Cloud supply chain earnings reports occur in two broad clusters each quarter, this post continues from the first cluster of reports. Key messages are summarized first, with detail for recent earnings reports following.
Cloud service provider summary:
- AWS extended its server depreciation from three to four years, which will potentially change the cadence of new infrastructure purchases at AWS as cloud adoption matures.
- Microsoft mentioned that Azure “per user” asset use is improving, which means that Azure is seeing better efficiencies in serving more customers with fewer servers.
- Alphabet expects that it will spend relatively more on servers than on new data center construction.
- In late November (prior quarter), Tencent reported its CapEx increased 12% due to more spending on servers to support expansion of its cloud business.
- Alibaba Group reported that Alibaba Cloud grew 38% but did not provide detail about Alibaba Cloud as coronavirus was top of mind during its earnings call.
- Baidu also reported double-digit growth and is investing heavily in new technologies and businesses, specifically calling out mobile and AI-based businesses.
“Classic” system vendor summary:
- On the hardware side, Cisco Systems reported a loss but is pivoting to provide switch chips for whitebox and cloud service provider internally-designed switches. This marks a tectonic shift in the data center switch and router supply chain.
- Dell Technologies, HPE and Lenovo all also reported losses, though Dell and Lenovo both reported narrowing losses and predicted return to growth. Strategies diverge wildly:
- Dell Technologies focused on enterprise and flexible consumption pricing models and not on cloud.
- HPE placed big bets on high-performance computing (HPC) and platform-as-a-service (PaaS) through acquisitions and investments.
- Lenovo reported a healthy and expanding cloud business.
Chip vendor summary:
- NVIDIA and Intel signaled a strong Q1 for cloud service provider purchasing but perhaps a slower rest of year.
- AMD reported that its EPYC second-generation “Rome” processor is ramping volume production.
- Xilinx reported its data center revenue is growing but not meeting previous expectations.
I also provide a separate analysis of the 2019 novel coronavirus (COVID-19) impact to this quarter’s cloud supply chain earnings. In a nutshell, I expect clouds to invest in infrastructure buildout over the next few quarters, despite COVID-19.
Cloud Service Providers
Alibaba Group reported 62% YoY growth for Alibaba Cloud. Alibaba Cloud was reported to surpass RMB 10bn in a single quarter for first time (RMB 10.7bn) with margin loss narrowing to RMB 356m. For comparison, Alibaba Group total revenue was RMB 161bn for the quarter, posting 38% growth.
Alibaba Group cited an overall decrease in CapEx due to seasonality but did not provide detail about Alibaba Cloud as coronavirus was top of mind during its earnings call.
Baidu reported that its new AI businesses, which include smart devices, smart transportation and Baidu Cloud, doubled quarterly revenue year-over-year. Baidu does not break out its cloud revenue separately from the rest of its AI-based businesses, but it claimed double-digit growth for Baidu Cloud with “impressive” margin improvements. Baidu mentioned entering 2020 with a lean P&L sheet but with “heavy investments” in technology and new businesses, particularly mobile and AI businesses.
Baidu, like AWS and Google, has designed its own in-house AI acceleration chip for cloud servers. Named “Kunlun”, the chip is claimed to customize a wide range of AI applications, spanning visual, speech and natural language. This might put Kunlun in the same category as Google’s Cloud TPU, as opposed to AWS’s Inferentia accelerator, which seems to be tuned for Alexa natural language processing.
While Cisco Systems is promoting multi-cloud and hybrid applications, its core data center switching and routing business is under attack. Cisco reported total revenue was down 4% and net income was flat year-over-year. Servers and Unified Communications both declined substantially. Its commercial customer segment was down 4% and its service provider segment was down 11%.
To fight back, Cisco is focusing on edge applications outside of its core data center business (primarily IoT and 5G), as well as switch and router silicon sales to blunt impact of white box switches and routers within large service provider data centers.
