Amazon declares results..and stuns!

I hadn’t originally planned on writing this post but couldn’t resist as it is at the confluence of two passions of mine – information technology and the financial markets.

For those of you who follow the stock market, Amazon declared their quarterly results on July 23, a few days ago, and I believe this event marks a momentous shift in the technology business landscape.

First, lets do the numbers and examine why they signify a blowout quarter in many ways beyond just impressive numbers.

Amazon reported an explosive quarter reporting a topline of $23 billion in revenue an y/y increase of 27%, even turning a rare profit of $92 million! For those new to their story, Amazon has always bucked conventional thinking by neglecting short term profits in favor of investing heavily in nascent businesses and constantly finding efficiencies in it’s operating model. The stock shares a somewhat mixed relationship with Wall St.

Amazon’s public cloud business, Amazon Web Services (AWS), reported $1.6 billion in quarterly revenue at a run rate of $6 billion for the year. An astounding number and even more magnified given that it is hugely profitable compared to Amazon’s other businesses (Kindle, Retail etc) representing about 40% of profit at about 8% of overall sales. Jeff Bezos’s then quixotic venture into cloud computing is now looking remarkably prescient (see BusinessWeek cover below). AWS is now key to Amazon’s growth. Cloud Computing has well and truly arrived. An ecosystem of pioneers – Netflix, Airbnb, Zillow etc all use AWS as their primary technology platform.

Of course, Wall Street took note by sending the stock sharply upwards, an intra day gain of 10%. Amazon’s cloud has now pulled way ahead of even Microsoft’s. It is rumoured to have 7-10 times the capacity of all it’s combined competition.

Number two, Amazon (around 20 years old) is now the worlds largest retailer, handily overtaking the venerable Walmart (established 1962) and it’s market capitalization is now worth more than five times that of Target’s.

Of course, there are no guarantees in this business but one can confidently state that Amazon is the business that every retailer or tech provider now desperately wants to emulate. It’s competitive moat widens quarter by quarter across it’s slew of businesses esp in Cloud which now generates the bulk of it’s profits.

CNBC published a rather interesting article a few days ago where Bob Pisani reported that the tech heavy Nasdaq composite index was almost up but was being driven primarily by four stocks alone.

Market capitalization (in billions) as of July 20, 2015:
Apple: $747
Google: $468
Facebook: $268
Amazon: $220
Total: $1.7 trillion

These four web scale giants comprised 31% of the market cap of the Nasdaq and were responsible for driving up the index to historic highs. Apple, of course, is now the most valuable company in the world.

If you recollect, these were the very four companies we discussed in the blog a few weeks ago as examples of businesses that have leveraged IT in the most innovative manner possible to create new markets (http://www.vamsitalkstech.com/?p=143). I reproduce a snippet from the blogpost.

The provenance of the term “WebScale IT”  is the recognition of the fact that the Web scale giants led by the Big Four – Google, Amazon, Facebook and Apple have built robust platforms (as opposed to standalone or loosely federated applications) that have not only contributed to their outstanding business success but have also led to the creation of (open source) software technologies that enable business systems to operate at massive scale in terms of billions of users and at millions of systems.  They have done all this while constantly churning out innovative offerings while still continuously adapting & learning from customer feedback. No mean feat this.

Why is this interesting and why should an IT practitioner care ?

In the earlier blogpost, I had outlined five major foundational capabilities that these pioneering organizations live by –
1. An outstanding approach to digitizing their product lines in a way that supports superior customer interactions and constantly creates new value.

2. Using data in a way that improves the efficiencies in back end supply chains as well as creating micro opportunities in evert customer interaction. As an example, in the earnings call, their CFO touted Amazon’s use of robotics in its large warehouses to lower costs. “We’re using software and algorithms to make decisions rather than people, which we think is more efficient and scales better,” he said. Used right, Data is enterprise destiny.

3. A relentless approach to cutting costs by adopting open source as well as not being afraid to incubate & even invent open technologies as applicable.

4. A mindset that constantly learns and collaborates from customer interactions as well as a flat hierarchy that encourages open communication. Amazon is famous for having a lean management chain and a culture of continuous delivery.

5. Building for the future by inculcating disruption into the organizational DNA. This is done by generating new ideas, being unafraid to cannibalize older (and even profitable) product lines and constant experimenting across new businesses. Reproduced below is a mind-map from Brad Stone from Bloomberg on Amazon’s many businesses.

Not every business needs to be as forward looking as Amazon but if you are looking to leave your competition behind, your IT & data architecture definitely need a re-look and a culture of unafraid experimentation & invention. And yes, a lot of those ideas will fail but you only need a few to succeed to realize massive business value.

References –

1)http://money.cnn.com/2015/07/24/investing/amazon-worth-more-than-walmart/index.html?iid=hp-stack-dom

2) http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-newsArticle&ID=2070674

3) http://www.wsj.com/articles/amazon-posts-surprising-profit-1437682791

4) http://www.cnbc.com/2015/07/20/the-tech-breakout-is-suspect-facebook-amazon-google-apple-rules.html

5) http://www.bloomberg.com/bw/articles/2014-12-04/amazon-expanded-far-beyond-retail-as-bezos-took-on-more-rivals