- Amazon said in its quarterly report that AWS has at least $16 billion in backlog revenue, up from the previous quarter's $12.4 billion.
- The average remaining life of those contracts also extended from 3.2 years to 3.5 years in its most recent quarter.
- It's the latest sign of AWS signing more long-term contracts, as opposed to customers paying by the hour.
Amazon's cloud service is locking its customers into bigger and longer-term contracts, signaling a deeper commitment from its already market-leading user-base.
Amazon disclosed in its latest quarterly report that it had $16 billion in backlog revenue for Amazon Web Services, up from the previous quarter's $12.4 billion. The average length of those remaining contracts also extended from 3.2 years to 3.5 years in its latest quarter.
Backlog revenue is a non-balance sheet item that represents the total value of future contract obligations. Amazon describes it as "commitments in customer contracts for future services that have not yet been recognized." The remaining balance gets recognized as revenue once the service is billed and delivered.
In AWS's case, it means at least $16 billion worth of contracts will likely get recognized over the next 3.5 years. By way of comparison, Microsoft's "contracted not recognized revenue" was $61 billion as of the end of March, 60 percent of which it expects to recognize over the next 12 months. Salesforce said it had $20 billion worth of "performance obligations" under contract in May.
The growth in AWS' backlog revenue and average contract length is the latest indication of a major shift in Amazon's cloud business. As opposed to a pay-as-you-go model largely catering to startups, AWS is now signing up a growing number of multi-year contracts that are preferred by big enterprise customers. Amazon started disclosing its backlog revenue for the first time in April.
"It suggests AWS is getting big customers to lock-in for longer," Menlo Ventures' Matt Murphy told CNBC. "That's a strong statement about their leadership in the market."
AWS is the largest cloud provider, accounting for roughly a third of the market, according to Synergy research Group. The majority of its revenue still comes from users that pay by the hour, based on their actual usage. But the growth in backlog revenue signals more companies are committing to long-term contracts — giving AWS a more predictable base revenue every quarter.
When asked about the growth in backlog revenue during Amazon's earnings call, CFO Brian Olsavsky said he's "very happy" with the results, saying it's in part driven by more customers "branching out" to other AWS products, including software in machine learning, artificial intelligence, and database.
"They start small and then they continue to build and shift their businesses to us, and a large number have gone all-in on AWS," Olsavsky said.
Most multi-year contracts come with steep discounts, but AWS hasn't let that slow its sales growth. In the latest quarter, AWS revenue jumped another 49 percent, to $6.1 billion, re-accelerating its growth rate for the third straight quarter. The 49 percent quarterly growth rate was the highest in almost two years.
AWS' bounce back in revenue growth shows the cloud service is becoming more efficient with its platform, analyst say. In fact, investment in capital leases for new data centers remained flat in the first six months of the year, showing how Amazon has been able to grow its business without significantly spending more. Meanwhile, AWS has added 800 new features so far this year, which is a faster pace than last year.
"AWS customers are becoming increasingly dependent on the platform," Gene Munster of Loup Ventures told CNBC.
All this points to an "inflection point" for AWS, further solidifying its market-leading position, James Cordwell, an analyst at Atlantic Equities, told CNBC.
While Microsoft still poses as a growing threat, especially given its perceived greater capabilities in other areas like AI and stronger enterprise presence, AWS is starting to distance itself from competition, he said.
"If AWS keeps executing as it is doing presently, it will be close to impossible for competitors to close the gap with them," Cordwell said.