Cisco Silicon One unified networking architecture and its Q100 chip mark a sea-change for Cisco’s adaptation to a changing market. Google and Facebook publicly supported Silicon One at its announcement in December 2019. Chuck Robbins, CEO, said “We have taken orders for both (8000-series routers and Q100 chips) from different cloud players, and so we feel good about the acceptance of that launch.”
Cisco’s shift to cloud security contributes to its shift to software services (up 9% and 5%, respectively), which was a bright spot in its earnings report.
Dell Technologies reported that its Infrastructure Solutions Group (ISG) FY2020 revenue was down 7% from 2019 but still up 10% from 2018, based on large enterprise customers in China digesting their FY2019 CapEx in FY2020. ISG server and networking revenue was down in FY2020 as ISG “didn’t chase unprofitable server deals in a down market”, perhaps signaling lackluster cloud sales.
ISG reported revenue for the quarter was down 11%, with the server revenue component down 14%. Thomas Sweet, EVP and CFO, attributed that 14% decline to demand in China being down 35% while the rest of the world was down only 5%.
Dell stated “We’re planning for both the overall server market and our server revenue to return to growth, driven by higher value workload servers, increasingly more robust AI and machine-learning solutions and distributed IT requirements at the edge.”
On the other hand, Dell Technologies’ VMware and Dell Financial Services (DFS) businesses are in healthy positions. Dell highlighted DFS Flex On Demand flexible consumption model and stated its billings total nearly $900 million.
HPE reported that overall revenue was down 7% for the quarter “primarily due to declines in our compute business”, which declined 10% sequentially and 16% year-over-year.
HPE intends to become an edge-to-cloud platform-as-a-service company and is shifting its product mix to higher margin software solutions. HPE even cast its Cray acquisition as a software platform running in a cloud-native environment to process large data-intensive workloads.
I’ll be watching HPE to see how its big bets, such as its investment in Pensando, help it progress toward its new business goals.
Lenovo Group reported narrowing quarterly losses for its Data Center Group (DCG), from $47 million to $8 million sequentially, stating “We will resume revenue growth in DCG. In our hyperscale business, we will expand our business with the existing customers and continue to acquire new customers.” Kirk Skaugen, President of DCG, stated that Lenovo already sells to six of the top ten clouds and that DCG has added additional sales staff to target smaller clouds globally.
Lenovo DCG also mentioned that cloud demand is recovering and is expected to strengthen each quarter through the year. Mr. Skaugen cited high-end demand from cloud providers to provision workloads such as SAP HANA, with DCG supplying four- and even eight-socket servers to large cloud providers to meet demand.
NVIDIA reported its full year revenue was down 7% based on an early year pause in cloud spending that recovered by Q4. NVIDIA’s Q4 revenue was up a stunning 41% year-over-year and 3% sequentially, based on growth in its data center and gaming businesses. NVIDIA tagged cloud demand on growth in artificial intelligence (AI) workloads, both for training and inference applications.
Prior to COVID-19 affecting earnings reports:
Intel reported in January that it expects an exceptionally strong Q1 as cloud customers continue their second-half 2019 capacity build out. But Intel also expects slower capacity expansion for the rest of 2020 as CSPs “digest” three quarters of infrastructure build-out.
AMD reported in January that EPYC Rome has been in market 4-5 months and is ramping. AMD’s share of instance types deployed at the top four clouds has been increasing slowly. Liftr Insights measured AMD’s share of processor-only-based instance types at a fraction over 9% exiting 2019. That is an improvement from earlier in the year, but it did not break into double digits. Data center revenue was “heavily weighted” to server CPU, with data center GPU revenue reported as “lumpy.”
Xilinx reported in January that its data center revenue is growing, but not meeting previous expectations. Xilinx also used the word “lumpy” to describe its revenue progress. Xilinx expects that most of its 2020 growth will be due to a mix of high-performance computing and cloud customers, with slower growth from storage and networking applications.The original Forbes post can be found here.