So, we’re mid way through the year (or completed, if you’re Microsoft) - how are the cloud vendors holding up? Here’s a run-down of the big three, who’ve all posted results in the past week or so.
Usual caveat: this is not quite an apples-to-apples comparison. Some will moan that Microsoft don’t break out Azure, but Google lumps Workspace in with GCP too, and AWS I’ve heard people say unfairly includes Support fees – so: the trends and the statements are perhaps the interesting bit.
And good news for the partner ecosystem: the cloud vendors are all growing at a healthy rate. But interestingly, one trend I’d call out is a bit of investor impatience with the volume of money being spent (on AI mainly!) vs. the plan for a return in “some future years” time.
Anyway, let’s get into it and start with the most recent. Our friends at Amazon posted their numbers on Thursday night.
AWS was front and centre – in fact they led with it, ahead of the Amazon retail business when providing colour on the numbers. And why not, when it now contributes so much of the company profits. Amazon made $14.6Bn of operating income (profit!) in the quarter, and a whopping $9.3Bn of that came from AWS. In Q2 2023, AWS contributed $5.4Bn in profit to the group, which shows how this has materially grown in the past year. Like most, a bit of that improvement comes from extending server life, but that is a well run business by any account. There was quite an interesting thread of discussion on the earnings call about projecting demand and the fiddly balance of getting hardware spend and logistics right across 35 Regions, 110 AZs and 200+ services – and in fairness, those algorithms clearly work.
In top line revenue, AWS delivered $26.3Bn in Q2, which continues to astound me - ($105Bn run rate). This is up about 19% over the prior year. Andy Jassy hailed this “continued reacceleration in AWS growth” now that customers have "completed the significant majority of their cost optimization efforts and are focused again on new efforts."
For context on AWS’ scale, Subscription services, which include Amazon Prime memberships, brought in $10.9 billion. Overall the Amazon business all up generated $148Bn in Q2, up about 10% vs. prior year - less than investors had hoped.
In terms of commentary, they called out 3 trends driving AWS growth:
1) being the cost optimisation cycle ending mentioned above
2) secondly the modernisation (migration!) to the cloud is back on again: “AWS continues to be customers' partner of choice and the biggest beneficiary of this flip from on-premises to the cloud.”, and
3) of course.... AI!
There was a lot on this topic, as you'd expect. I still quite like AWS’ strategy here, noting they’re not quite yet on the front foot vs. others, certainly in perception terms: ”At the heart of this strategy is a firmly held belief, which we've had since the beginning of AWS, that there is not one tool to rule the world”, i.e. they’ll be a marketplace.
“While many teams will build their own models, lots of others will leverage somebody else's frontier model, customize it with their own data and seek a service that provides broad model selection and great generative AI capabilities. This is what we think of as the middle layer, what Amazon Bedrock does and why Bedrock has tens of thousands of companies using it already. Bedrock has the largest selection of models, the best generative AI capabilities in critical areas like model evaluation, guardrails, RAG and agenting, and then makes it easy to switch between different model types and model sizes.”
However, they tempered near term expectations, at least a little:
“I think the generative AI component is in its very early days. It's -- as I said, we kind of sometimes look at it and say that it's interesting that we have a multibillion-dollar revenue run rate already in AI, and it's so early. But if we look at the amount of demand that we have from customers right now, it's very significant.”
"While we're investing a significant amount in the AI space and in infrastructure, we would like to have more capacity than we already have today. We have a lot of demand right now. And I think it's going to be a very, very large business for us."
Outside of AI discussion, a big theme in the results this time around is CapEx spend......mainly due to addressing that AI point above. AWS was no exception, with over $30Bn spent in the first half of the year, meaning they’ll likely spend more than the $48Bn for all of 2023. “we expect capital investments to be higher in the second half of the year. The majority of the spend will be to support the growing need for AWS infrastructure”. That is serious spending, but they can afford it. Equally, they’ve got a ton of EDP commitments locked in for the future – they confirmed the backlog is now $156.6Bn(!), up about 20% year over year.
Investors didn't love what they heard, as revenue was $700 million short of market expectations, and q3 guidance for all up Amazon was less than desired, so shares dipped – however will doubtless bounce back quickly.
For fans of AppMod (like Team D55), this was an interesting statement:
“With Q's code transformation capabilities, Amazon has migrated over 30,000 Java JDK applications in a few months, saving the company $260 million and 4,500 developer years compared to what it would have otherwise cost.” Unclear how much human effort went into this - I would still bet "a lot".
The other thing of note to tech enthusiasts / people who don’t like our woeful national comms infrastructure: they confirmed their satellite broadband offering (Kuiper) is accelerating in terms of build out – they seem to be targeting business and government more than consumers, although this home Starlink user thinks all competition is good for the market when they do get there.
Next up, Google – who posted their Q2 numbers over a week ago now.
Overall, this was a strong set of numbers for Alphabet – ahead of expectations. The market being the market, the share price dipped of course – likely on the basis of warnings around margin compression in the future given high levels of spending forecast, mainly on hardware. It has since basically recovered.
