5 Things Investors Need to Know About Amazon's Web Services Financial Results

By Markets Fool.com

Amazon.com has been notoriously secretive when it comes to certain financial data it does not have a legal obligation to disclose.

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The company has never been forthcoming about how many Kindle tablets it sells, how many people pay to be Prime members, or, until it reported its first-quarter 2015 results, exactly how big the Amazon Web Services business segment has become. Now, however, the retail giant has peeled back the curtain to give investors a look at the size of the business of selling cloud servers and other services.

Amazon did not share all its secrets during the earnings conference call or in the accompanying press release, but it did give a much more specific picture of how AWS contributes to the company and of its prospects for the future.

It's pretty big
"Amazon Web Services is a $5 billion business and still growing fast -- in fact it's accelerating," Amazon CEO Jeff Bezos said in the press release.

Amazon Web Services hasn't actually quite become a $5 billion business (though it's certainly headed there). The division grew an astounding 49% in 2014 to $4.6 billion in sales. The growth percentage in the first quarter was the same, pushing the segment's revenue to $1.6 billion for the period.

Unlike retail sales, AWS revenue is essentially subscription-based as companies rent cloud servers for use in ongoing operations. That removes some, but not all, volatility, along with some of the seasonality associated with the retail business.

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Bezos was clearly delighted with the path the business has taken.

"Born a decade ago, AWS is a good example of how we approach ideas and risk-taking at Amazon. We strive to focus relentlessly on the customer, innovate rapidly, and drive operational excellence," he stated. "We manage by two seemingly contradictory traits: impatience to deliver faster and a willingness to think long term. We are so grateful to our AWS customers and remain dedicated to inventing on their behalf."

AWS has shown tremendous growth. Source: Amazon.

AWS is the fastest-growing part of Amazon
While AWS' $1.6 billion was only a tiny portion of the company's net sales of $22.72 billionfor the first quarter, the cloud services business is growing faster than Amazon's larger retail segments. The North American and international businesses combined for 93% of Amazon's revenue, but those areas are growing much slower than AWS.

The North American business grew 24% for the quarter while the company's international efforts actually shrank by 2%. At 49% growth, AWS appears to have huge upside.

AWS is an investment
Amazon Web Services is also profitable, showing a 17% operating margin, but that number is a bit misleading because the capital investment required for the division is huge.

At the end of last year the cloud service had about 1.4 million servers in operation serving more than 1 million customers. Maintaining that volume of business requires a lot of equipment. Of the $17 billion of property and equipment Amazon owned at year-end 2014,Re/codereported, over $6 billion worth was devoted to AWS, an 86% year-over-year increase.

The AWS platform is expanding
In addition to breaking out financial results for AWS for the first time, Amazon also announced a number of additions to the cloud computing platform during the quarter:

  • Amazon Machine Learning: A fully managed service that makes it easy for any developer to use historical data to build predictive models that can be used for a broad array of purposes, including detecting problematic transactions, preventing customer churn, and improving customer support.
  • AWS Marketplace for Desktop Apps: This area of the AWS Marketplace makes it easy for customers to search for and buy applications for their Amazon WorkSpaces cloud-based desktops.
  • New Amazon EC2 Dense-storage, or D2, instances, and larger, faster Amazon Elastic Block Storage, or AmazonEBS, volumes: To support very large transactional databases and Big Data analytics, the new Amazon EC2 D2 instances offer up to 48 TB of storage and up to 3,500 MB per second of disk read throughput, while the new Amazon EBS volumes store up to 16 TB and process up to 20,000 input/output operations per second.

Amazon Web Services has become more than just a cloud server solution, and adding products like these allows the company to realize more revenue from existing customers.

The company is not sure where AWS pricing will go
Amazon Web Services has reduced prices 48 times since the division was created, Amazon CFO Thomas Szkutak said on the conference call. That has driven cloud prices down across the industry.

"The team has done a terrific job of working on behalf of customers to pass on savings as they see it," he said. "But in terms of any comment on what to expect going forward, there's really not much to add there."

Brian Olsavsky, vice president of finance for Amazon's global business, jumped in to add that while "price is a factor, the primary factor for customers moving to AWS is really around their ability to move quickly and be nimble and agile."

The article 5 Things Investors Need to Know About Amazon's Web Services Financial Results originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He uses AWS. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.