Anirban's quarterly cloud computing checkin looks at how Amazon Web Services, Microsoft Azure, and Google Cloud Computing are growing ... and what we can learn about the broader Cloud Computing space from the results of these hyperscalers.
October 31, 2022
I am back once again with my quarterly cloud computing checkin. After all, today’s enterprises use hundreds of cloud-based applications, and ultimately every company is on its path to embracing the Cloud. But how far are we into this cloud transformation? Is growth slowing because we are hitting the upper bounds of this sector’s potential?
My favorite barometer for answering the above questions is to look at the cloud segment of the three hyperscalers, namely Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN).
For those interested in looking at my earlier reports, I include links below:
Let’s dive in.
Google doesn’t break out GCP’s revenue. However, Google Cloud’s third-quarter (Q3) 2022 revenue grew 38% year-over-year to $6.9 Billion. Note that this quarter’s growth rate saw a slight acceleration over Q2’s growth. Alphabet’s CFO Ruth Porat again used her stock lines to describe cloud performance noting the following:
Revenues were $6.9 billion for the second quarter, up 38%. GCP’s revenue growth was again greater than Cloud’s, reflecting significant growth in both infrastructure and platform services. Strong revenue growth in Google Workspace was driven by growth in both seats and average revenue per seat.
While GCP continues to grow at scale revenue, we are yet to see meaningful operating leverage. This quarter’s operating loss was $699 million, up from $644 million a year ago.
Given Alphabet doesn’t break out GCP sales, we are left making an estimate. I peg GCP’s contribution to be 70% to 80% of Alphabet’s overall Cloud revenue. That puts GCP in the $19 to $22 Billion annual run rate neighborhood, growing north of 35%. That’s strong, and Pichai et al. believe we are still in the very early stages of this journey.
One way to track potential future growth is to look at the company’s remaining performance obligations (RPO). In Alphabet’s case, RPO is primarily related to Google Cloud and represents customer future spending commitments.
Alphabet reports RPO in its 10Q filings, and it usually isn’t featured in the earnings release. As of September 30. 2022, RPO was $52.4 Billion, an increase of 41% year-over-year. The significant number and high growth rate for RPO tell us that GCP is managing hyper-growth at scale, and we are far from done with Cloud Computing.
Like Alphabet, Microsoft too bundles Azure within its broader Cloud segment. Microsoft Cloud revenue in Q1 2023 was $25.7 Billion, up 24% year-over-year. Microsoft’s Cloud growth rates have recently slowed, with the company reporting 28% and 32% growth rates in Q4 2022 and Q3 2022, respectively. Currency was a significant headwind as, on a constant currency basis, the growth was 31%.
Concerning Azure, CFO Amy Hood noted the following:
Azure and other cloud services revenue grew 35% and 42% in constant currency, about 1 point lower than expected, driven by the continued moderation in Azure consumption growth as we help customers optimize current workloads while they prioritize new workloads.
Microsoft Azure is facing the twin headwinds of a strong US dollar and a harsh macro environment. As noted by Hood, customers are optimizing their usage, resulting in a moderation of the segment’s growth.
Given that Microsoft’s Cloud segment includes some mature but well-ingrained offerings like Office 365 Commercial, it might be reasonable to estimate Azure’s contribution to be roughly 60% to 70%. That puts Azure on approximately a $62 to $72 Billion annual run rate, growing around 35%.
Lucky for us, Amazon actually breaks out AWS results. In the latest quarter (Q3 2022), AWS reported revenue of $20.5 Billion, up 27% year-over-year. That’s a deceleration from the 33% year-over-year growth in Q2 2022 and 37% year-over-year growth in Q1 2022. Interestingly, foreign exchange was only a 1% headwind. Nonetheless, the 80 Billion annual run rate is nothing to sneeze at.
AWS is nicely profitable, but this quarter we saw operating profit increase by only 11%, coming in at $5.4 Billion. CFO Brian Olsavsky discussed the impact of the challenging macroeconomic conditions noting:
With the ongoing macroeconomic uncertainties, we’ve seen an uptick in AWS customers focused on controlling costs. And we’re proactively working to help customers optimize, just as we’ve done throughout AWS’ history, especially in periods of economic uncertainty. The breadth and depth of our service offerings enable us to help them do things like move storage to lower-priced tiers options and shift workloads to our Graviton chips.
Further, Olsavsky noted that AWS growth had slowed to mid-20% towards the backend of the quarter, and they are currently expecting slower growth to continue into the next quarter.
What’s interesting, however, is that while growth has accelerated in the near-term, future customer commitments have continued to grow. The backlog was a cool $104 Billion at the end of Q3 2022, up 57% year-over-year. As a side note, AWS’ backlog is twice that of GCP.
The hyperscalers are today approximately on a $170 Billion per year run rate, growing at a 30%-plus per year cadence. That says something about the scale of cloud computing. These hyper-scale providers also are pouring a lot of money to keep growing their infrastructures, which says something about the scope of future opportunities.
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