Overall, the Alphabet revenues were up 14% vs. the same q in the prior year – now at $84.7Bn for Q2. Ads made up a whopping $64.62Bn of that. The bit you care about, Cloud, hit a new high watermark of $10.34Bn in the quarter – up from $8.03Bn in the same period in 2023. As a reminder, that’s both GCP and Workspace (and doubtless a few other bits like Maps). For comparison, YouTube is now a meagre $8.7Bn... More interestingly, they seem to have found their groove on profitability, generating $1.17Bn from cloud. Make no mistake, this is a serious bet for Google.
The earnings call was unsurprisingly AI heavy, with Sundar boasting “We are innovating at every layer of the AI stack”. Also punchily stating: “Year to date, our AI Infrastructure and Generative AI Solutions for Cloud customers have already generated billions in revenues, and are being used by more than 2 million developers.”
However, in the Q&A this was more moderated:
“On the enterprise side, I think we are at a stage where there are definitely a lot of models. I think roughly the models are all kind of converging towards a sort of base capabilities but I think where the next wave is working is to build solutions on top of it..... And I think there are pockets, be it coding, be it in customer service, et cetera, where we are seeing some of those use cases seeing traction. But I still think there’s hard work there to completely unlock those.”
So we can surmise that there are still relatively few killer use cases, and lots of experimentation, per this quote:
“We now have over 2 million developers playing around with these things.”
It was CFO Ruth Porat’s last call before she steps down, and she covered cloud in a bit more detail saying cloud is “up 29%, reflecting: first, significant growth in GCP, which was above growth for Cloud overall and includes an increasing contribution from AI; and second, strong Google Workspace growth, primarily driven by increases in average revenue per seat.”
i.e. presumably not many net new Workspace licenses being sold, but existing customers are paying more.
There was a fair bit on cost: “we remain committed to creating investment capacity with our ongoing work to durably re-engineer our cost base” and “Once again, headcount declined quarter-on-quarter, which reflects both actions we have taken in the first half of the year and a much slower pace of hiring”.
The bit the market would have liked less was:
“However, in the [coming] third quarter, operating margins will reflect [...] expenses associated with the higher levels of investment in our technical infrastructure, as well as the increase in Cost of Revenues due to the pull forward of hardware launches into Q3.”
As a reminder, if you’re thinking of competing with the big guys, this is how much you have to spend per quarter:
“With respect to CapEx, our reported CapEx in the second quarter was $13 billion, once again driven overwhelmingly by investment in our technical infrastructure, with the largest component for servers, followed by data centers.”
Phew.
One other notable thing from Alphabet was the continued investment in driverless cars – Waymo specifically – with a reasonably chunky $5Bn committed over a few years.
Ok finally, Microsoft.
To quote the big man: “We had a solid close to our fiscal year.”, said Satya. Which seems like a fair statement for a year reporting revenues of $245Bn, 15% up on the prior year, and with “Microsoft Cloud revenue” passing $135Bn – including a whole heap of Microsoft tech, not just Azure of course. One of their strengths is the breadth of tech available to an enterprise.
For their Q4 specifically, revenue was $64.7Bn, and Azure revenues were up 29% over the same period in the prior year. It was 31% previously, and analyst consensus was 30%, but to me it’s close enough.
For fans of segment analysis, “Microsoft Cloud” was $36.8Bn in that quarter and “Intelligent Cloud” was $28.5Bn. It’s not perfect, but there’s a summary here of some of the product split: Segment Information - Microsoft Investor Relations. Azure is the fastest growing of the various “cloud” components, as you might expect – and they confirmed they’re expecting it to grow even faster in the second half of fiscal 2025.
Other notable comments on Azure included from CFO Amy Hood that there was “some softness we saw in a few European geos on non-AI consumption, [which] really made the difference in that number” and “you’re right, capacity constraints, particularly on AI and Azure, remained in Q4 and will remain in H1” -> i.e. acknowledging Azure growth was a bit weaker than planned, albeit still strong in my eyes.
My favourite “WTF” statement was this one: “In Azure, we expect Q1 revenue growth to be 28% to 29% in constant currency. Growth will continue to be driven by our consumption business, inclusive of AI, which is growing faster than total Azure”. Make of that what you will, quite how 'Azure' is separate to 'consumption', I don't know. Either way, sounds positive!
There was plenty of chat on CapEx here too, with Satya likening the spend on AI to be similar to their cloud build out phase, where the revenue did eventually follow after the big initial spend. He said they have clear “demand signals” that this strategy will work – and in fairness, they have definitely got growing AI usage across the Microsoft portfolio. Capital spending was up significantly (nearly 80%) to $19Bn in the fourth quarter – with cloud and AI accounting for basically all of that. This spend formed part of the whopping $56Bn spent over the full year.
In terms of AI highlights, Satya noted “we now have over 60,000 Azure AI customers, up nearly 60% year-over-year" and “Copilot accounted for over 40% of GitHub’s revenue growth this year, and is already a larger business than all of GitHub was when we acquired it” - with the latter maybe explaining why AWS seems to be bailing out of some competitive solutions like CodeCommit.
Amy Hood said this will be monetised over the next 15+ years – which is quite a period to make a statement about. Oh, and she confirmed they’ll spend even more in 2025. Oof.
The AI wars are the new cloud wars, it seems. Onwards.
p.s. Pic from: https://designer.microsoft.com/image-creator (simple and free) - the prompt was only a one liner, but not quite there yet....
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