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Amazon Shares Dive After Q4 Earnings, But AWS Is An Increasingly Fine-Tuned Profit Machine

Joseph Tsidulko

While Amazon reported fourth-quarter earnings Thursday that turned off investors, the public cloud component of the business was anything but disappointing.

Based on fourth-quarter revenue of more than $2.4 billion, Amazon Web Services fell just short of a $10 billion run rate, Amazon CFO Brian Olsavsky told investors.

Sales of the industry-leading public cloud service grew by 69 percent year over year. With margins climbing to 28.5 percent, AWS delivered $687 million in profit.

[Related: Amazon Stuns Wall Street As Cloud Sales Soar In Q3]

An increasingly diverse and segmented company, Amazon as a whole delivered earnings per share of $1, missing estimates by 56 cents. The stock price plunged more than 13 percent in after-hours trading.

While Amazon's e-commerce business generates controversy with its miniscule margins, the cloud business bucks that trend.

AWS operating margins have successively climbed from 21.4 percent in the second quarter to 25 percent in the third quarter, to the current 28.5 percent.

That spectacular growth in margin made the cloud 186 percent more profitable than it was in the same quarter of the previous year, or 161 percent when adjusted for currency fluctuations.

The continuing margin increases result from a cost structure being fine-tuned through technological innovation and operational expertise, explained Phil Hardin, Amazon's director of investor relations.

"As they continue to learn, and we continue to invent and get better at designing infrastructure and assets, we have been able to drive cost out of that business," he said of AWS.

Innovation at Amazon isn't only driving down costs.


AWS launched 722 new services and features in 2015 -- 40 percent more than it did the previous year, Olsavsky told investors.

While AWS recently implemented its 51st price reduction, Amazon finds speed, agility and the ability to deliver services and features are what set the cloud apart in winning new customers, he said.

Olsavsky told investors the company's pricing strategy isn't constrained by any capacity challenges, especially in light of several new AWS regions that will soon bring online additional capacity across the world.

Amazon laid out about $9 billion in 2015 to pay for its cloud infrastructure. But expanding its data center footprint wasn't the most significant factor in those costs, Olsavsky said. Servicing existing regions and meeting existing customer demand was the greatest source of capital expenditure.

"We've seen great efficiencies in capital expenditures," he said, and Amazon continues working to improve purchasing efficiencies and drive higher utilization rates at data centers.

The year-over-year revenue growth of 69 percent in the fourth quarter actually represented a deceleration from previous quarters, which saw 78 percent, and before that 81 percent, annual growth.

Olsavsky told investors they shouldn't interpret those numbers as a slowdown. On a dollar basis, the fourth quarter was Amazon Web Service's fastest-growing quarter.

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