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Here's Why Web Services Is the Key to Amazon's Earnings Report

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Next week, all eyes will be on internet behemoth Amazon (AMZN - Free Report) as it reports its first-quarter financial results. While there is always plenty to dig through when Jeff Bezos and company file their quarterly report, one of the most important figures to note will be the performance of Amazon Web Services.

Web Services is a collection of enterprise-level platforms designed for websites and companies that can’t afford the time or money it takes to develop their own server farms. In other words, AWS provides cloud-based storage and templates for companies to quickly boost their computing capabilities.

Launched a decade ago, AWS has really exploded in popularity over the past few years. The service now has millions of customers, and it is a primary driver of profit for the e-commerce giant.

To really get a sense of how important AWS is for Amazon, you have to dive into its growth rates and margins.

Amazon Web Services revenues came in at $3.536 billion for the fourth quarter, marking year-over-year growth of 47%. These results brought the segment’s full-year total to $12.219 billion, up more than 55% from its prior-year total of $7.880 billion.  

Perhaps more impressive than Amazon’s ability to grow the AWS division was its ability to make it more profitable. Keeping the unit’s 2015 and 2016 revenue totals in mind, note that its operating income in 2016 was up to $3.108 billion from $1.507 billion in 2015.

This means that the Web Services unit operated with an EBITDA margin of 25.4% in 2016, which was a nice improvement from the EBITDA margin of 19.1% it posted in 2015.

If we take a look at the results of Amazon’s other divisions, it becomes clear that the company would like not be turning a profit without AWS. In fact, Amazon’s North American operations saw operating income of just $2.361 billion in 2016, and its International operations posted an operating loss of about $1.283 billion.

So why is Amazon Web Services so important? Because it’s significantly more profitable than many of Amazon’s other ventures.

We know that the margins in the e-commerce business can be razor-thin, and when you consider how much cash Amazon has been pumping into its media division, it’s obvious that AWS is keeping the ship afloat for now while the company invests in its future.

Will the shocking growth in AWS eventually plateau? Probably. But our consensus estimate for the upcoming quarter—which compiles data from 28 independent analysts—calls for AWS revenues to hit $3.652 billion, an increase of 42% from the year-ago quarter.

While AWS will likely not sustain its 40%+ growth rate forever, Amazon seems to have a consistent profit-making champion in this unit.

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