AMZN Amazon.com Inc

By Greg Bensinger 

Amazon.com Inc. on Thursday delivered its most profitable quarter ever, topping last year's record holiday period, thanks to surging sales from its lucrative cloud-computing business.

Despite a persistent reputation as a profit miser, Amazon turned in its fourth straight moneymaking quarter and expanded margins in its core retail business, as well as the Amazon Web Services division that rents computing power to other companies.

Shares in the Seattle online retailer surged more than 12% after hours as the company's results far outpaced analyst estimates.

Superlatives abound: Its 28% sales growth was the highest since the second quarter of 2012, while its operating margin of 3.7% was its best in more than five years.

The cash cow driving these figures is AWS, a decade-old operation that pioneered the business of hosting computer servers for companies like Netflix Inc. and the Central Intelligence Agency. AWS has become the go-to provider for a generation of startups, government agencies and other corporations seeking to offload computing power to Amazon's thousands of servers.

The cloud division's sales rose 64% to $2.57 billion. While that is less than one-tenth of Amazon's overall revenue, AWS generated about 67% of the company's operating income in the quarter.

In other words, AWS is supporting Amazon's sprawling, 20-year-old business that spends billions of dollars in an effort to upend traditional brick-and-mortar retail by providing customers nearly everything imaginable in as quickly as one hour.

Chief Executive Jeff Bezos has said he expects AWS to reach $10 billion in sales this year, even as Microsoft Corp., Alphabet Inc. and others ramp up pressure. AWS's operating margin was 28%.

"AWS is having its iPhone moment," said Colin Gillis, a BGC Partners analyst. "Adoption is spreading, margin is expanding."

Still, Amazon Chief Financial Officer Brian Olsavsky cautioned analysts not to expect similar hefty results for AWS in the coming years. "It is very early to start drawing too many conclusions on the long-term margins in this business," he said on a conference call with analysts. "They'll be bumpy over time."

Beyond AWS, the company is also pulling in loyal consumers to its retail operation with its Prime unlimited shipping and streaming video service, and the promise of ever-faster delivery in the largest U.S. markets.

Amazon continues to build new warehouses and streamline shipping and logistics operations, including making more of its own deliveries by truck and plane as it challenges carriers like United Parcel Service Inc.

Amazon still spends heavily to ship its inventory to customers. Shipping costs rose a steep 42% to $3.28 billion in the quarter, giving more reason for Amazon to find ways to contain costs by land, sea and air.

Amazon has struck a deal to lease 20 planes to shuttle merchandise around the U.S. in recent months, installed robotic assistants in its warehouses, opened scads of new storage facilities closer to urban centers and begun delivering more of its own packages to customer doorsteps.

Amazon also is working to bring in new members to the $99-a-year Prime service with proprietary television content and monthly-plan offers released just earlier in April.

Mr. Olsavsky said he expected to "significantly increase our content spend" through the rest of the year.

The company has won critical acclaim for its "Transparent" streaming television series and is developing a show with Woody Allen, as well as movies for release in cinemas.

Amazon increased its spending on technology and content by 28% to $3.56 billion, larger than the 25% overall growth in operating expenses, which totaled $28.06 billion.

Some of those costs went to spending on product development, including for new devices like its Echo Dot and Tap virtual assistant speakers. It also recently released a new Kindle e-reader device, which helps feed its e-books business.

Amazon reported a profit of $513 million, or $1.07 a share, reversing its year-ago loss of $57 million, or 12 cents per share, and topping the $482 million earned in the fourth quarter. Analysts were expecting a profit of 58 cents, according to the average estimate compiled by Thomson Reuters.

Sales of $29.13 billion, up 28% from a year ago, surpassed Amazon's own forecast of $26.5 billion to $29 billion and analysts' expectations of $27.98 billion.

For the current quarter, Amazon expects sales between $28 billion and $30.5 billion, suggesting growth ranging from 21% to 32% from a year ago.

Analysts, on average, were expecting sales of $28.33 billion, according to Thomson Reuters.

Write to Greg Bensinger at greg.bensinger@wsj.com

(END) Dow Jones Newswires

April 29, 2016 02:48 ET (06:48 GMT)

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