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Amazon earnings reveal AWS' profitability

Amazon broke out AWS financial numbers for the first time this week, putting it squarely in the category of major enterprise IT vendors.

Amazon separated out its cloud business revenue numbers for the first time, putting to rest any doubts about the strength of Amazon Web Services.

Amazon Web Services (AWS) earned $4.644 billion in 2014, with $660 million in profit, according to Amazon's latest earnings statements; for the first quarter of 2015, it earned $1.57 billion with $265 million in profit.

For IT pros, this means one thing: The company they're relying on as a public cloud provider is stable and positioned well for future growth.

There has been skepticism in the market around the viability of cloud models as many of the largest publically traded software as a service vendors such as Salesforce and Workday have negative operating margins, according to Technology Business Research analysts Jillian Mirandi and Meagan McGrath in a note to clients sent Thursday night. AWS' announcement shows that there is profit to be made in cloud and that the business model is here to stay.

"The most significant thing to me is that this absolutely puts Amazon in the category of enterprise-class IT vendor," said Carl Brooks, analyst with 451 Research, based in New York. "It's a very different story when an enterprise is looking at a vendor to be able to say, 'Hey, we're a $5-billion business and we sell to all of your friends,' versus an enterprise looking at a vendor that says, 'You should try us because you'll really like it, and we're pretty sure about that but can’t tell you anything else.'"

This absolutely puts Amazon in the category of enterprise-class IT vendor.
Carl Brooksanalyst with 451 Research, based in New York

Some analysts predicted AWS would not be profitable, based on the history of the Amazon.com retail business, which often operates at a loss, and given the amount of capital investment in hiring and opening new data centers the company has laid out for AWS in the last year.

"I was surprised that they weren't taking more of a loss, just because you have to invest in technology pretty significantly in the first five years," said David Linthicum, senior vice president with Cloud Technology Partners based in Boston. "I figured they'd be hitting the accelerator and going into the red to move faster with research and development."

While a good step in the direction of greater transparency about the AWS business, Brooks said Amazon could've been even more forthcoming about the costs associated with its cloud computing arm.

"The open question is: Where do they go from here?" Brooks said. "Are they going to make disclosures around hiring? How are they going to talk about data center investment versus warehouse investment?"

In the meantime, Amazon's chief competitor Microsoft reported its cloud business is operating at an annual run rate of $6.3 billion; Amazon's first-quarter revenues annualized would be $6.26 billion, putting the two cloud giants in a neck-and-neck race in terms of revenues, though some point to outstanding questions about how Microsoft recognizes cloud revenue as evidence that the AWS cloud remains ahead.

"With Microsoft, it's hard to figure out the gray areas," Linthicum said, "Much like IBM and HP and the other big guys that have a significant on-premises enterprise business, it's always a bit of a tricky thing to figure out what is pure public cloud revenue."

AWS is also not a particularly low-margin business today, especially compared with the retail side; while AWS has made 48 price cuts since it started, "the primary motivator [for AWS adoption] is really around the innovation that AWS enables and the ability for developers to move really quickly," said CFO Tom Szkutak on the company's earnings call.

AWS' fiscal strength has also further fueled speculation in the market that Amazon might spin it off. Making AWS its own publicly traded company might increase its value; selling it would surely generate a tremendous one-time cash infusion for the Amazon.com retail business, analysts said. Amazon has not publicly stated whether it plans to spin off AWS. 

Being able to offer future AWS employees stock-based compensation might be a good way of attracting and retaining top talent to keep an edge against competitors like Microsoft and Google, Linthicum suggested. Holding on to AWS as it continues at a 49% growth rate, however, might also accomplish the same things.

Beth Pariseau is senior news writer for SearchAWS. Write to her at bpariseau@techtarget.com or follow @PariseauTT on Twitter.  

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5 Billion sounds like a lot but that's revenue not profit, only 600 million of profit.... I'm not really sure what that really means though.
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