One standout number in Amazon’s financial report showcases a positive shift in its growing cloud business

But coronavirus could start a slowdown

0 366

Amazon Web Services has been focused on signing up more large business customers in recent years, as it continues to expand beyond the tech startup community that first adopted its cloud technology.

That shift is important because large businesses typically sign longer-term contracts — unlike smaller companies that prefer the pay-as-you-go model — making them a bigger and more predictable source of revenue.

One figure from Amazon’s annual filing reflects that transition: performance obligations.

Performance obligations, which Amazon says is “primarily related to AWS,” represent the total value of signed contracts that haven’t been recorded as revenue because the service hasn’t been delivered yet. For example, if a company signs a three-year deal, only the first 12 months worth of contracts are recorded as revenue over the course of the first year, while the rest of the contract goes to performance obligations.

Amazon’s performance obligations, or backlog revenue, jumped 54% to a record $29.8 billion in its most recent quarter, according to company filings. That’s almost a 2.5-times growth since the first quarter of 2018, when Amazon first started disclosing the figure. The remaining life on those contracts is on average 3.3 years, meaning Amazon expects to convert most of its performance obligations to revenue over that stretch.

Lee Horwitz, an analyst at Evercore Partners, told Business Insider that most of Amazon’s performance obligations likely come from contracts signed by larger enterprises who are making longer commitments to AWS. The 54% growth in backlog revenue last quarter is bigger than AWS’s overall revenue growth of 34%, signaling faster adoption among large businesses than small companies, he said.

“It’s a good leading indicator of overall enterprise demand,” Horwitz said. “We see AWS’s enterprise growth outpacing small and medium size business growth at this point.”

Change over the past 6 years

AWS is no stranger to serving large businesses. It’s been the cloud provider for Netflix and Airbnb for a long time, and has a giant contract with the CIA as well. But as more companies move their entire computing needs to the public cloud, AWS is seeing a more diverse group of enterprise customers in different verticals, including healthcare, finance, and energy.

At last month’s Goldman Sachs Technology and Internet Conference, AWS CEO Andy Jassy highlighted this shift, saying it’s one of the biggest changes he’s seen in its business over the past six years. While companies like Slack and Pinterest started using AWS since they were small startups, he said a growing number of big companies like Goldman Sachs and GE are now using it as well.

“In the early days of AWS, it was mostly startups building their businesses from scratch on top of AWS,” Jassy said. “What’s happened over the last six years is that the enterprise and public sector have very rapidly adopted AWS in the cloud.”

Even compared to some of its peers, Amazon’s performance in obligations growth is noticeable. Microsoft’s number grew 29% in its most recent quarter, while Salesforce’s saw 20% growth from the year-ago period. Google disclosed $11.4 billion in performance obligations for the first time last quarter. While it’s difficult to do an apples-to-apples comparison with these figures, given each company includes different cloud services in its calculation, it still gives good context in how fast Amazon’s enterprise portion is growing.

“It’s an eye-popping number that speaks to the underlying demand Amazon is seeing from AWS build-outs over the coming year,” said Dan Ives, an analyst at Wedbush Securities.

Coronavirus risk
AWS reported $35 billion in sales last year, a 37% increase from the previous year. So far this year, AWS announced Carrier, 3M, and the German soccer league Bundesliga as new business customers.

But the pace of AWS’s enterprise growth could be affected by the coronavirus, according to D.A. Davidson’s analyst Tom Forte. As more companies put in travel bans in place and cancel customer conferences, every software company, including AWS, could find it more difficult to close deals, he said. Amazon, for example, has been significantly expanding its enterprise salesforce in recent years, as most enterprise customers prefer doing business in-person.

In fact, Salesforce disclosed in its annual filing that the coronavirus is now a risk factor as the company cut back on customer events and faces a slower spending environment.

“These conditions can affect the rate of IT spending and could adversely affect our customers’ ability or willingness to attend our events or to purchase our enterprise cloud computing services, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which could adversely affect our future sales and operating results,” Salesforce wrote in its filing.

In a note published this week, D.A. Davidson also said software companies that rely on traveling sales reps and user conferences to sell to large enterprises are most impacted by the coronavirus. While it didn’t mention AWS, the note said companies like Salesforce and Workday could see increased risk in the current environment “given the travel bans and conference cancellations (along with the accompanying lower business confidence).” Forte said the impact will likely start to show up in future quarters as the coronavirus only started to affect US companies in recent weeks.

“There is a risk — but it looks like there is a greater risk to the June quarter than to the March quarter,” Forte said.

– Business Insider

Leave A Reply