Amazon cautions against reading too much into slowdown in AWS revenue growth rate

Amazon has cautioned market watchers against reading too much into the slowdown in its revenue growth rate or the deceleration in its capital expenditure, as highlighted in its first quarter results.

The online retail giant posted a record quarterly profit of $3.6bn against revenues of $59.7bn during the first quarter of 2019, which is 17% up on the previous year, but is also the lowest growth rate the company has posted in four years.

This slowdown in its revenue growth appears to have been precipitated by drops in revenue growth across several of the firm’s core business initiatives.

Its advertising arm, for example, posted a revenue growth rate of 34%, having demonstrated growth in excess of 60% over the past five successive quarters.

Revenue generated by its physical stores, including Whole Foods, also rose just 1% year-on-year to $4.3bn.

The first quarter also saw the company’s cloud arm – Amazon Web Services (AWS) – report a slight slowdown in its revenue growth rate to 42%, which is markedly down compared to first quarter 2018 when its revenue growth rate hit 49%.

Revenue for the quarter at AWS, meanwhile, hit $7.69bn, and the business unit also generated $3.6bn in profit for its parent company.

During a conference call with analysts, transcribed by Seeking Alpha, Amazon’s chief financial officer, Brian Olsavsky, said the firm is happy with how AWS is performing, given its revenue growth rate is prone to being “lumpy”.

“It’s not only dependent on us, it’s also dependent on the companies that are adopting Amazon… so there are differences in sales cycles. There are differences in adoption of the cloud. There are differences in migration patterns that will make any quarter-to-quarter movements lumpy,” he said.

Analysts on the call also queried an apparent downturn in Amazon’s capital expenditure during the quarter, which Olsavsky said should not be interpreted as a sign that the firm is expecting “diminished returns” in any of its business units any time soon.

“We [are not] restraining the business or constraining the business in any way with our capital,” he said. “We did front-load a lot of the investment both in fulfilment centres and also infrastructure [in 2016 and 2017], but more than that, it’s more than kind of leading through excess capacity.”

Instead of matching those past investments and generating more excess capacity, the company is now doubling-down on making its operations even more efficient, including its datacentres.

“Every percentage utilisation in our datacentres is worth tens and more millions of dollars. So again, that’s a big part of our model. It is not only investing, but working on efficiencies, adding new products and features for customers,” he said.

“As we lower costs, we pass those along to customers, either through new rates or new deals that we have. I would look back on the performance in 2018 and say that that was great work with a lot of efficiency, as we also banked a lot of capacity that had been built previously,” he added.

The company is also turning its attention to tapping into the growing demand for cloud services in China, and eat into the market share of Alibaba, which leads the public cloud market in that country.

As alluded to on the call by Olsavsky, the company has opened its first datacentre region in Hong Kong, which Olsavsky claims will expand its cloud footprint to an additional 19 cities in the country.