WASHINGTON: Amazon.com Inc’s cloud unit posted the strongest sales growth in a year, a sign that the retailer’s most profitable unit is recovering from a slump as businesses resume spending on technology projects, including artificial intelligence (AI) services.

Despite the strong cloud performance, the company’s sales forecast for the current quarter fell short of estimates, reflecting concern about the main eCommerce business as consumers continue to spend cautiously.

In recent years, chief executive officer Andy Jassy has cut costs and focused on profitability in Amazon’s online shopping business, laying off thousands of people and touting a more efficient warehouse network.

At the same time, he’s backed big investments in AI services that Amazon expects to generate tens of billions in revenue in the coming years. Those sales are starting to materialise.

The Seattle-based company posted a first quarter operating profit of US$15.3bil.

Revenue increased 13% to US$143.3bil in the period ended March 31, Amazon said in a statement. Both figures topped analysts’ estimates.

Sales in the Amazon Web Services (AWS) cloud unit were US$25bil, up 17% from a year earlier. Analysts estimated AWS sales at US$24.1bil.

“We’re seeing strong demand signals from our customers on the AWS side,” chief financial officer Brian Olsavsky said on a call with reporters. “They’re signing longer deals with larger commitments, many with generative AI components.”

Olsavsky said generative AI now represented a “multi-billion dollar revenue run rate business” for Amazon, the first time the company has publicly put even an approximate figure on that franchise.

That will come at a cost. AI chatbots, data-crunching tools, and other software that respond to queries from users are possible only thanks to massive quantities of cutting-edge computer chips.

Olsavsky said Amazon’s capital expenditures would “meaningfully increase” in 2024, primarily to support AWS growth, including for generative AI.

The company has said it will spend more than US$150bil to build out and operate data centres in the coming years.

Sales growth at the cloud unit had slowed to a record low last year as businesses cut back on technology spending and sought to curb computing bills that ballooned during the pandemic.

Investors have been banking on a rebound this year, particularly after strong results last week from Microsoft Corp and Alphabet Inc’s Google, Amazon’s two main rivals in the business of renting computing power and data storage.

AWS generated a profit of US$9.42bil in the quarter.

The unit’s operating margin, which is 37.6%, is the widest since Amazon began disclosing sales for its cloud business. The division held its largest-ever layoffs last year and has continued to trim its ranks selectively, even as it hires in other areas.

Amazon said revenue will range from US$144bil to US$149bil in the period ending in June. Analysts, on average, projected US$150.2bil. The company’s main eCommerce business reported sales of US$54.6bil in the quarter, slightly missing analysts’ estimates.

Olsavsky said consumers continue to trade down to save money.

Shoppers are ordering more consumables, which they need quickly, but they also cost less than other categories, he said.

That puts pressure on the profitability of the business because Amazon has to process and deliver more units.

The slowing eCommerce sales have also pushed Amazon to seek greater growth for other business lines. For example, advertising revenue rose 24% to US$11.8bil.

The results reflect the first quarter since Amazon introduced video advertising to the Prime Video streaming service.

Amazon shares gained about 2% in extended trading after closing at US$175 in New York. The stock has jumped about 15% in 2024.

 - Bloomberg