AWS revenue growth stabilizes as generative AI opportunities offer "tens of billions of dollars" of new business

Stuart Lauchlan Profile picture for user slauchlan October 27, 2023
Summary:
Customers are starting to think about new initiatives and some unfinished business, according to Amazon CEO Andrew Jassy.

AMAZON
Andy Jassy

AWS managed to stabilize its sales growth in Q3 after several quarters of decline, with revenue coming in at $23.06 billion, up 12% year-on-year. 

That’s the same percentage figure as Q2, but still significantly down on the 33% rate reported in 2022 and well behind recently announced Google and Microsoft levels. Operating income was $7.0 billion, up 29% from $5.4 billion for the comparable year-ago quarter. 

Amazon CEO Andrew Jassy was quick to point out that revenue growth decline had levelled off: 

AWS' year-over-year growth rate continued to stabilize in Q3. And while we still saw elevated cost optimization relative to a year ago, it's continued to attenuate as more companies transition to deploying net new workloads.

Companies have moved more slowly in an uncertain economy in 2023 to complete deals. But we're seeing the pace and volume of closed deals pick up and we're encouraged by the strong last couple of months of new deals signed. 

These new deals aren’t necessarily showing up on the bottom line just yet, he added:

For perspective, we signed several new deals in September with an effective date in October that won't show up in any GAAP reported number for Q3, but the collection of which is higher than our total reported deal volume for all of Q3. Deal signings are always lumpy and the revenue happens over several years but we like the recent deal momentum we're seeing.

Wary

That said, customers are still keeping a wary eye on the macro-economic climate and this is having an impact on AWS, with Jassy stating: 

We're still seeing elevated customer optimization levels than we've seen in the last year or year before this, I should say…If you look at the optimization too, what's interesting is it's not all customers deciding to shut down workloads. A very significant portion of the optimization are customers taking advantage of enhanced price performance capabilities in AWS and making use of it. So, for example, if you look at the growth of customers using EC2 instances that are Graviton-based, which is our custom chip that we built for generalized CPUs, the number of people and the percentage of instances that launched their Graviton base as opposed to Intel or AMD base is very substantially higher than it was before.

One of the things that customers love about Graviton is that it provides 40% better price performance than the other leading x86 processors. So you see a lot of growth in Graviton. You also see a lot of customers who are moving from the hourly on demand rates for significant portions of their workloads to one-to-three year commitments which we call savings plans. So those are just good examples of some of the cost optimization that customers are making in less certain economies where it's really good for customers short and long term and I think it's also good for us.

Customer focus is key, he argued: 

Even if you look during optimization times in this difficult economy, customers have really noticed how AWS leaned in with them for the long term. And I think that matters to customers. And then we have a $92 billion revenue run rate business where 90% of the global IT spend still resides on premises. If you believe like we do, that equation is going to flip, there’s a lot more there for us.

The AI stuff

Of course, generative AI is having a positive impact, Jassy went on, stating that he sees this as driving “tens of billions of dollars of revenue for AWS over the next several years”. AWS has a big competitive advantage, he claimed: 

It's worth remembering that customers want to bring [Large Language Models] to their data, not the other way around, and much of that data resides in AWS as the clear market segment leader in cloud infrastructure. We're innovating and delivering at a rapid rate and our approach is resonating with customers.

The number of companies building generative AI apps in AWS is substantial and growing very quickly, including Adidas, Booking.com, Bridgewater, Clariant, GoDaddy, LexisNexis, Merck, Royal Philips and United Airlines, to name a few. We are also seeing success with generative AI start-ups like Perplexity.ai who chose to go all in with AWS, including running future models in Trainium and Inferentia. 

And Amazon as a whole is tapping into AWS’s work, he said:

Beyond AWS, all of our significant businesses are working on generative AI applications to transform their customer experiences…A few examples include, in our stores business, we're using generative AI to help people better discover products they want to more easily access the information needed to make decisions. We use generative AI models to forecast inventory we need in our various locations and to derive optimal last mile transportation routes for drivers to employ.

We're also making it much easier for our third-party sellers to create new product pages by entering much less information and letting the models to the rest. In advertising, we just launched a generative AI image generation tool, where all brands need to do is upload a product photo and description to quickly create unique lifestyle images that will help customers discover products they love. 

And in Alexa, we built a much more expansive LLM and previewed the early version of this. Apart from being a more intelligent version of herself, Alexa's new conversational AI capabilities include the ability to make multiple requests at once as well as more natural and conversational requests without having to use specific phrases. We continue to be convinced that the vision of being the world's best personal assistant is a compelling and viable one and that Alexa has a good chance to be one of the long-term winners in this arena. Every one of our businesses is building generative AI applications to change what's possible for customers and we have a lot more to come.

The future’s bright, he concluded: 

I think a lot of the relatively low-hanging fruit on optimization has happened in 2023. It's not to say there won't be any more optimization…we're already seeing more and more companies that are turning their attention to newer initiatives.

He predicted it won’t just be all about generative AI. There is unfinished business in many cases: 

There was a significant number of new customer transformations where companies were going to largely move from being on-premises to being in the cloud. That got stalled in 2023 because companies were being more conservative with their spend and wary of an uncertain economy. I think that what you'll see increasingly is that companies will both go back to those transformations they were planning on making, working with a lot of systems integrator partners, as well as ourselves, [and] start to see the production in large scale of the generative AI applications that they're all working on and prototyping and starting to deploy into production.

My take

We've just seen a collection of  [deals] the last couple of months being discussed for several months where I think, frankly, both sides thought they would close faster, but just went slower than they did. So I just think you're starting to see companies look forward more.

A strong quarter for Amazon overall and some reasons to be cheerful coming out of AWS, assuming that Jassy’s interpretation of market trends comes true. 

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