non-essential products into our warehouses. Then we reversed that or eliminated that decision in mid-April. So we started to normalize on our channel mix. And I would say, as we moved into late April and early May, we expected that because a lot of the sellers can toggle between MFN or FBA sales that we would see MFN drop as FBA picked up. But to a large extent, MFN remained strong even as FBA picked up. So, we had a very favorable mix, if you will, coming from March on. It started to normalize a little bit more to normal levels towards the end of the quarter. But MFN still remains high.

On the product side, a lot of what we saw in March and early April was sales of consumables and groceries and safety items. And we talked a lot about the fact that, that was coming at pretty much zero cost — our zero profit when you factored in the COVID-related cost. We got better on our cost structure and we also resumed a more normal mix in, I’d say, early part of May. So since then, I would say it’s getting closer to what we call a more normal mix. Demand is still super high. What we’re seeing on — it’s driven by Prime members and Prime member engagement. They’re shopping more often. They have larger basket sizes. There’s still a heavy component of grocery. Online grocery sales tripled year-over-year in the quarter as we added capacity there. So while there’s shifts in the mix based on what customers want, it’s looking a little more normal and is staying at a very high level. On one day, we realize that our first priority is to keep our employees safe and the second is to focus on getting our capacity increased. Once we’ve done that, we are working very hard to get faster shipments. And we’ve seen the one-day and two-day recover through the quarter, but it’s still probably considerably behind the going-in rate before any of this happened. So, we’ll continue to work on that. But again, first priority is definitely keeping employees safe and second is increasing our capacity.

Dave Fildes — Director of Investor Relations

Yeah. This is Dave. I think from a geographic perspective, Brian’s opening comments there, a lot of these order trends and activity, you can see that both North America and international segment are growing well. So a lot of those kind of trends in category performance is first-party and third-party seller growth. Whether it be merchants fulfilled or FBA sellers, we’re seeing a lot of growth across the board. And kind of similar type broad trends when you think about the US and North America, as well as our international regions, particularly more established international regions.

Operator

Our next question is from Mark Mahaney with RBC. Please proceed with your question.

Mark Mahaney — RBC Capital Markets — Analyst

Okay. So, two. Just a quick follow-up on Erik’s question, Brian, when do you think you’ll get back to par in terms of one-day being one-day? And then secondly, these profit levels are super high now. They’re becoming super high at the Company if you ex out the COVID costs. Is Jeff aware of how profitable the Company is becoming? Is he happy about it? And I’m kind of being facetious obviously when I ask that. But what I also want to ask really is, when you think about new investment areas, the top list, maybe some new international launches or really building out some of the markets that you’ve like India and Brazil and Mexico or the business-to-business operations, like there’s a ton of new investment areas, and it seems like Amazon historically, and I’m sure it’s the same now, would be using this kind of revenue surge in really investing aggressively in these new areas. So just talk about that. I know you’ve got spend on COVID. But as you think about the next three to five years, you’ve got these really profit surges, how can you deploy those? Or do you — how do you want to deploy those into some of the newer investment areas? Thanks a lot.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Sure. Thanks for your questions, Mark. First on when we’ll get back to par, we don’t know yet. We’re getting progressively better. But we’re also balancing what is going to be very stepped-up demand and capacity in Q3 and Q4. So, if you look at our historic run rates and you can see how big a quarter Q2 was. Q2 was actually higher revenue than Q4 of last year, which is unheard of. And Q3 is now forecast to be also higher than Q4 of last year. So, we’ve kind of moved the peak forward and — for different reasons, and we’re trying to — mainly, like I said, first priority is getting — is making sure employees are safe and that we continue to do social distancing and keep everybody safe and healthy. Second priority is getting capacity online because we do not have — in Q2 — we generally have lower revenue in Q2. As I mentioned, we were able to use the excess capacity that did exist to serve the higher demand. Now, as we move into Q3, we’re starting to — we need to build inventory more for Q4, and we’ve run out of space. So we’ve got our hands full on that challenge, but we’ve got a really good team that’s been working very hard probably since late February on this issue.

And when you talk about profitability, I will also mention that there are a couple of expenses that have gone down in the interim. Marketing — we cut marketing probably by about a third in Q2 as — mainly because we’re trying to manage demand. It started to normalize and get back to its somewhat normal levels in Q — at the end of Q2 but — and therefore, we will see a higher level in Q3. But certainly, marketing costs were lower. I probably saw that in a lot of companies. Travel expenses have almost ground to a halt. Meeting costs, even medical costs in some examples or in some cases, have been delayed as people don’t go to the doctor or don’t go there as quickly. We think that’ll normalize over time.

