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Amazon Shocker: Profit Buoyed By AWS' Runaway Growth and Efficiencies

Anticipating another report of an unprofitable quarter by the margin-pressed, analysts were shocked by the e-retailer's $92 million profit for the second quarter on $23.2 billion in revenues, reported Thursday. Albeit the profit was miniscule, Amazon notoriously posts losses and last quarter wasn't projected to be an exception. Remarkably, taking the squeeze off margins was its Amazon Web Services (AWS) public cloud service.

AWS revenues surged 81 percent year-over-year to $1.82 billion, showing markedly accelerated growth over the first quarter's 49 percent jump in sales. Analysts also were impressed by AWS margin of 21 percent, up from 17 percent last quarter.

Investors rewarded Amazon pushing its shares up more than 16% during Friday morning trading, boosting its market cap above $250 billion and giving the company a larger valuation than its brick-and-mortar rival Wal-Mart, making it the largest retailer in the world. In addition to tighter companywide cost controls, analysts were notably impressed by the performance of AWS, some even suggesting Amazon may profit by spinning it off or selling it. Wall Street has overnight fallen back in love with Amazon.

What a difference a year makes. At this time in 2014, Amazon posted disappointing results quarter after quarter, with much that blamed on the tight margins of its retail business, huge investments and a slowing AWS business.  

Despite AWS' heavy price cutting to compete with Microsoft and Google, Amazon Chief Financial Officer and Senior VP Brian Olsavsky credited the subsidiary's team with the rollout of numerous new services and features for enterprise customers as well as improved cost efficiencies. "We are seeing continued increases in usage, both sequentially and year-over-year," Olsavsky said on Thursday night's earnings call. "Innovation is accelerating not decelerating. We had over 350 significant new features and services and we believe that's what resonates with customers. While pricing is certainly a factor we don't believe it's always the primary factor. In fact what we hear from our customers is that the ability to move faster and more agile is what they value."

AWS performance gives it new momentum. Though always the undisputed leader in the growing market for enterprise public cloud services, Microsoft and Google have built out large global infrastructures that rival its footprint, features and pricing. IBM, Hewlett Packard, Oracle and Rackspace, among others, continue to mount challenges as well. While these rivals talk up their hybrid differentiators and continue to expand and gain share, so far it isn't stymying AWS' growth. 

Posted by Jeffrey Schwartz on 07/24/2015 at 10:09 AM


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