The American tech giant, Amazon Inc. (AMZN, Financial) is all set to change its market position from online retailer biggie to a strong Web Service provider as its quarter 1 results shows high profit margins in its AWS- Amazon Web Services worth $1.57 Billion. The overall results grew more than expected helped by rising sales in North America as well as Cloud computing services. The shares went up approximately 7%.
The Cloud’s charisma
Founded in 1994, the Seattle based e-commerce company has been showing strong foothold in the online business arena. Started as an online bookstore, Amazon soon ventured into sale of other consumer goods and ultimately graduating into a ‘get all-things-required under one umbrella’ business house. The company gradually also started producing consumer electronics like Amazon kindle e-book readers, Fire Tablets, Fire TV and Fire phone and providing cloud computing services.
Talking of Cloud computing, the Amazon Web Service has been designed to provide rented storage space and servers where all types of software can run. This proved as a boon to businesses and developers who no more have to buy and make space for machines. All they have to do is hire the computing services. Being the pioneer in this area, Amazon has been able to build a $4.6 billion worth business of cloud computing. Many other top tech giants followed suit including Microsoft (MSFT, Financial) and Google (GOOG, Financial). The innovation of cloud computing also posed a big threat to businesses of tech companies like HP (HPQ, Financial), Dell (DELL, Financial), EMC (EMC, Financial) and Oracle (ORCL, Financial) who were selling hardware and software. Analysts believe that, 5 years down the line, Cloud computing industry will grow to $40 billion with 15% accountability for all information technology spending.
Seeing Cloud Computing from Amazon’s point of view
Amazon for the first time talked about AWS and shared its financial details whose operating income grew 8% to $265 million. Having a strong belief in accelerated growth of its cloud services, the company is planning to put in a major sum of capital expenditure into it and expects free cash flow very soon. During last year, AWS grew a whopping 49% at $4.6 billion in revenues. It currently seems on track with the expectations for the business to reach $6.23 billion by end of this year.
Microsoft’s cloud service, Microsoft Azure has been giving tough competition to AWS. Though, profits at AWS are on the rise, but business is shrinking at the same time due to competitors like Google and Microsoft and also Amazon’s recent investments in new data centers. The way out for Amazon is to continue offering new innovative services, which differentiate it from its competitors.
Ups and Downs in Amazon’s retail unit
Sales from North America were up 24% to $13.4 billion in the first three months. Company’s international unit that fetches 35% of total sales went down 1.77% at $7.75 billion. The high yielding sector outside U.S. has been in India where growth has been quite consistent as a lot of sellers are up for getting their businesses on online portal. The company faced a loss of $57 million or 12 cents per share in the first quarter which was lower compared to its last year’s profits of $108 million or 23 cents per share owing to its involvement in products and services like Hollywood-style television productions, streaming video calls and drone delivery. The world’s biggest online retailer by sales posted a net income of $82 million for the quarter, which was down 37% from last year. Company’s gross profit margin increased 26.6% from 24% a year ago.
Going forward, although Amazon expects an operating loss of $500 million to an operating income of $50 million for the second quarter, its net sales have been estimated to grow 7% to18% at $20.6 billion to $22.8 billion.
Conclusion
As of now, Amazon’s cloud business is not generating big revenues but the pace, which it is following, is to be acknowledged surely. Company’s decision to reveal its financial details in the quarterly results is an indication how important and beneficial is the AWS for it. Turns out, the cloud computing may become a defining factor of the company’s future.