And as far as investments, I think we’ve got a lot of investments already in play. So I don’t think it’s a matter of necessarily accelerating investment or — we’re always looking for new investments that makes sense to us. But during this time, I would say, we’ve actually accelerated our ops investment, pulled in capacity that we probably didn’t think would be needed until 2021, maybe later. On grocery, we’ve also greatly expanded our grocery delivery capacity, and that’s probably ahead of schedule.

Dave Fildes — Director of Investor Relations

Yeah, this is Dave. Just to add to that I think, Prime is such a big focus. And some of the growth statements that Brian talked about at the opening the call, whether it was strengthened paid Prime membership and acceleration we saw in the US or worldwide or some of the usage stats like the grocery momentum or the doubling of video hours, for us, it’s just another encouraging sign. We think there is still a lot more value we can add to that program. And that’s not just in the United States where it’s — we’ve got a sort of broader set of services than some of the other regions, but really focusing on supporting in some of those other regions. So, we’ve got places like Australia, the Middle East. We’ve talked about India many times, but ought to focus on building that out. I think what’s great about a place — all geographies but a place like India is, we’re really focused on digitizing the Indian sellers, a lot of micro, small and medium-size businesses there. And we launched new features there to help support the digitization efforts with some of those brands. And just a lot of — great work being done by that team. They have some goals around getting more sellers onboard and hiring many more people as well. So, a lot of focus there.

Operator

Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question.

Brian Nowak — Morgan Stanley — Analyst

Thanks for taking my questions. I have two. The first one, Brian, just going back to the investments, and you’re often making multi-year investments for customers and customer offerings and you’re the man behind the capital allocation plan. I guess I’d be curious to hear about, can you give us some examples of areas of investment that may have been pushed out this year because of shelter-in-place and the higher demand that you’ve been seeing? So what were the areas where you thought you were going to spend more at the start of the year than you actually have now in the current 2020 plan? And then the second one, the international strength — I appreciate the color on Europe and Japan. Nice to see the profitability. Maybe just talk to us sort of qualitatively about some puts and takes around your core international markets, Europe and Japan, and how to think about whether or not they could be more or less profitable than the US long term. Thanks.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Sure. I think we’ll start with that second one. You’ll notice that the international segment was profitable this quarter. And that’s a great sign. It is heavily driven by the pickup in demand that we saw, as I’ve mentioned, I believe, in multiple calls. What’s going on internationally is, we have some very healthy established countries that we’ve been in the long time, and we probably accelerated their adoption of Prime benefits. We’ve pushed video and devices and music and other things to those countries probably earlier in the lifecycle than you would have seen in the US. So there’s a bit of a forward investment on Prime benefits in many of those countries. But you also see our investments in new countries. Obviously, India is the biggest one, but also to a lesser extent, the Middle East, Brazil, Turkey and Australia are recent additions. So, there’s always an element of expansion going on there. Advertising is growing. So that’s a good source of profitability. But if you look at what happened in Q2 was essentially just much higher volumes than we had anticipated or had on our run rate. So, our fixed costs were leveraged to the hilt. Obviously, we had to some capacity and things in transportation and fulfillment centers. But all other fixed costs were pretty much leveraged on that higher demand. The UK in particular was very strong because there’s probably more stay-at-home orders and the way the economy was developing in the UK. We had a very, very strong quarter there. So, I would say that the surge in demand internationally also helped drive that profitable maybe a little earlier than the trajectory would have shown. And not sure that that is going to continue for the next couple of quarters. But it’s a good trend. It’s a good sign that we could leverage that. And a lot of the same trends in the US were apparent internationally; higher Prime — more frequent Prime purchases and higher basket sizes. So, all good signs. And perhaps we’ve got a glimpse of the future on the demand curve.

Your second question on slowing investments, the list is very short on what we’ve had to slow down. It’s mostly — it hasn’t been done necessarily for cost reasons. It’s been done for people reasons. The one I’d point to is studios. We’ve had to delay production. I think most studios have. And that’s been augmented by some new things like our Amazon cinema where we’re having first-run movies. And so, I think in this time when people want entertainment, people are having trouble creating new content across the board, and that’s a bit of a challenge, but it’s not something we’re doing intentionally. We’re doing it to protect the actors and filmmakers, and we think that’s the right decision. As I said, a lot of the investments are being pulled in, especially on the op side and grocery delivery, same-store pickup. The number of Whole Foods stores that you can pick up deliveries tripled this quarter. So the list is short on things that we’re slowing down on, I would say. That’s just we’re adapting and probably looking at whether some things have changed and creating some things for the new environment, especially in the entertainment area.

Operator

Our next question comes from Doug Anmuth with JPMorgan. Please proceed with your question.

