Amazon share price stumbles on Q2 results; cloud revenue flat thanks to price cuts

Profile picture for user ddpreez By Derek du Preez July 24, 2014
Summary:
Chief Financial Officer Tom Szkutak said, however, that AWS usage had grown 90% since the same time last year and that the team will continue to invest and innovate in the cloud.

It's been a mixed bag of results this week, some good (Facebook), some bad (Yahoo!) and some middle of the road (Microsoft, Google). And it wouldn't be

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right to finish off the week leaving anyone out, and so we turn our attention to cloud giant and industry disruptor, Amazon. And unfortunately for Amazon, it seems that its Q2 results left Wall Street a bit disappointed this week as its shares dropped more than 11% after reporting its widest loss since 2012.

However, it wasn't all bad news and there is reason for investors (and for customers of its cloud business) to be happy with what is being put out. Ultimately Amazon is a company that invests heavily to expand, which is expensive, but this doesn't necessarily mean that poor results equals poor performance (well, at least not to us anyway). Here are the headline figures for Q2:

  • Amazon reported a loss of $126 million, which was more than analysts' average estimate of $66.7 million (Bloomberg) and $7 million more than a year earlier.
  • Sales increased 23 percent to $19.3 billion
  • However, operating expenses increased 24 percent to $19.4 billion
  • The 'other' category in Amazon's financial statements (which includes AWS) saw a revenue drop of 3 percent to $1.17 billion

 

Although AWS figures aren't broken out separately, analysts predict that cloud brought in approximately $1 billion of revenue in the second quarter, which is flat on what it generated in the last quarter. Amazon's Chief Financial Officer, Tom Szkutak wasn't explicit about the reasoning behind this, but he did emphasize (more than once) the large price cuts that AWS has delivered to its customers since March. On an analyst call upon releasing the results, he said:

We had very substantial price reductions for customers starting in second quarter. They ranged from 28% to 51% depending on the service.

And...

And we put in some price reductions that were very substantial that are saving customers hundreds and millions of dollars over the next several months, as we mentioned 90 days ago.

He also highlighted the associated investment costs:

And so we're investing. And so that's certainly impacting both the pricing decisions we've made. They're certainly impacting the guidance. Also, the large amount of CapEx in infrastructure for that business is certainly impacting the guidance along with a number of other things across the business that we're investing in. But we're very pleased to do that.

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However, Skutak also stated that AWS experienced growth close to 90% year-over-year (which it defined as aggregation of usage across all its services) and that it was continuing to invest and grow the business. He said:

We love that business. It's doing great and we're very pleased to have the opportunity to invest in it. The team is innovating very quickly. In fact, so far year-to-date, they've released 250 significant service and features and that's at a pace that's much, much faster than last year's pace, which was faster than the year before. So again, they're continuing to innovate on behalf of customers. 

In addition to that, over the past year, we've added thousands of people in Web Services. So again, ramping that up.



Senior analyst at Technology Business Research (TBR), Jillian Mirandi, said that Amazon's cloud business will continue to do well, despite the ongoing price cuts, and customers can expect a lot of useful new services to be released. She said:

AWS is healthy and will remain healthy in coming years driven by a quickly growing customer base and impressive customer wins despite price cuts effecting top line revenue. On top of compute and storage, ongoing launches of higher-level services such as Kinesis, a dedication to hybrid IT, and enterprise investments will drive high double-digit growth across 2014.

Hybrid is quickly becoming a focal point of AWS’ strategy as the business moves into the enterprise market. With tools such as Amazon VPC, AWS Direct Connect and AWS Data Pipeline, customers are able to more easily extend on-premises IT through AWS . We believe that the majority of AWS revenue is driven by large enterprise clients, making it critical for AWS to invest in hybrid IT options.

Service launches addressing high growth markets demonstrate AWS’ ability to remain agile

In July, AWS announced cloud storage and content collaboration service Amazon Zocalo and new AWS mobile services. These service

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launches underscore the company’s evolving portfolio outside of core cloud compute and storage; AWS has released 250 service and features year-to-date.

Will Fire be a flop?

With Amazon's Fire smartphone having only just been released, with its highly customised Android UI and novelty features that include a 3D screen, it's a bit too soon to tell whether or not it will be a success, in what is an already heavily crowded and competitive market. However, reviews to date have been particularly harsh and it seems that those that have got their hands on the device early aren't particularly enamoured with its specs. However, this didn't stop Szukat's optimism. He said:

“We're extremely pleased to get it in customers' hands. We think it's a premium product. You get a 32 gigabyte phone, premium product, one-year free subscription to Prime along with all the other features that I'm sure you've read about. So again, we're very pleased to get it to customers and start shipping.”

Good luck!