Q3 2020 Cloud Commentary Report

Please see HERE for our latest Cloud Commentary report (Q4 Cloud Commentary Report)

Written by Christine Edmonds, Vivian Guo, Caroline Ricksen

ICONIQ Growth has been actively investing in cloud companies since our inception. As part of our work we closely track the major public cloud platforms: Amazon AWS, Google Cloud, and Microsoft Azure and what these platforms are experiencing regarding their adoption and growth.

The following is based on publicly available earnings transcripts as well as press releases issued by Amazon, Google and Microsoft.

In the most recent quarter (Q3’20), the three dominant public cloud service providers saw consistent gains in Y/Y growth, although not uniformly. Despite continued COVID-19 headwinds, all three companies expressed confidence in on-going momentum driven by accelerated digital transformations across industries, requiring migration to the cloud.

Amazon grew revenue 29.0% Y/Y on a constant currency basis, ending the quarter at $46.4B in run-rate revenue. AWS usage and backlog remained strong with an increasing number of multi-year contracts, although certain industries more impacted by COVID-19 experienced notable volatility.

Google Cloud revenue grew 45.0% Y/Y, generating $13.6B in revenue this quarter (although not disclosed, we estimate GCP run-rate revenue to be around $8B). Notably, they highlighted several key new logos including Best Buy, Nokia, as well as government agencies. Perhaps best signaled by their decision to break out Google Cloud in a separate reporting segment starting in Q4, Management expressed strong confidence in Google Cloud momentum and is committed to making long-term investments across their GTM motions, product roadmap, and data center footprint.

Azure grew 47% Y/Y, on a constant currency basis, which is a slight deceleration from the previous quarter where they saw 50% Y/Y growth. Although not disclosed, we estimate Azure run-rate revenue to be around $25B as of Q3. Management highlights their consistent execution across core annuity sales motions as well as their focus on supporting customer needs for distributed cloud infrastructure as core drivers of their growth. Among a growing number of partnerships, Microsoft highlighted the significance of their strengthened partnerships with Verizon and AT&T.

This post is an overview of our findings, please reach out to a member of the ICONIQ Growth team if you would like a copy of the full report.

On balance, the macro environment has created moderate tailwinds for cloud providers as movement to the Cloud continues to accelerate in order to support digital transformations and an increasingly remote workforce

Despite COVID-19 headwinds impacting certain customer segments, on aggregate, the macro environment has helped support growth for cloud providers. One component of this is a rapid enterprise shift to the cloud to drive cost efficiencies, supporting continued revenue expansion and momentum and an increase of multi-year cloud contracts. All three cloud providers also highlighted significant commitments with new Fortune 50 customers and both Google and Amazon mentioned recent partnerships with various government agencies. Despite continued transactional weakness and volatility in certain industries such as travel, it is clear that cloud remains a significant growth opportunity for these businesses and all three are committed to making long-term investments with their product roadmap, GTM motions, and footprint — despite looking to drive cost efficiencies themselves across other areas of their businesses.

As a result of this momentum, all three providers have made clear commitments to on-going investment into their Cloud businesses, with a particular eye towards industry-specific solutions

A common theme among AWS, GCP and Azure was an ongoing commitment to vertical industry solutions. As the battle for cloud market share continues, the player who can deliver specialized solutions with demonstrated value is likely to dominate. Google announced investments in industry-specific solutions for consumer goods and lending and also highlighted pricing based on value as a key focus area. Microsoft also noted significant investments in vertical products like Microsoft Cloud for Healthcare.

While COVID-19 remains challenging for enterprises, all 3 companies are committed to making strategic investments in their cloud business to capitalize on the digital transformation trend currently driving continued cloud momentum.

AWS, the largest public cloud provider, experienced another quarter of impressive Y/Y revenue growth, with continued momentum heading into Q4

Continuing to establish itself as the leading cloud provider, Amazon reported run-rate revenue of $46B with a Y/Y growth of 29% in Q3, consistent with Q2 results. AWS was reported as accounting for 57% of Amazon’s consolidated operating income and 12% of consolidated revenue, remaining a strategic component of the overall Amazon business model. AWS did experience some industry-specific volatility due to COVID-19, but also pointed to strong aggregate momentum as companies look to cut down long term expenses through cloud migrations.

With several new product announcements, including five new AWS Wavelength Zones and a focus on developer tools, AWS successfully attracted a variety of new customers and partnerships in Q3. Notably, Global Payments is partnering with AWS to manage issuer processing, totaling ~27B transactions per year. In addition, AWS signed contracts with Moderna, Jack-in-the-Box, Weta Digital, Indeed, Arcelik, Best Western International, and Carrier. Overall, AWS had a healthy quarter of growth and is seeing continued momentum with an increasing backlog of multi-year deals.

Google continues to see ongoing strength in GCP performance, in part, reflecting their ability to meet customer demands for data analytics and products that support the shift to a remote work environment

Google Cloud saw yet another quarter of strong growth, reporting $3.4B in revenue at an accelerated Y/Y growth rate of 45% — a 2 point increase from Q2. Although not disclosed, GCP was reported to have a growth rate meaningfully above that of Google Cloud overall. This momentum is expected to continue into Q4 with customer demands for data analytics, enterprise cost savings, and an emphasis on collaboration in the new remote world.

Pleased with the GCP revenue and outlook, Management pointed to key differentiators that have contributed to the success of Google Cloud: unique industry solutions, strong underlying technology, advanced data analytics, and AI capabilities. This has helped Google Cloud secure new customers and strengthen relationships across various industries and verticals. Notably, Nokia and Google Cloud are collaborating to migrate 30+ data centers to Google Cloud infrastructure. Google also celebrated several partnerships with key US government agencies. Looking to the future, Google sees the Cloud as a long-term opportunity that is a key cornerstone for the world’s accelerated pace of digital transformation and is committed to make aggressive investments.

Despite a slightly slowed growth of 47% Y/Y this quarter, Microsoft Azure started their fiscal year on strong footing. Innovating across their full modern tech stack, Microsoft was able to match heightened demand due to accelerated digital transformation

Following a historic pattern of impressive earnings, Microsoft continues to see strong Y/Y growth to kick off their fiscal year. Driven by consistent execution across core annuity sales motions and and strengthened customer relationships, Microsoft continues to excel. Microsoft Azure reported a 47% increase in earnings, down just 3 points from 50% Y/Y in Q4 FY2020. Looking forward, Azure’s future growth trajectory is expected to be impacted by lowered consumer spending and transactional weakness due to COVID-19, a strong FY2020 comparable, and volatility from securing more long-term Azure contracts focused on long-term partnership rather than immediate profitability.

Microsoft Azure looked to expansion in every facet during Q1 FY21. This included the launch of new data center regions (now totaling 66), addressing challenges for current partners, and securing more large, long-term contracts with a variety of companies including PepsiCo, BP, Shell, Airbus, Volkswagen, AT&T, and Verizon. They also looked to new verticals, with a particular focus on healthcare. Microsoft’s investment in Azure’s vast hybrid capabilities, including Azure Arc, SQL Edge, Cognitive Sciences, and AI models, points to a commitment to their customers and the developer-wide landscape. Transactional licensing remained a headwind for Microsoft and although the SMB customer segment improved slightly through the quarter, Microsoft will need to continue investing in the significant opportunity ahead of them to drive future growth amidst the accelerated digital landscape.

We hope this overview helps provide insight into the growth of public cloud providers in recent quarters, and how these management teams expect to evolve their platforms in the future. For more detailed information, please reach out for a full copy of the report.