Doug Anmuth — JPMorgan — Analyst

Thanks for taking my questions. I have two. Brian, first, just curious about your overall thoughts on how the e-commerce adoption curve has been shifted here over the next few years, and anything you can share around behavior for the new and existing customers. And then, separately, on the AWS, the $43 billion run rate, obviously slowed some in the quarter. But I hope you could comment just on the pace of IT decision making in this environment, whether you’re still impacted by some clients more highly exposed to challenged verticals. And due to those factors, is it possible that AWS can accelerate growth going forward? Thanks.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Yeah. Let me start with that second one. Thanks Doug. So in AWS segment revenue, what we see are companies working really hard right now to cut expenses, especially in the more challenged businesses like hospitality and travel, but pretty much across the board. We’re helping them. We’re actively, with our sales force, looking for ways that we can help them save money. This includes things like scaling down the usage where it makes sense or benchmarking their workloads against our architectural best practices. So that’s not going to help our usage growth in the short run, but it’ll help those customers save money and we think that’s the right thing to do, not only for their success, and so they can come out of this at a better shape, but also for the long-term health of our relationship with them as an AWS provider. But we’re also seeing a lot of companies that are really wishing that they had made more progress on the cloud because they’re seeing how companies that are on the cloud can turn into a variable cost and scale up or scale down, depending on their particular situation. They realized their on-premises infrastructure is not really flexible to go up or down. And especially in the time of sinking demand, it’s a big fixed cost for them. So, we expect — we’re seeing migration plans accelerate. That’s certainly not going to happen overnight, but we see companies moving more in that direction. We think that will be a good long-term trend. And there are certainly winners in this area right now. Things like videoconferencing, gaming, remote learning and entertainment, all are seeing usage growth. And it’s a bifurcated world out there.

So the — on your e-commerce adoption, I think it’s hard to tell. We’re super encouraged by the fact that grocery delivery has picked up and that’s been accelerated versus what we had thought. We certainly are glad to be there for our Prime members who are shopping more frequently and buying more. We do know that there are — there’s reasons that their other options are limited. There’s always retail options out there, especially to go pick up in store, but less people want to go into stores perhaps now. So we’re going to have to see what is maybe a step-up in the curve and getting to a point quicker versus what are some one-time sales. And yeah, things like — hopefully things like masks and gloves and cleaning supplies in the fullness of time become one-time purchases, but we’ll see.

And sorry, your last point was on new customers versus existing customers. We’re seeing similar trends. We’re seeing good pickup in frequency and basket size for new members in Prime as well. Yeah, certainly not the same as people who have been Prime members for number of years, but it’s encouraging. And as you saw, Prime gross retention has increased. We’ve accelerated the number of — the growth of Prime members, both in the US and internationally. So, that’s a good sign that we’re happy about. And we hope that that has long-term ramifications.

Operator

Our next question comes from Ross Sandler with Barclays. Please proceed with your question.

Ross Sandler — Barclays — Analyst

Yeah. Just a follow-up to that last comment. So the Prime behavior for international Prime members, you guys have talked about how, like, in the 16, 17 countries, the overall service levels are a little bit behind, selection is a little bit behind. So has the last few months and the pandemic closed that gap meaningfully in terms of GMV per Prime member for international versus what you see in the US and any comment there? And then, on the 3Q guidance, you pushed Prime Day for western markets into 4Q. So, how much of the deceleration — it’s obviously a really strong number for 3Q. But the growth rate is decelerating a little bit. Is that mostly from Prime Day? Or can you just talk about what kind of behavior you’re seeing right now as you go into 3Q? Thank you.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Right. Well, we ramped up through the quarter in Q2 and ended up with 41% year-over-year growth in FX-neutral — on an FX-neutral basis. A lot of those trends are continuing into Q3. You see our revenue ranges $87 billion to $93 billion, coming off a $89 billion quarter. So I would say that the — if you look at the growth rate, that translates into somewhere in the 24% to 33% growth rate in Q3. So I can’t break out exactly the Prime impact because there there’s — but suffice to say, it’s a big driver on why 41% growth in Q2 turns into 24% to 33% growth in Q3 on what turns out to be higher revenue volume.

And then on Prime behavior, it’s — I can’t really give you more on that because it is actually a very localized set of stats by country. In international, aggregate does not matter of that much. And what I would say is, generally what we’re seeing is similar trends in international in response to COVID purchasing patterns. I wouldn’t say it closed the gap. I would say, the both went up and we’ll see how it goes from there. I think just, definitely — differences in selection or differences in shipping — there’s a myriad of factors that go into a Prime member’s decision to be a prime member and to what they buy and what they use as far as benefits that we give them. So I don’t want make too many sweeping comments on that right now.

Operator

Our next question comes from Brent Thill with Jefferies. Please proceed with your question.

