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AWS Doesn't Disappoint In Amazon's Q3 Earnings

The public cloud crossed the $3 billion quarterly revenue threshold in Q3 -- a milestone largely overshadowed by a somber earnings report.

The financials Amazon reported Thursday disappointed investors, but the industry leading public cloud was one segment of the sprawling business that became more profitable in the third quarter.

In the quarter that ended September 30, Amazon earned 52 cents a share on revenues of $32.71 billion, well below the 78 cents a share Wall Street analysts were expecting.

AWS, however, notched more than $3.2 billion in sales, compared to just more than $2 billion a year earlier, for 55 percent year-over-year growth. On a trailing nine-month basis, cloud sales were up to $8.6 billion from $5.4 billion in the first three quarters of 2015.

AWS' operating income doubled, year-over-year, in Q3 of 2016 to more than a billion dollars, driven by margins of more than 31 percent. In the previous sequential quarter, AWS' margins came in just under 30 percent, and they were at 25 percent in Q3 of 2015.

[Related: Amazon CFO: 'There's Plenty Of Room For Multiple Winners' In The Cloud Business]

While AWS improved its profitability, most other parts of Amazon's business saw margins flat-line, sending the stock tumbling to $768.50 at press time, a drop of more than 6 percent in trading after the market closed.

The earnings miss prompted a somber investor call in which CFO Brian Olsavsky dispensed with the typical prepared remarks and went straight into taking questions from investors.

Asked about price pressure on AWS from rival cloud providers with deep pockets, Olsavsky brought up one particular competitor that was simultaneously presenting its own earnings: "I didn't listen to the Google call. You'll have to fill us in on it."

Amazon's very comfortable with decreasing cloud prices, Olsavsky said, noting the provider's 52nd price drop in its history took place in the quarter that closed.

"Price reductions are a core part of our philosophy," Olsavsky told investors. "Not only lower prices of products, but we create new services that are cheaper that customer can switch to."

But Amazon's CFO said cost isn't why Amazon continues to dominate the industry.


"People choose AWS for the functionality and pace of innovation," he said, which "is greater than our competition."

So far in 2016, AWS has rolled out more significant new services and features than the 722 it did through all of last year.

Olsavsky also said the provider's partner ecosystem was a differentiator, noting a recent alliance entered with VMware.

Experience is also a big factor in customer wins, he said.

"We've been in this business a long time, longer than anybody else. We've used that time to make our products and services better," he said.

Amazon's CFO then repeated a statement he made in the company's last earnings call—there are going to be a lot of winners in the cloud.

Darin Manney, Amazon's head of investor relations, said on the earnings call that AWS is helping drive new business to its cloud by investing in technologies that help customers migrate from on-premises environments to AWS.

Those solutions include the Database Migration Service for lifting-and-shifting production databases with almost no downtime, as well as the Schema Conversion Tool that switches database engines to cloud-based solutions.

"We're doing a number of things to make it easier for all customers to move to AWS," Manney said.

That includes continuing to open new regions in the coming months, like the Ohio region Amazon debuted in the quarter that closed, he said.

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