Amazon tops forecasts with 15% sales rise

Amazon has disclosed that its fast-growing technology subsidiary, Amazon Web Services, is also one of its most profitable businesses, a revelation that will increase competition among tech companies sparring for dominance in the cloud.

Amazon Web Services reported sales of $1.6bn in the first quarter, up 50 per cent from the previous year. The subsidiary has the highest margins of any Amazon segment, with an operating income margin of 17 per cent.

The ecommerce group overall beat expectations with $22.7bn in net sales in the first quarter, up 15 per cent from the year prior. Growth in its tech subsidiary helped compensate for a strong dollar and weak sales growth outside the US.

Amazon's retail operations were hit by a strong dollar in the first quarter, particularly international retail, which saw growth slow to 14 per cent in currency-adjusted terms. The company has been investing heavily to increase its sales outside the US, with mixed success.

The company reported a loss of 12 cents per share, in line with expectations, due in part to charges for stock-based compensation and amortisation expenses.

AWS rents out computing infrastructure and software to IT professionals, which is in increasing demand as companies move from on-premise data centres to cloud offerings. It is the biggest public cloud provider in the world by usage, although it faces growing competition from Google, Microsoft and IBM.

AWS was just 7 per cent of Amazon's net sales last quarter, but company executives say it could one day overtake the company's retail operations to be Amazon's biggest business.

"Amazon Web Services is a $5bn business and still growing fast - in fact it's accelerating," said chief executive Jeff Bezos, referring to usage rates. "Born a decade ago, AWS is a good example of how we approach ideas and risk-taking at Amazon."

The AWS numbers, which were disclosed for the first time on Thursday, also highlighted Amazon's heavy investment in the business. Last year Amazon spent some $4.2bn on property and equipment additions for AWS, including capex as well as assets acquired under capital leases, nearly twice as much as the prior year.

Tom Szkutak, chief financial officer, said: "We are deploying a large amount of capital for AWS because growth is so strong." He pointed out that the usage growth, which has been roughly doubling annually, has driven the increase in capital spending.

Lydia Leong, analyst at Garnter, said the profitability of AWS was a surprise.

"A lot of people have looked at cloud computing, and at what Amazon and Microsoft and Google are doing, and asked, how can they make money given the prices they are charging?," said Ms Leong. "The positive operating margins speak to the fact that this is a business that benefits from economy of scale, and it has dynamics that are more similar to software markets than hardware markets."

AWS has cut prices nearly 50 times since inception as it seeks to win market share versus Microsoft and Google.

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