AWS growth rate slows in Q2, as Amazon retail's run of quarterly record profit growth ends

Amazon’s second-quarter results has seen its cloud arm report another successive quarter of dampened growth, despite banking $8.4bn in revenue during the three months to 30 June 2019.

The results saw the year-on-year revenue growth rate for Amazon Web Services (AWS) slip to 37% for the second quarter, which is markedly down on the previous quarter’s revenue growth rate of 42%.

AWS also made a profit of $2.12bn during the second quarter, up 22% on the same period in 2018 when it banked $1.6bn.

During a conference call with analysts, transcribed by Seeking Alpha, Amazon CFO Brian Olsavsky, said AWS continues to perform well for the company, and called out the growing demand for its machine learning tools, including Amazon SageMaker, as a notable highlight.

“We’re very happy with the growth in absolute dollar terms and we’re seeing a pick up from customers and their usage, their increased pace of enterprise migration, and increased adoption of our services – especially our machine learning services,” he said.

“Continually, AWS is being chosen as a partner to many companies because of our leadership position both in technology, our vibrant partner ecosystem, and also the stronger security that we offer.”

Olsavsky has previously warned market watchers off reading too much into any fluctuations that may occur in the AWS revenue growth rate, claiming it is prone to being “lumpy”.

However, the slowdown in revenue growth AWS is now experiencing is one the analyst community has long predicted will occur, on the basis that it is difficult for a firm the size of Amazon’s cloud business to maintain such rates the bigger it gets.  

For this reason, John Dinsdale, chief analyst at Synergy Research Group, said the slowdown in AWS’s growth rate is pretty insignificant when viewed in the context of how the rest of the public cloud market is performing.

“All of the major cloud providers have seen their growth rates tail off a bit, but that was only to be expected given the scale that the market has now achieved,” he said. “The market is rapidly approaching a revenue run rate of $100bn per year, and yet it is still growing by almost 40% per year.

“The sequential quarterly growth in absolute dollar terms [AWS posted] was the second highest ever achieved. We are forecasting that this market will continue to grow strongly for years to come.”

Outside of its cloud business, the results posted for Amazon’s online retail arm saw the company’s share price fall by around 2% in after-hours trading, despite achieving year-on-year growth in both revenue and profit.

The firm reported revenue of $63.4bn for the quarter, which is up 20% on the previous year, and quarterly profit growth of 3.6% to $2.63bn – both of which were below analyst expectations. Particularly as the firm had, up to this point, reported record profits for three consecutive quarters.

During the analyst conference call, Olsavsky alluded to the fact the firm has seen an uptick in its spending during the previous quarter, caused – in part – by the roll-out of its one-day delivery service to members of its Amazon Prime subscriber base.

The firm previously estimated that would cost around $800m in additional transportation costs to accommodate its one-day delivery plans during the second quarter, but the cost involved has been a “little bit higher”, he confirmed.

Some of these additional costs were related to transitioning its warehouse and altering its inventory systems to accommodate this change, so goods can be moved closer to where its customers are to cut down on delivery times, he added.

“We have had large changes to our distribution and transportation network repeatedly in our history – from going from media to a vast variety of different product lines,” he said.

“It does create a shock to the system. We’re working through that now. We expect we’ll be working through that for a number of quarters, but when the dust settles, we will regain our cost efficiency over time.”