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Amazon Web Services Is Helping Amazon Scale Like a Proper Tech Company

By Motley Fool Staff – May 5, 2017 at 3:14PM

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Here's what investors need to know from Amazon's first-quarter earnings call.

Amazon (AMZN 3.15%) has long been considered a tech company, although its core e-commerce operations don't scale in the same way that most tech companies do. Amazon Web Services (AWS) has changed that dynamic, as the cloud infrastructure business is starting to exhibit operating leverage.

In this segment of Industry Focus: Tech, Motley Fool analyst Dylan Lewis and contributor Evan Niu, CFA, break down last quarter's AWS figures.

A full transcript follows the video.

This video was recorded on April 28, 2017.

Dylan Lewis: Looking at Amazon's report here, they put up $35.7 billion in revenue. A year ago, $29 billion. That's a 23% increase year over year. That's pretty incredible given the size they're working on with that denominator for year-over-year changes. Down to EPS, $1.48 per share. Based on last year, $1.07, good for 39% increase year over year. When it comes down to it, the company really crushed Wall Street's expectations and their own estimates.

Evan Niu: Yeah, I think it was a pretty strong quarter. The same thing we've been seeing play out over the past year-plus. Amazon Web Services continues to really crush it. This AWS segment is so important at this point financially, because it's so much more profitable than the e-commerce businesses. Plus, on top of that, operating margins for AWS is expanding, so they're starting to see some operating leverage kick in. Whereas the e-commerce businesses, both North America and international, saw operating margins decline a little bit. AWS is now approaching 25% operating margins, compared to 2% to 3% in North American e-commerce, and negative in international. And that's only going to get more pronounced over time as AWS continues to grow, continues to scale, and continues to be even more and more increasingly important, financially speaking, to their bottom line.

Lewis: A couple numbers on the company's cloud computing division, AWS. Sales were up 43% year over year. AWS accounted for 10% of Amazon's total sales in the quarter, which was up from just under 9% in the year-ago period. Like you were saying, investors should be thrilled to see AWS continue to become a larger part of the company's top line, because it is a much higher-margin business than the company's e-commerce efforts. E-commerce is, by nature, razor-thin, particularly the way that Amazon does it. So, when you have a cash cow business like AWS, to highlight the margin differential here, that segment produced more operating income than Amazon's North American division on roughly one-sixth the sales. Which is insane.

Niu: Yeah. I think it's funny. Amazon has always been considered a tech company, but I would argue that's only recently become an appropriate description. E-commerce, yeah, you're doing online, but the cost structure doesn't scale in the way that most tech companies do scale. That's one of the big advantages for a lot of tech companies, that they can really scale up into these really high levels and profits just start expanding. But when you have e-commerce, it's just not that way, because the infrastructure investments are massive, the margins are, like you mentioned, very small to begin with. I think when they jumped into this AWS thing a few years ago, obviously cloud infrastructure is pure tech, and it's also very scalable, which is also another thing that's common in tech. I just think it's interesting how, historically, they've always been considered a tech company, when their operations have been less tech-focused, especially in terms of the cost structure compared to this new cloud business, which is just exploding and blowing up everywhere.

Lewis: And that cloud business has really allowed them to invest in other parts of the business. We mentioned the losses that are going on in the international side right now. That segment posted 16% year-over-year growth. It's still operating at a loss. The reason for that is, they're sinking a ton of money into long-term investments on that side. You can think about what they're doing with e-commerce and building out warehouses, that fulfillment infrastructure. They're investing in content and having original programming that's bespoke to all the markets they're entering, launching Prime in India, all these different things that are long-term plays, that's all enabled by the fact that AWS is creating a ton of money for them.

Dylan Lewis has no position in any stocks mentioned. Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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