Analysis: For the first time, Internet giant Amazon breaks out its AWS cloud services financials, and the numbers are impressive with a 17 percent operating margin and a run rate of $6.3 billion. Analyst Meaghan McGrath of Technology Business Research offers her insight.

Hampton, N.H. – With a 17% operating margin in the quarter and a $6.3 billion run rate, AWS proves the viability of the cloud IaaS business model

Amazon’s public release of AWS’ revenue and operating metrics gives the market long-awaited data around the public cloud IaaS business.

The big takeaway is, as TBR predicted, that AWS is in the black. Revenue from AWS reached nearly $1.6 billion in 1Q15, growth of 49% year-to-year, and netted more than $4.6 billion in 2014. In 1Q15, AWS achieved a 17% operating margin, down from 23% in the year-ago quarter.

There has been much skepticism in the market around the viability of cloud models as many of the largest publically traded SaaS vendors such as Salesforce and Workday have negative operating margins year after year. Further, IaaS is charged on a usage basis (whereas SaaS is a subscription) further making the business model risky. However, with AWS’ announcement, the market can rest assured that there is profit to be made in cloud and that the business model and (successful) vendors are here to stay.

As executives on the 1Q15 Amazon earnings call detailed, AWS operating expenses are expected to trend downwards as a percentage of revenue, as capital expenditures decelerate and the business unit scales, indicating that the business unit will improve overall margins to drive significant free cash flows in the long term. To note, executives mentioned that AWS’ non-technical expenses are allocated to the North American segment, indicating that this does not give a full picture of the total expenses required to run a cloud business.

Further expansion of AWS’ enterprise application suite competes directly with well-established portfolios

After launching WorkMail, a cloud-based managed email and calendar offering that works with Amazon WorkDocs and integrates with Microsoft Active Director in January, AWS introduced unlimited storage on Amazon Cloud Drive in March; and unveiled the Amazon WorkSpaces Application Manager (Amazon WAM) to manage and control access to businesses’ own LOB applications as well as applications purchased from the new AWS Marketplace for Desktop Apps. Together, these announcements suggest that AWS will continue to expand its enterprise application suite to compete more directly with productivity suites, namely Google’s.

TBR believes that this space is relatively saturated with sticky products such as Microsoft Office and Google Apps, and AWS will be challenged to gain meaningful market share in the segment. We expect that AWS will drive incremental revenue in existing accounts with its enterprise applications suite, but net-new customer wins led by this suite will likely remain scarce.

The launch of Amazon Machine Learning continues AWS’ focus on developers

At the April AWS Summit in San Francisco, AWS Senior VP Andy Jassy announced the release of Amazon Machine Learning, a fully managed machine learning service for developers. Amazon emphasizes that the gap between machine learning expertise and software development engineer expertise continues to grow as the big data, analytics, and BI markets expand, but today’s software developers need to use data in their processes.

The solution will reduce the impact of this knowledge gap by supporting real-time analytics by building predictive models into the business process and supporting developers so they don’t need advanced analytics knowledge to effectively work with data sets. This new service will offer data visualization and exploration, sourcing new models, and will feature programmatic access via APIs, regression models, binary predictions, multi-class predictions, and algorithms. Amazon Machine Learning will then take users through data validation and optimization options, helping them make real-time and batch predictions.

The Amazon Machine Launch coincides with other public cloud IaaS vendors building similar solutions into their portfolios, with IBM announcing its public beta for Watson Analytics in December 2014, and Microsoft announcing its Azure Machine Learning Service in February 2015. TBR expects that this solution will be supplemented with additional analytics offerings across 2015, to build more comprehensive, managed big data solutions.

(C) TBR