5 Things We Learned About AWS From Q2 Earnings

Amazon Web Services continues to be Amazon’s fastest-growing and most profitable business.

The Q2 2016 earnings release outlined that revenue grew another 58% year-over-year to $2.88 billion, while posting $718 million in operating income – which is larger than the $702 million operating income its core North American retail business recorded. Note: all currency figures in this post are in USD.

Here are 5 things we learned:

1. AWS is on pace to deliver ~$17 billion revenue over the next 12 months

Earlier this year, Jeff Bezos noted that AWS is on track to achieving a $10 billion run rate in 2016. Based on the Q2 earnings, the 10yo cloud platform is well on its way to surpassing that mark.

Source: Amazon Quarterly results, Amazon.com

While customers are improving their unit level economics via optimization solutions such as GorillaStack (read: cost savings and efficiencies), overall AWS bills are increasing as usage continues to surge as more and more workloads are moved to the cloud.

This increase in value from existing customers plus the continued rapid adoption of the cloud by first-time users makes us believe these kinds of double-digit growth rates are very sustainable.

If you extrapolate out the Q2 performance ($2.88 billion revenue base, 58% YoY growth), you hit the $17 billion run rate mark over the twelve months.

2. The pace of revenue growth is slowing

Despite the stellar headline numbers, the AWS results didn’t quite show the growth momentum that some investors hoped to see in all areas.

Ahead of the quarter, there were concerns that Microsoft’s Azure cloud and Alphabet’s Google Cloud Platform were gaining market share. Those fears proved in part to be correct.

Source: Amazon Quarterly results, Amazon.com

Although AWS still grew +58% year over year to $2.88 billion, that rate was about ten percentage points slower than in the first quarter. Investors were hoping to see some acceleration there. It seemingly didn’t matter that the operating income in AWS grew 135% year-over-year to $718 million, up 19% from the first quarter.

3. Profit is no longer a word to be frowned on at Amazon

Unlike the rest of Amazon’s core ecommerce business (which notoriously didn’t turn in a profit for years), AWS is already hugely profitable even in a period where it’s still ramping up growth as the global market for cloud services expands exponentially.

Thanks to the overhead that most traditional IT suppliers put into their product and service pricing (mostly due to their sales and delivery model), the virtualized IT infrastructure market is a much richer target than generic retail these days for Amazon, which struggled to turn a profit until AWS hit critical mass as it’s doing now.

Source: Amazon Quarterly results, Amazon.com

Scale is clearly driving profitability, with profit rates growing at an even faster rate than revenue. That said, by the time Amazon and its competitors are done fighting over the cloud market some years hence, margins in the cloud could be razor thin, too.

In fact, if I was to guess how Amazon will play this, it could well reach a point in the medium term where it has enough market share that it can use low margins to keep competitors out of the market in the longer term.

4. International is important

In its earnings announcement, Amazon pointed the spotlight on several AWS developments as contributors to its growth. India in particular, with it’s new Mumbai region, was called out in a number of areas. Highlights included:

• The launches of the Elastic File System and the X1 instance type from earlier in the year.
• The launch of a sixth APAC Region, this one in Mumbai, increasing the amount of global availability zones to 35 across 13 technology infrastructure regions
• SAP business-critical applications gaining momentum.
• Salesforce will provide its cloud infrastructure to cover AWS Sales Cloud, Service Cloud, App Cloud and other for the company’s planned international infrastructure expansion.
• The new FedRAMP High compliance certification, giving US government agencies the ability to use the AWS Cloud for highly sensitive applications and workloads.

5. Jeff Bezos is now the world’s 3rd richest person

A knock-on impact from the earnings, rather than featuring in the results themselves (!). Amazon stock has been trading above $770, as shares hit an all-time high following record second quarter results.

Their previous high was $757 (set earlier in July), with the Amazon.com stock up more than 45% year-over-year, and 13% year-to-date. As long as Amazon keeps reporting profitable quarters, the stock is likely to respond accordingly.

According to Forbes this makes Jeff Bezos, who owns 18% of Amazon’s shares, the world’s 3rd richest person. Forbes estimated his fortune to be $65.3 billion which is only surpassed by Microsoft founder Bill Gates, worth $78 billion, and the $73.1 billion fortune of Zara founder Amancio Ortega.

Here he is in the next Star Trek movie…