Brent Thill — Jefferies — Analyst

Thanks. Good afternoon. I was curious if you could just expand on AWS. There was a little bit of a slowdown across the board in the number of cloud numbers. I’m just curious if there is a common trend that you’re seeing there and perhaps just talk about the backlog. I know you’ve disclosed that backlog has been improving in the filings. But a little more color on AWS would be certainly helpful. Thank you.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Yeah, sure. I’ll give you the backlog number. It grew 65% year-over-year and 21% quarter-over-quarter. So that’s healthy, and we have — the average contract length is over three years for our AWS contracts. I would say, contract volume and negotiations are strong and have maintained through this period. So it is — that’s a good sign. It really does boil down to short-term versus long-term incentives here for a lot of our customers. They’re — if you’re in an industry that’s been heavily impacted by COVID and the economy, you’re looking for ways to save money and you’re trying to do it quick, and we’re trying to help in that regard. And one of the best ways to save money long-term is to use the cloud, not only to turn into a variable cost — it could be a fixed cost — but also to be able to take advantage of the partner network that we have, the security that we have, and also the constant evolution of products and services that we bring to market.

Operator

Our next question comes from Aaron Kessler with Raymond James. Please proceed with your question.

Aaron Kessler — Raymond James — Analyst

Great. A couple of questions. First, maybe just one of your competitors noted that growth was slowing in some markets that have opened up, I guess probably more in Europe. Maybe you thoughts there. Are you seeing any change in some of the markets that are starting to open up? And is there any commentary on the Zoox acquisition, how you kind of can use that technology longer term as well? Thank you.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

I imagine you mean consumer businesses that are opening up.

Aaron Kessler — Raymond James — Analyst

Yes.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Well, we still see strong demand. So I don’t have any particular color on that regard by country. We do think probably the UK was very — grew very strongly in Q2 and that — I believe they’re starting to moderate a bit, but still stronger than normal. So I don’t want to go by country. But I think those trends will start to perhaps become evident. But the — from our vantage point, the Prime members still continue to order more frequently and in larger basket sizes.

Dave Fildes — Director of Investor Relations

Yeah. And then, Aaron, just on your second question on Zoox, it’s — there’s not too much to say at this point. It’s still pretty early, but I think probably goes without saying, it’s a tremendously forward-thinking team which resonates with us. And they really do kind of pioneer in that space, the ride-hailing space. So a lot of core work they’re doing, designing autonomous vehicles and focused on the passenger, right, front of mind in that. So I think again, just as we think about kind of the innovation components and commitments to solving kind of problems and challenges for customers, it’s pretty exciting for us to be able to work with them and bring that vision to fruition in the years ahead.

Also read: Amazon is headed for a busy second half

Operator

Our final question comes from Justin Post with Bank of America. Please proceed with your question.

Justin Post — Bank of America — Analyst

Great. A couple of questions. Obviously, a great cost quarter on the leverage side. Any changes in e-commerce gross margins to call out? Is scale and getting size improving gross margins? Or anything on the mix shift there that’s interesting? And then secondly, we’ve talked a lot about one-day investment last year. Obviously, the shipping times were impacted by COVID. But are you back to kind of normal times? And where are you on the one-day investment? Thank you.

Brian T. Olsavsky — Senior Vice President and Chief Financial Officer

Sure, on one-day, again, we’re first prioritizing employee safety. We have a lot of effort in that regard. We’ve changed over 150 process paths. We’ve instituted social distancing, cleaning, temperature taking, both with warehouse employees and also our transportation employees. So that’s really still priority one. And second is capacity expansion, especially as we head into second half of the year, which generally sees a step-up in volume, even over the first half of the year. So we will — we are improving the percentage of one-day. We’re not back to where we were pre-COVID. We don’t think we’re going to be back in the short run. But we will continue to improve it. And hopefully, it’ll be less noticeable for our consumer base.

On the gross margin side, it’s very much a mixed bag right now. There is — before the COVID outbreak, the positives were generally AMZL costs, delivery costs. We’re becoming more efficient. Advertising was — and AWS was certainly a strong component of gross margin increases. Product mix could go either way, depending on the country. But as this COVID has played out, consumables and grocery, which are lower margin, have started to have been a negative impact on gross margin. But the — we feel good about where we are. Gross margin for the quarter was 40.8% and was down 200 basis points from last year. It’s probably more tied to the addition of one-day shipping. And even though we didn’t do as much one-day shipping as we’ve been doing post-COVID, the cost of one-day shipping are already rebuilt into our structure. We’ve already reconfigured our network. We’ve already created the capacity to be able to ship. It’s just a matter of whether or not we can get it out through the warehouse and to you in one day or not.

Dave Fildes — Director of Investor Relations

Thanks for joining us today on the call 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.