The logo of Amazon Web Services (AWS) is seen during the 4th annual America Digital Latin American Congress of Business and Technology in Santiago, Chile, September 5, 2018.
Ivan Alvarado | Reuters
Amazon Web Services leads the market for remote delivery of computing power and data storage for third-party applications. It has become a major component of the digital supply chain for online services, including Intuit and Workday, along with companies outside the technology industry, including Hess and Kellogg. For the past five years AWS grew faster than Amazon’s other segments and given Amazon the majority of its operating profit. But this time, things changed.
AWS revenue totaled $10.81 billion in the second quarter, less than the $11.02 billion consensus among analysts polled by FactSet. That represents 12% of Amazon’s total revenue, down from 13% in the year-ago quarter as Amazon shipped products to customers during the pandemic. For the first time at least since the first quarter of 2015, AWS wasn’t the fastest growing segment. The North America segment grew 43% on an annualized basis, Amazon’s international segment grew 38%, Amazon said in a statement.
Brian Olsavsky, Amazon’s chief financial officer, talked about what happened during the quarter on a conference call with analysts on Thursday:
So on AWS, segment revenue, what we see are companies working really hard right now to cut expenses, especially in the more challenged businesses like hospitality and travel, but pretty much across the board. We’re helping them, we’re actively, with our sales force, looking for ways that we can help them save money. This includes things like scaling down the usage where it makes sense or benchmarking their workloads against our architectural best practices. So that’s not going to help our usage growth in the short run, but it helped those customers save money, and we think that’s the right thing to do, not only for their success, so they can come out of this in better shape, but also for the long-term health of our relationship with them … .
We’re also seeing a lot of companies that are really wishing that they had made more progress on the cloud because they’re seeing all companies that are on the cloud can … scale up or scale down depending on their particular situation. They realize their on-premises infrastructure is not really flexible up or down, and especially in a time of sinking demand, it’s a big fixed cost for them.
So we expect — we’re seeing migration plans accelerate. They’re certainly not going to happen overnight, but we see companies moving more in that direction. We think that will be a good long-term trend.
And there’s certainly winners in this area right now — things like videoconferencing, gaming, remote learning and entertainment. All are seeing usage growth. And it’s a bifurcated world out there.
The slowing growth was not unique to AWS. In reporting its own second-quarter earnings last week, Microsoft, which is AWS’ closest competitor, said revenue growth from the Azure public cloud for the period slowed to 47% from 59% one quarter earlier. And on Thursday Google parent Alphabet reported cloud revenue, including G Suite productivity software subscriptions, grew 43%, down from 52% in the first quarter.
Operating profit at AWS totaled $3.36 billion, which was up 58% and above the FactSet consensus estimate of $3.01 billion. Around 57% of Amazon’s operating profit came from AWS. Operating margin for the segment was 31.1%, higher than it’s been since 2018.
In the quarter AWS lowered the cost of EC2 computing instances for customers that commit to usage over a set period of time, and it announced a deal with one customer, Slack, that will see Amazon employees adopt Slack’s communication service, while Slack will adopt the technology underlying Amazon’s Chime communication product.
Also in the quarter, Tim Bray, a former Amazon vice president and distinguished engineer, said he would like to see AWS taken out of Amazon and turned into an independent company. He published a hypothetical press release and frequently-asked-questions document that he imagined for an announcement like that. Amazon employees often perform the exercise of writing those documents to guide their work in preparation for a product introduction. In December, AWS CEO Andy Jassy told CNBC’s Jon Fortt that Amazon would not spin out AWS in 2020. “I would be shocked if that was the case,” he said.