Alphabet, Amazon, IBM, Microsoft and Oracle recently announced quarterly earnings covering their public IaaS cloud offerings, respectively, Google Cloud Platform (GCP), Amazon Web Services (AWS), IBM Cloud, Microsoft Azure and Oracle Cloud Infrastructure (OCI).
I evaluated each company’s earnings from an IaaS perspective to understand how these cloud giants are managing and growing their infrastructure.
But the biggest news is that Alphabet broke out revenue for GCP as a separate line item, following Amazon’s previous breakout of AWS. Perhaps Microsoft can follow by doing the same with Azure at some point?
Amazon – AWS
Amazon reported that Amazon Web Services (AWS) annual growth slowed in 2019, down to 37% from 47% net growth in 2018. This is to be expected. It’s easy to post triple-digit growth as a small company, but it gets increasingly difficult for a market leader to grow ahead of the market when it represents such a large chunk of it.
For 13 years AWS has continually refined its infrastructure software to run more efficiently on its hardware, and AWS also continues to update and improve its operational systems. Its goal is to extend the useful life of its internal servers as well as AWS public cloud servers, so in its 4Q 2019 earnings AWS restated server depreciation from a three-year basis to a four-year basis.
Extending its server depreciation basis from three to four years is hugely important. AWS stated that the change reflects actual useful server lifetime metrics and is not just an accounting trick. What this means is that cloud infrastructure best practices are maturing at AWS. It will potentially change the cadence of new infrastructure purchases at AWS as cloud adoption matures.
AWS made a point of covering its announcement of three Arm-based instances type families, M6g, C6g and R6g, using AWS’s new internally developed Graviton2 processors. AWS deployed its M6g instance type family into production in December 2019 but has not yet deployed the other two type families.
AWS also pointed out that its new Arm-based instances are powered by its AWS Nitro smart NICs (network interface cards).
AWS also mentioned its Outposts, Local Zones and Wavelength product rollouts in its earnings press release, highlighting its tacit recognition that hybrid cloud will be with the public cloud industry for a long time to come.
Microsoft – Azure
Microsoft reported that Azure grew 41% in 2019, slightly ahead of AWS but from a smaller base. Microsoft said its operating expenses (OpEx) increased 12% year-over-year due to continued investment in LinkedIn and in cloud engineering. Likewise, capital expenses (CapEx) were up 17% due to buildout of cloud infrastructure.
Azure saw broad-based consumption growth, especially in infrastructure as a service (IaaS) and platform as a service (PaaS). Also, Azure saw an increasing percent of PaaS revenue, as customers adopt new high-value platform services such as Synapse, CosmosDB and Arc.
Microsoft also mentioned that Azure “per user” asset use is improving, which means that Azure is seeing better efficiencies in serving more customers with fewer servers, thus driving gross margin improvements. Microsoft hinted that this trend will continue and enable Azure to serve more customers with potentially less future build-out.
Microsoft stated that Azure will be the first major cloud provider to open regions in Israel and Qatar. I assume they mean to do so in 2020. Alibaba Cloud created its me-east-1 region in Dubai in 2016. AWS activated its me-south-1 Bahrain region in October 2019. In July 2019, Azure launched its uae-central in Abu Dhabi and uae-north in Dubai, so Azure’s new investment in the region is likely to provoke responses from the other major clouds.
Microsoft barely mentioned Azure Stack or hybrid cloud, focusing instead on cloud infrastructure improvements and growth in PaaS and services.
Alphabet – Google
Alphabet broke out its overall revenue numbers for Google Cloud for the first time ever in its year-end 4Q 2019 earnings call. Google Cloud includes GCP and G Suite. Alphabet provided three years of annual revenue (2017, 2018 and 2019) plus 4Q revenue for both 2018 and 2019.
Alphabet’s newly disclosed Google Cloud revenue data shows 30% CAGR growth over the past three years and 53% growth 2018 to 2019.
Alphabet reiterated several times during its earnings call that GCP growth was “meaningfully” higher than its overall cloud business growth. It further stated that its infrastructure offerings and its data and analytics platform led that growth.
Alphabet will continue to invest in technical infrastructure, stating “investments in particular support ongoing demand for machine learning across our businesses, as well as for Cloud, Search, Ads and YouTube.” However, in 2019 it set up a core infrastructure team to create shared hardware infrastructure for more efficiently deploying machine learning capabilities across its businesses.
Alphabet expects that it will spend relatively more on servers than on new data center construction. This focus is to drive efficiency in optimizing its server fleets and better manage its supply chain.
While Alphabet did not specifically mention on prem enterprise sales, it did say that it is “investing heavily” in developing hardware engineering capabilities, as well as building out supply and physical distribution chains.
All of this sounds like GCP is moving in the right direction. It also sounds like GCP is contemplating future Outpost-style on prem hardware deployments, following its investments in Anthos, GKE “on-prem” and other hybrid cloud environments.
IBM – IBM Cloud
IBM reported that its 4Q 2019 Cloud and Cognitive Software revenue was up 9% year-over-year, while cloud revenue within the segment was up 75%. Across all IBM business segments, Q4 2019 cloud revenue grew 23%. IBM also reported that its Cloud and Data Platforms revenue was up 20%. While it’s difficult to tease out IBM’s IaaS related revenue, it appears to be moving in a positive direction.
IBM stated that it is expecting to increase CapEx as it continues to expand its IBM Cloud data center capacity in 2020. As it does so, IBM is also focused on improving its infrastructure cost competitiveness.
While mentioning its infrastructure capabilities and build-outs, IBM only mentioned IBM Cloud twice by name, unlike all of the other cloud providers covered in this earnings summary. Just after reporting earnings, IBM promoted Arvind Krishna, former head of IBM’s Cloud and Cognitive Services business, to CEO as Ginni Rommetty retires.
Mr. Krishna is credited with a leadership role in IBM’s development of artificial intelligence, quantum computing and blockchain services. At the same time, IBM named James Whitehurst, former CEO of Red Hat, as president.
All of the above may signal an IBM shift away from IBM Cloud IaaS toward PaaS and SaaS services.
Oracle – Oracle Cloud
Although Oracle reported earnings in mid-December, I mention them now because Oracle appears to have changed positioning and hit a few important milestones.
Oracle now runs its own business on its own cloud. Like AWS freeing itself from Oracle and only using AWS databases, Oracle has migrated away from traditional IT systems and away from several critical external services. This means that Oracle can act as its own case study and can fully describe its own cost savings from migrating to Oracle Cloud Infrastructure (OCI) Gen2.
Oracle’s margins from its Cloud Services and Licensing division was down slightly due to accelerated investment in OCI Gen2 buildout.
Oracle claims to be seeing a lot of demand for its Oracle@Customer private cloud in the form of customer orders, but it has not shipped the rack-level appliance yet. Oracle@Customer will compete with AWS Outposts and Microsoft Azure Stack.
Oracle stated that there are two key products that will determine its future in the cloud: its Autonomous Database and Cloud ERP.
A key part of Oracle’s refocus is a new competitive target, SAP. Oracle Chairman and CTO Larry Ellison pointed out that SAP never rewrote its core ERP applications for the cloud. As a result, Oracle claims to be replacing a lot of mid-market ERP customers today with its ERP Cloud and expects to launch a product aimed at SAP’s top 50 enterprise customers in March 2020.
Cloud provider and supply chain earnings are not done yet…
In a few weeks, Alibaba, Baidu and Tencent, as well as Cisco, Dell, HPE and Lenovo will also drop their Q1 2020 earnings results.
The original Forbes post can be found here.