Growing AWS Props Up Amazon's Profits, But Revenue Growth Slowing

Amazon on Thursday said that Amazon Web Services revenue is continuing to grow strongly, with an annual run rate now of about $16 billion, although the company noted that revenue growth for the public cloud giant has slowed down.

But AWS was critical to Amazon's profitability in its 2017 fiscal second quarter. Operating income for the cloud business, $916 million, was up 28 percent year over year from $718 million. Meanwhile, operating income for all of Amazon was $628 million.

As Amazon released its financial information for the quarter, which ended June 30, Brian Olsavsky, Amazon's chief financial officer, told investors during a short question-and-answer session that AWS's run rate, which stood at $14 billion in the previous quarter, rose to $16 billion.

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"We saw the largest quarter-over-quarter expansion in revenue for that business," Olsavsky said.

Seattle-based Amazon, the parent company of AWS, supported that growth with a 71-percent year-over-year increase in investment to accelerate services and geographic expansion, including the opening of five new sites around the world, Olsavsky said. In addition, the growth in the number of engineering and salespeople at AWS outpaced that of Amazon's entire workforce, which numbers about 340,000, he said.

"The momentum is growing strong," he said. "We're opening new regions. … We know that customers value our partner and customer ecosystem."

AWS revenue for the quarter reached $4.1 billion, up 42 percent over the $2.9 billion reported for the second quarter of 2016, Amazon said.

However, that rise continues a trend of slower growth for AWS. Amazon figures show that revenue growth has slowed for the last six consecutive quarters. However, financial news site CNBC said Thursday that the growth has actually slowed for the last eight straight quarters, falling from a peak of 81 percent in the second quarter of 2015.

When asked how AWS price cuts in May impacted its business, Olsavsky said AWS has continued to reduce services costs and roll out new services that might cannibalize existing services, but he otherwise declined to comment.

Another investor asked whether AWS saw any volume pickup in response to the price cuts. Olsavsky responded that, in the second quarter, AWS saw its largest sequential and year-to-year rise in revenue on a dollar basis, although it was exceeded by the growth rate of all AWS services, he said.

He also said that AWS' marketing expenses are rising. "That is driven by increases in expenses related to the sales team," he said.

For Amazon as a whole, the company reported second fiscal 2017 quarter revenue of $38.8 billion, up about 25 percent compared to the $30.4 billion it reported in the second quarter of 2016.

Meanwhile, net income was $197 million, or 40 cents per diluted share, down sharply from the $857 million, or $1.78 per diluted share, that the company reported last year.

Looking forward, Amazon as a whole expects third-quarter revenue of between $39.25 billion and $41.75 billion, up between 20 percent and 28 percent over the third quarter of 2016. The company also expects operating income to range between a loss of $400 million and income of $300 million, down sharply from third-quarter 2016 operating income of $575 million.

Investors took note of the guidance and drove Amazon's stock price down about 3 percent in after-hours trading, to about $1,014 per share.