AWS Continues Strong Growth and Margin Expansion in Q2

Posted by Josh Stinehour
Aug 11 2016

Amazon reported results for the second quarter of 2016.  Since the first quarter of 2015, Amazon has been reporting the individual results of Amazon Web Services (AWS).  AWS had revenue of $2.88 billion in the quarter, a 58% increase over the year-earlier quarter, and an increase of 12.4% against the preceding quarter, Q1 2016.  For the trailing twelve months ending in the second quarter AWS generated $9.9 billion in revenue.  Amazon_AWS_Logo

AWS represented 9.5% of Amazon’s total sales for the quarter, an increase from the 7.8% contribution for Q1 2015, and an increase from the 8% contribution in Q1 2016.

While AWS represented 9.5% of sales from Amazon in the quarter, it contributed 56% of Amazon’s total operating income.  Operating income for the quarter was $718 million, a 135% year-over-year increase, and an 18.8% increase over the first quarter.

Operating margins for AWS in the quarter were 24.8%, a substantial increase over the 16.7% operating margins during Q2 2015, and an increase over the 23.5% margins in Q1 2016. The reporting of operating income includes a burden for stock-based compensation.  The margin expansion is reflecting efficiencies from AWS ever-growing infrastructure.

The reported revenue for AWS consists of the more than 70 services now offered from the AWS platform across including the sales of compute, storage, and database.  Amazon does not specifically address how much AWS revenue was attributable to the media industry.  However, the AWS figures are a great data point for better understanding the broader adoption of cloud services.

Speaking at the 2016 NAB Show Cloud Innovation Conference, Bhavik Vyas Global Alliance & Segment Leader in Media & Entertainment for AWS, offered several examples of media companies using AWS infrastructure for media operations.  The below slide is from Mr. Vyas’s presentation.



The below chart from Amazon’s Q2 2016 earnings presentation illustrates the growth of revenue and operating income for AWS over the past year.


Management attributed the growth in AWS revenue and profitability to increased customer usage and cost structure productivity.  This was partially offset by continued pricing decreases and increased spending on technology infrastructure.

Operating margins don’t capture the cash flow impact of capital expenditures and payments attributable to the financing of equipment for AWS, which is not disclosed directly.  It is a very capital intensive business.

Additional information from Amazon’s filings are illustrative of the significant level of investment in technology infrastructure attributed to AWS.  The Company’s total capital expenditures (cash) were $1.7 billion during the quarter, an increase of 42% versus both year-earlier period and the preceding quarter.  According to Amazon’s SEC filings, “This primarily reflects additional investments in support of continued business growth due to investments in technology infrastructure (the majority of which is to support AWS) and additional capacity to support our fulfillment operations.”

Cash capital expenditures do not account for property and equipment acquired under capital lease obligation (non-balance sheet items).  Property and equipment acquired under capital leases were $1.4 billion in Q2 2016, flat versus Q2 2015, and an increase of 60% against Q1 2016. Amazon attributes this spend to “investments in support of continued business growth primarily due to investments in technology infrastructure for AWS.”

On Amazon’s call with earnings analyst, Brian Olsavsky, SVP and Chief Financial Officer, responded to a question on the market rates of cloud adoption as follows, “We think still very early. Again, we like our position, our industry leading position in the cloud space, and we’re working on things that would incent more and more customers to accelerate their cloud conversion. The lower prices and services that we offer, and as I said, we’ll work on things that will make it easier and easier for customers to work with us with their hybrid data centers or transfer their volume to us.”


Related Content:

Press Release: Amazon Q2 2016 Earnings

Presentation: Amazon Q2 2016 Earnings



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