The big 3 Infrastructure as a Service (IaaS) providers are possibly a good indicator of the state of enterprise software as a whole. Anirban drives into the recent Amazon, Microsoft, and Alphabet conference calls to check in on the state of cloud computing.
February 7, 2022
– Advisor: Anirban Mahanti
Industries: Enterprise Software Internet Infrastructure
Where are we in the cloud computing journey? It’s a question that is often asked. After all, it has been 2 decades since the launch of Amazon‘s (NASDAQ: AMZN) Web Services in 2002. Today, almost every software company is cloud-based. Enterprises use hundreds of cloud-based applications. So, indeed it appears cloud computing is everywhere, and it is natural to think of them as at least relatively speaking a mature area, perhaps well past peak growth.
But would such a narrative make sense?
One way to gauge what inning The Cloud might be in is to look at what the three key Infrastructure as a Service (IaaS) providers – namely Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Amazon – are saying.
Let’s start with the baby of the lot: Alphabet’s Google Cloud Computing (GCP) platform.
Here’s what Alphabet CEO Sundar Pichai said in the company’s Q4 2021 earnings call:
In Q4, Cloud revenue grew 45% year-over-year to $5.5 billion. Alphabet’s backlog increased more than 70% to $51 billion, most of which is attributed to Google Cloud. This growth comes from many leading businesses including Albertsons and LVMH; digital natives, including Box and Spotify; and public sector agencies, including the Commonwealth of Massachusetts, the Defense Innovation Unit and the USDA.
Google doesn’t break out GCP’s revenue, but an educated guess might be that around 80% of its Cloud revenue is from GCP, given the majority of their massive $51 Billion backlog is due to Cloud. If you stick with my 80% estimate, GCP revenue was around $4.4 Billion for the quarter or roughly at an annual run rate of $17.6 Billion. Massive, right? That number is even more impressive when we contextualize that revenue base alongside its growth rate. As Alphabet CFO Ruth Porat likes to remind us on almost every earnings call, and she did it again, noting:
GCP’s revenue growth was again greater than clouds, and that reflects significant growth in both infrastructure and platform services.
In other words, GCP is somewhere in the $15 to $18 Billion annual run rate growing north of 45%. That’s simply phenomenal!
What about Microsoft’s Azure?
In their recently concluded Q2 2022 earnings call, CEO Satya Nadella noted the following:
It was a record quarter, driven by continued strength of the Microsoft Cloud, which surpassed $22 billion in revenue, up 32% year-over-year. We are living through a generational shift in our economy and society.
Like Alphabet, Microsoft too bundles Azure within its broader Cloud segment, which includes Azure, Office 365 Commercial, and a few other things. Similar to what we did for Alphabet, we will assume 80% of the revenue came from Azure. That puts Azure on roughly a $70 Billion annual run rate, growing possibly in the high 30%s. Now that number makes Alphabet’s GCP look small, right?
What about AWS?
Lucky for us, Amazon actually breaks out AWS results. In the latest quarter (Q4 2021), AWS reported revenue of a whopping $17.8 billion, up 40% year over year. That’s a $71 billion annual run rate, roughly similar to my approximation for Azure. It could well be that I am overestimating Azure’s revenues.
Nonetheless, here we have the big three together, driving north of $150 billion in sales annually and growing it comfortably at a 35% per annum rate. Interestingly, the pace of growth hasn’t really slowed as the base sales run rate has increased.
So, where are we in the cloud journey?
Amazon’s CEO Andy Jassy has noted that we are still in the early stages of enterprises’ transition to the Cloud in the US. He also said that the rest of the world was probably 18 to 36 months behind in the adoption curve. Other leaders have been on the record claiming about 15% to 20% of workloads have moved to the Cloud. But Jassy has been bolder at times. For instance, Jassy, in his email to AWS employees on Adam Selipsky taking over AWS reigns (when Jassy moved to take over Amazon following Bezos decision to retire), said this:
…it’s easy to forget that AWS is still in the very early stages of what’s possible. Less than 5% of the global IT spend is in the Cloud at this point. That’s going to substantially change in the coming years.
I am with Jassy on this claim. We are still in the very early innings of the cloud transformation. And given the big IaaS providers are growing not just showing healthy growth but doing so at scale, we should expect cloud-based software as a service (SaaS) businesses, at least the ones that are top dogs in their industry and known for solid execution, to also enjoy the tailwinds driving these IaaS players.