Amazon Execs Tout AWS Strength, Competitive Advantages on Shareholder Call

Growth in Amazon's AWS and advertising segments offset expenditures related to the ramp-up of its one-day shipping program.
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There was plenty of good news for investors in Amazon's latest earnings report, and it also served as a reminder: Don't count out AWS. 

For the December quarter, Amazon  (AMZN) - Get Report blew away earnings estimates as well as beating expectations on revenue. Earnings came in at $6.47 per share, compared to a $4.03 consensus, while revenue grew 21% to $87.4 billion versus a $86.02 billion consensus. 

Shares were up close to 10% after hours following the fourth-quarter release. 

So how did Amazon manage to post a blockbuster profit while only modestly topping revenue estimates?

"The reason for the better profitability is that the advertising and AWS businesses are more than offsetting the cost of building out one-day shipping (shipping costs up 43% y/y vs units up 22%)," noted Loup Ventures' Gene Munster. 

Amazon's high-margin AWS segment reported revenue of $9.954 billion, up from $7.430 billion a year ago, and above Wall Street’s consensus of $9.84 billion in the segment. Meanwhile, its "other" segment, which is mostly advertising revenues, reported a record $4.78 billion, up 41% year-over-year. Munster estimates the operating margin for that business at 65%. 

On a shareholder call, Amazon CFO Brian Olsavsky said that Amazon's AWS growth was "broad-based" and the result of adding new products, investments in sales and regional expansion, and a "network effect" among its customers and partners. 

"We’re very happy with the progress of the revenue, and our...acceptance by customers," he said. "As far as the competitive set, we think we start with a very big lead in this space because of many years of investment, not only in capacity but in services and features."

Amazon's AWS is the largest player in the cloud infrastructure market. Microsoft's  (MSFT) - Get Report Azure is the second-largest, but has gained some ground in recent quarters as the market expands as a whole. But, as analyst Patrick Moorhead pointed out, looking at raw dollar growth in lieu of growth rates may be most illuminating as the market evolves.  

"AWS sales grew over $2.5B for the quarter, which is larger than the overall annual size of most cloud company's revenue. To put this into perspective, if we annualize AWS's Q4 numbers, it would be a $40B business compared to Google Cloud of $8B," said Moorhead, president of Moor Insights & Strategy. "Google's Cloud business includes a lot of GSuite SaaS, not IaaS or PaaS. As AWS gets larger, the percentage growth will decline due to the law of large numbers, so I urge everybody to focus on dollar growth and compare it to its competitors like Google Cloud, IBM Cloud, and Azure. Also important to note that AWS generated 67% of the company's operating income.”

Olsavsky also touted the "network effect" among AWS customers, citing its annual Re:Invent conference as an important driver of adoption of new cloud products and services. 

Looking ahead, the company expects net sales of between $69 billion and $73 billion in the first quarter. Wall Street is currently forecasting revenue of $71.64 billion.