Amazon.com (AMZN.O) Inc's cloud computing unit may be its next billion-dollar business and analysts will be watching for clues on how fast this secretive unit is growing when the Internet retailer reports results next week.
Amazon Web Services started small in 2006 by selling extra computing power and data storage to emerging technology companies, blogs and websites. Now the unit, known as AWS, counts NASA, the U.S. Department of State, Siemens (SIEGn.DE), Pfizer (PFE.N) and Nasdaq as customers.
"AWS has the potential to be very large," RJ Hottovy, an equity analyst at Morningstar told Reuters on Thursday. "Any indication that growth rates are progressing will be well received by the market."
Amazon doesn't disclose AWS results. However, a spokeswoman said the business has hundreds of thousands of customers in more than 190 countries.
Analysts and investors get a sense of how fast AWS is growing by looking at how many pieces of data, or objects, are stored by the unit's S3 service, which sells storage on off-site servers, which is known as the cloud.
At the end of the second quarter, S3 held more than 449 billion objects, up 71 percent from the end of last year, according to the official AWS blog.
Amazon EC2 is the other main part of AWS which supplies extra computing power from the cloud. This service was used by 3,674 of the top 500,000 websites in January, up almost 50 percent year over year, according to a survey by cloud computing expert Guy Rosen. That put Amazon just ahead of Rackspace Hosting (RAX.N) as the largest cloud provider, he noted.
"I'm amazed by how fast it's growing and it's clearly accelerating," said Bernard Golden, chief executive of cloud consulting firm HyperStratus. "Companies are building whole businesses around AWS."
Despite such growth, AWS remains a small part of Amazon. On Tuesday, the world's largest retailer is expected to report second-quarter earnings of 35 cents per share on revenue of $9.373 billion, according to Thomson Reuters I/B/E/S.
AWS generated about $500 million in revenue for last year, according to estimates by Morningstar's Hottovy and analysts at J.P. Morgan, UBS and Citigroup.
Citigroup Internet analysts, led by Mark Mahaney, attended an AWS conference in San Francisco in June, where Amazon's Chief Technology Officer Werner Vogels spoke and customers including Adobe (ADBE.O), Autodesk (ADSK.O) and NASA turned up.
"While still very small for Amazon (likely about $750 million revenue run rate), given the size of the market opportunity and Amazon's strong competitive positioning, we believe that this could soon be a $1 billion revenue segment," Mahaney wrote in a note to investors this week.
Doug Anmuth, an analyst at J.P. Morgan, believes AWS revenue will reach $2.6 billion by 2015 as companies outsource more of their data center needs.
AWS can win more customers because it charges fees based on how much its services are used, so there are no upfront costs to deter adoption, Anmuth also said this month.
"Most competitors want to sell white-glove treatment and lock you in for long contracts," said Brian Fitzgerald, an analyst at UBS. "Amazon was unique in that they came to the market and made it very easy to dial up or down the computing power based on customer need," he said on Thursday.
He expects AWS by next year to become Amazon's next billion dollar business.
Amazon has been spending a lot of money to improve AWS's ability to offer more computing power and data storage.
Analysts see the business as a microcosm of Amazon as a whole.
In the first quarter of 2011, Amazon's revenue surged, but profits missed Wall Street estimates. That was partly because of heavy spending on fulfillment centers to support Amazon's main online retail business. But a lot of the spending was also on servers and datacenters to support AWS expansion.
Analysts expect a similar pattern in the second quarter.
"We expect top-line momentum to continue, but the second quarter could be the low point for profit margins," Morningstar's Hottovy said.
Amazon's operating margin was 4.1 percent last year, but Hottovy expects that to fall close to 3 percent for 2011 as a whole.
Still, Hottovy says AWS profit margins could rise in coming years as more customers are added.
Citigroup's Mahaney said AWS gross margins may be up to four times higher than Amazon's overall margins.
"We'll be listening on the earnings call for any details on new traction for this segment," the analyst wrote in a recent note to investors.
(Reporting by Alistair Barr; editing by Carol Bishopric)