Amazon Strong Results Point Toward Boost for Cloud Business

(Bloomberg) -- Amazon.com Inc. Chief Executive Officer Andy Jassy gave investors much of what they wanted this earnings season: robust sales and profit growth along with a hint that the cloud division earnings machine is regaining momentum.

While third-quarter revenue at Amazon Web Services, the cloud computing unit, fell just short of projections, Jassy said the business is stabilizing. The company signed several new deals with customers that took effect this month, and demand for generative artificial intelligence is likely to boost the division well into the future, he said Thursday on a conference call after the results were released. The shares gained sharply after his comments and were up about 6% as the markets opened on Friday. The stock has gained almost 50% this year. 

Amazon’s CEO has been winning over Wall Street with deep cost cuts and a focus on boosting profit. Under his guidance, the Seattle-based company has become increasingly reliant on services that tend to make more money than the original business of hawking goods online, including advertising, logistics services for independent merchants and renting computing power to corporations.  

Cloud unit sales increased 12% to $23.1 billion, a growth rate that was “just enough to keep the goblins away,” analysts at Jefferies said in a note to clients. It was slightly higher than the previous period, marking the first quarter-to-quarter rise in AWS revenue growth in almost two years.

The business’s operating income of $6.98 billion was about $1.3 billion more than analysts expected. AWS, which generally accounts for more profit than the rest of the company combined, reported the highest operating margin since the first quarter of 2022. 

On the call, Jassy acknowledged that some companies are still seeking to cut their spending on rented computing power and software, a phenomenon that has hobbled growth at AWS, along with rivals Microsoft Corp. and Alphabet Inc. But many clients are now turning to running new projects on Amazon’s servers, Jassy said.

The CEO laid out Amazon’s aims to become a major player in generative AI, which is software that can be prompted to produce writing or images based on an enormous amount of data. Jassy said the technology represents “tens of billions” in potential revenue for AWS over the next several years. It’s unclear to what degree such applications are boosting the unit’s sales now, but the business is growing “very, very quickly,” he said. 

During the quarter, Amazon announced a partnership with AI startup Anthropic. Under the deal, Anthropic will use AWS technology and make its tools available to cloud customers. Amazon, widely seen as lagging behind Microsoft and Google in generative AI applications, is investing $1.25 billion – and as much as $4 billion – in Anthropic.

Even as investors parsed Jassy’s words about the health of the company’s most profitable business, the quarterly results provided a clear indication that Amazon’s cost-cutting effort was paying off. Executives have scrutinized expenses in the last year, eliminating jobs, curbing hiring and shuttering marginal projects. 

Amazon’s spending on sales and marketing declined from a year earlier, a first since at least 2015. The growth in spending on technology and infrastructure, a category that includes the salaries of software engineers and costs for AWS servers, rose by just 8.8%, about a quarter of the rate of a year ago.

Third-quarter revenue gained 13% to $143.1 billion, Amazon said in a statement. Analysts, on average, estimated $141.6 billion, according to data compiled by Bloomberg. Operating income increased to $11.2 billion, compared with $2.5 billion in the period a year ago. Analysts, on average, estimated $7.71 billion.

The company’s central online stores also produced a better-than-expected performance. The unit generated $57.3 billion, a 7% increase from the period a year earlier. The quarter included Prime Day, Amazon’s mid-summer shopping bonanza. Operating profit in the company’s catchall North America segment was the highest since early 2021. Advertising sales jumped 26% to $12 billion, also topping estimates.

Amazon projected sales of $160 billion to $167 billion in the quarter ending in December, compared with analysts’ average estimate of $166.6 billion, according to data compiled by Bloomberg. Operating income will be $7 billion to $11 billion in the period. Analysts, on average, projected $8.71 billion.

While company executives were cautious about holiday-quarter spending, Zak Stambor, an analyst at Insider Intelligence, was more optimistic. Amazon’s “successful Prime Big Deal Days event — which Insider Intelligence believes generated $5.9 billion in US retail e-commerce sales, an 8% gain year-over-year — gives it strong momentum as we head into the heart of the holiday season,” Stambor said.