Well ok, it's actually a little after Q3 results season, but I figured there would be enough people like me that had been too busy until now to read the reports (we've been closing out another great quarter ourselves). So, as usual, I thought I'd summarise the results from the major cloud vendors for you.
tl;dr: significant growth, but at a slightly lower rate.
As a reminder of scale, AWS' parent company has a market capitalisation (total value of its shares) of $890Bn. As is the way, the stock dipped after the results were issued in late October, but have since recovered.
Why the dip? You might well ask. Primarily because the earnings per share in Q3 were lower than analysts had forecast, mainly linked to higher expenditure, and the Q4 forecast is also a little lower than analysts were expecting.
Doom and gloom? Not by my judgement. Amazon's total revenue in the quarter was up 24 per cent to $70bn, with AWS growth at 35 per cent over previous year's quarter, taking them to $9bn revenue in the quarter and not that far off an impressive $40bn annual run rate. This is a massive number, just massive. Outside of cloud, what else do you know growing this fast at this scale? Amazon are rightly proud of AWS, and one of the few vendors to consistently reveal the numbers for their cloud segment. Of course it's also hugely profitable, with AWS generating $2.26bn in profit for the group in the quarter. This is 71 per cent of Amazon's total operating income vs. just 13 per cent of its revenue.
Now, 35 per cent YoY growth rate is the lowest it's been for some time...but equally the number is a lot larger - so it's hard to see how that's a huge worry right now. Relatively, they grew YoY 37% in the prior quarter and 46% this time last year, so that is a "decline" in one regard, but I don't see how anyone expects a business of this size to grow at a linear rate.
Analysts were expecting a little more from the operating profit of AWS. The reasons discussed by the CFO included increased costs for sales and marketing (probably hiring ‘people' as the main cost), alongside a major investment in hardware (capex) as more customers use their services. I suspect there's also competitive price pressure impacting margins, with some large cuts being made, for example, to Elastic File System.
AWS say they have a huge $27bn in future commitments from AWS customers on the books. This is up more than 50 per cent year over year, and shows both the significant investments customers are making to AWS but also perhaps that pace of adoption isn't as rapid as anyone would like.
Other noteworthy items for the group:
- I'd missed this interesting piece of M&A relating to a flash storage hardware company
- Amazon (not solely AWS) hired over 95,000 people in the quarter, which is verging on crazy and links to the next point:
- Amazon spent nearly $10bn in Q3 alone on shipping costs. You love Prime, Amazon know you love Prime. But wow. It's expensive for them. This is up nearly 50 per cent year over year.
For a similar scale perspective, Microsoft is currently valued at $1.1tn (trillion!). They are making incredible amounts of money and their share price over the year reflects this - up 35 per cent since January. As a reminder, Microsoft doesn't operate a ‘calendar' financial year, so this covers their fiscal Q1 results.
Total revenue in their Q1 was $33bn (much lower than Amazon of course, due to the scale of the latter's retail business). This was up 15 per cent on last year, with profits up 21 per cent.
As I've previously noted, Microsoft sell a lot of things and the product groupings aren't always clear to a casual observer. The simple version is:
- ‘Productivity' related revenue was $11.1bn. This includes Office, LinkedIn, and Dynamics.
- ‘Intelligent Cloud' generated $10.8bn. This includes server (WinServer, SQL Server) products, cloud services, and enterprise services (GitHub, Consulting), not just Azure as some commentators might suggest.
- The ‘Personal Computing' bucket generated $11.1bn including Windows, Search, Xbox, and Surface revenues.
So you'll note, then, that it's hard to do a direct comparison of Azure vs. AWS, other than AWS is significantly larger in any direct IaaS/PaaS comparison, with Microsoft having a larger ‘cloud' offering when including other SaaS revenues.
Azure is definitely growing significantly, with segment revenues up 59 per cent year over year, decreasing from 64 per cent in the prior quarter and 76 per cent a year ago. Their CFO confirmed they are forecasting growth here, and higher gross margins over time.
Based on the earnings call, I think that positive Server segment growth of 14 per cent was driven by aggressive end of life offerings, and many customers opting to keep server workloads on premises rather than moving to Azure just yet - although presumably they will in the future.
There were many other positives noted for Azure, including a major win of a US defence contract known as JEDI. This could have a value of $10bn alone over the next decade - although I'd expect AWS to challenge this award decision. Microsoft also signed a large deal with SAP that will strengthen enterprise credentials, and said they are seeing material growth in contracts greater than $10m for Azure.
Like AWS, their capex spend grew - up by about 12 per cent as the datacentre wars continue.
One other noteworthy item for the group I would mention is that Office 365 subscribers continue to grow - now sitting at more than 35 million in the consumer space and more than 200 million in the enterprise category.
Alphabet's (Google's parent company) market cap now sits very similar to Amazon's at $877bn. Revenues came in at just over $40bn, up 20 per cent year over year. This is vs. a 19% comparable year over year growth in the prior quarter, so they're growing.
Investors were initially disappointed with overall operating margins at 23 per cent (down from 25 per cent year over year), although there are some exceptional items their CFO pointed out which impacted results including a giant French tax bill of $554m and a large $1.5bn loss on some equity investments made.
Advertising, of course, made up most of the revenue, but the "other" category for Google, which includes the higher growth rate segments like cloud, reported $6.4bn - having increased 39 per cent year over year. This is not pure cloud (GCP + G-Suite) revenue, although that is the largest part of it. It includes Pixel hardware, Nest, Google Play, etc, and now generates more than 15 per cent of Alphabet's revenues. We know from the prior Q that Google Cloud hit an $8bn annual run rate, but we don't officially know how that moved over the quarter, nor the split with G-Suite.
Other highlights in the cloud space I would pick included data analytics, specifically with BigQuery as driving both growth and differentiation. Also worth noting their flagship wins with Deutsche Börse and National Australia Bank.
Other noteworthy items for the group:
- The poaching of Javier Soltero from Microsoft to run the G-Suite SaaS team
- Some incredible new work in the sphere of Quantum Computing
- Capex investments were significant at $7.2bn
- Since the results were announced, they've moved to acquire FitBit
What about Alibaba?
The group is a little smaller (relatively!), with a market cap around half the size of Amazon or Alphabet. They do basically own the vast Chinese market, however. Maybe I'll focus more on Alibaba in a future update, for now I'll say they continue to be open about their cloud revenues which grew 64 per cent year over year to $1.3bn - primarily driven by existing customers spending more.
It's competitive out there… Essentially, you have three of the world's largest organisations - a retailer, a software company and an advertising company all containing an incredible cloud computing businesses. Direct comparisons are tricky, although in terms of pure scale the "1, 2, 3" of AWS, Azure, GCP still holds for IaaS and PaaS, with Microsoft leading when SaaS is included.
Capex spend on hardware remains vast - with over $20bn being spent by the major vendors and with that spend accelerating.
The public cloud market continues to grow strongly. Any talk of a decline is nonsense. Large baseline revenue numbers are increasing at percentages most organisations can only dream of.
Chris Bunch (pictured) is general manager for EMEA at Cloudreach
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