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Cloud Services

Amazon Earnings: What to Watch For

The trick for Amazon in its earnings report Thursday will be to look good -- but not too good.

Amazon.com Inc. (Nasdaq: AMZN) plans in its quarterly earnings report Thursday to reveal financial performance for its AWS cloud platform for the first time. Previously, Amazon included its AWS results in the category "North America Other" business.

In revealing AWS performance, Amazon needs to be cautious: AWS needs to perform well, but if it performs too well it will make Amazon's mainstay retail business look weak. And that'll drive Amazon's stock price down, analysts say.

"AWS's profitability will be the key data point," said Carlos Kirjner, senior analyst for Alliance Bernstein, in a report emailed to Light Reading. "In brief, if AWS turned out to already be quite profitable, this would have a negative implication for the profitability of the much larger retail business. It follows that the more AWS is currently losing, the better the news for retail and, we believe, for the stock."

Alliance Bernstein believes AWS's GAAP EBIT margin, including stock-based compensation, is "highly likely" -5% to -10%, although it's hard to tell given lack of visibility on staff count and other issues.

Kirjner estimated AWS generated $4.5 billion in 2014 sales, which will grow to $7.3 billion this year, according to Dan Frommer, writing at The Quartz. Cowen and Company estimates 2015 AWS revenue of $5.9 billion, and JPMorgan analyst Doug Anmuth estimates 2016 revenue at $8.9 billion.

Overall, analysts estimate Amazon will report revenue of $22.39 billion in the quarter, up 13.4% year-on-year from $19.74 billion.

Amazon is the top public cloud platform, with 50% market share. Rackspace trails by a long stretch, with 8% market share, followed by Microsoft Corp. (Nasdaq: MSFT)(6%), Verizon Communications Inc. (NYSE: VZ) and IBM Corp. (NYSE: IBM) (3% each). Other vendors combined have 30% market share, says The Quartz.

AWS is also the cloud sector's price leader, with the lowest prices, said analyst Mark Mahaney, RBC managing director, in a report emailed to Light Reading. Pricing actions over the last three months among Amazon and other major cloud providers have been "tame," Mahaney says. That contrasts with "very steep industry price cuts" in the first half of 2014, which slowed down North America Other revenue growth in the second quarter.

While Amazon hasn't been cutting pricing in 2015, it hasn't been quiet either. This month, it introduced Machine Learning as a service, along with virtual desktop management tools. (See Amazon Intros Machine Learning as a Service.)

Low pricing is key to Amazon's appeal. AWS gained market dominance by catering to the low end. Back at its founding in 2004, while competitors aimed for top executives in enterprise businesses, Amazon went after developers, who were more forgiving of glitches and willing to experiment. Meanwhile, CIOs were afraid to even try cloud computing, writes Jack Clark and Ashlee Vance in a brief history of AWS on Bloomberg.

Now, Amazon must lure those same big customers, who are adopting cloud rapidly, but are still timorous.


Want to know more about cloud? This will be just one of the many topics covered at Light Reading's second Big Telecom Event on June 9-10 in Chicago. Get yourself registered today or get left behind!


Why is Amazon breaking out the numbers now? Tom Szkutak, Amazon senior vice president and CFO, said in the company's January earnings call that the business is growing fast enough to make it the right time to do so.

But there may be another reason. Amazon may be planning to spin out AWS, which is "a completely different beast than Amazon's retail business, with different resources and expensive equipment," writes Rachel Lerman at the Puget Sound Business Journal.

Amazon is a company that traditional service providers need to watch. Its cloud platform is both a competitor to and partner with service providers, who sell enterprises on interconnections with AWS and other cloud providers. Likewise, Amazon's media streaming services drive demand for consumer broadband and compete with cable and carrier video offerings.

— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected]

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MikeP688 4/27/2015 | 2:00:54 PM
Re: Don't Be Yourself I get that --but you need to realize that the patience of investor/speculators can only go so far.    I personally enjoy watching Amazon and believe Bezos will continue to razzle and dazzle--but time will tell.   Appreciate your insights @brooks7 :-) 
brooks7 4/27/2015 | 1:37:53 PM
Re: Don't Be Yourself Yes - in a high growth environment - being break even is acceptable as long as it is the plan.  Once territory is seized, then you can back down on expenses and manage your business more profitably.  Want another example?  Try Enphase in the solar power converter business.  Could they make more money?  Why yes...taking market share requires investment so they choose not to.  All depends on where all of what you are doing is on the Product Life Cycle and what markets you are in.

seven

 
MikeP688 4/27/2015 | 12:22:22 PM
Re: Don't Be Yourself Are you suggesting that being breakeven is justified and justifying the high valuation?    I did some the "gross operating profit"--What is fascinating is that Amazon is in it for the long haul--and I think in that we can agree.
brooks7 4/27/2015 | 10:38:29 AM
Re: Don't Be Yourself Just FYI, Amazon made a modest operating profit.  The losses were due to taxes and interest and were modest as well.

Essentially, Amazon is operating at break even so ($52M loss on $22B in Sales) that implies that this is intentional.  Grow into your earnings is pretty much a standard practice in the "grab market share" game.

seven

 
MikeP688 4/27/2015 | 6:37:38 AM
Re: Don't Be Yourself It is part of a broader problem worldwide because it seems that "bigger is better" which truly stifles innovation.   I finished this earlier on one of my channels that reflected upon Apple v. IBM--it is compelling reading that the leading luminaries of our time have to taken notice.... 
jabailo 4/26/2015 | 10:18:20 PM
Re: Don't Be Yourself
It's a serious problem.  You have to dissect these businesses because right now they are holding gargantuan amounts of capital.  People are expecting both a "safe bet" and enourmous growth.  Who wouldn't want that, right?   But in the meantime, because the Hogs are holding on as hard as they can, any new growth, speculative or technologically edgy business (exactly the sorts we want right now to start exploiting 21st century technology and to create jobs and midsized businesses) can't get access to that capital as easily as they might.  It's the same problem with real estate and up until recently, oil.


MikeP688 4/26/2015 | 8:53:14 PM
Re: Don't Be Yourself Wow..Enron is quite a "Stretch.

But the scepticism I have noted prevails--so far the markets have not pulled the rug from under Amazon.    How long it can sustain is to me the big question--and on that I think you and I agree on.

 
jabailo 4/26/2015 | 8:31:02 PM
Re: Don't Be Yourself Enron comes to mind.   Building small bits of profit to mask a superstructure of ever lessening (or money losing) enterprises.  Someone will have to call, at some point.

Because at the end of the day, all you're saying is Amazon is a Cloud vendor selling rack space.   And now Microsoft is a Cloud vendor.   But...almost every business written about here is a cloud vendor.

I am not seeing the special value of having a profitable cloud business saddled with a potentially disasterous low profit, high overhead "other" business other than the cloud business masks all the potential for complete collapse.

In logic this is called the Least Plausible Hypothesis.   You are claiming that overall this explains the "success" of the business.  But you can show that it's just a two businesses glued together, one, unsuccessful, and one, the smaller half, successful, but you're building your argument only on that very much smaller part.

(In this same way Climate Scientists explain the decades of where there is cooling by resorting to a weak theory of aerosols.)

Business needs to make the transition to the 21st century.  Completely.



 

 
MikeP688 4/26/2015 | 6:14:50 PM
Re: Don't Be Yourself History is full of such examples.     The question continues to be whether the Market will sustain the philosophy that Jeff Bezos underscores constantly--so far it does becuase the underlying fundamentals of Amazon (Beyond the "Book Selling") seems ot be ever so solid and engaging.    It will be fun to continually assess it though--isn't it?

 
jabailo 4/24/2015 | 5:39:03 PM
Re: Don't Be Yourself It's like a living example of the old vaudeville joke:

Businessman:  You see, we lose a little bit on each sale.
Reporter:  So how do you stay in business?
Businessman:  Volume!

But seriously, this idea of putting a little "cherry" on top of a pile of sawdust and calling it an ice cream sundae is unfortunately becoming the norm for many large cap stocks.   It's kind of a ruse in many ways because the big of high profit masks a giant money losing operation.   Add it all together and it appears as slow but steady growth.  However, what happens when the foundation crumbles?   



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