Q4 2020 Cloud Commentary Report

Story by Vivian Guo, Christine Edmonds, Zach Cherian, and Haley Aube

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, as well as Tencent and Alibaba quarterly filings.

In the most recent quarter (CY Q4 2020), the three leading public cloud service providers saw large gains in Y/Y growth, although not uniformly. Despite continued COVID-19 impact across various industries and customer segments, we believe all three companies expressed confidence in on-going momentum driven by accelerated digital transformations across industries, requiring migration to the cloud.

Amazon Web Services grew revenue 28% Y/Y on a constant currency basis, ending the quarter at $51B in run-rate revenue. AWS usage and backlog ($50B) remained strong with a continued focus on international customers and an increasing AWS product ecosystem. Finally, while Andy Jassy’s replacement has yet to be announced, there is perhaps no stronger indication in the importance of AWS to Amazon’s overall strategy than having Andy Jassy replace Jeff Bezos as CEO.

Google Cloud revenue grew 47% Y/Y, generating $15.3B in run-rate revenue this quarter (although not disclosed, we estimate GCP run-rate revenue to be around $8B). We believe management maintained strong confidence in Google Cloud momentum and is committed to doubling down on 6 key verticals in addition to aggressive investments in GTM motion, product, and data center footprint. For the first time, Google also disclosed operating income/loss for its Google Cloud business unit in its quarterly earnings — with $5.6B in losses for fiscal year 2020 on $13B of revenue.

Azure grew 48% Y/Y, on a constant currency basis, which is a slight acceleration from the previous quarter where it saw 47% Y/Y growth. Although not disclosed, we estimate Azure run-rate revenue to be around $29.5B as of Q4. Management highlighted the strength of its hybrid products, integrations and vertical solutions as key drivers of accelerating growth. Among a growing number of partnerships, Microsoft highlighted the significance of their strengthened partnerships with GM/Cruise, the Broad Institute of MIT and Harvard and SAP.

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.

1. There is continued, strong momentum across the macro environment as migration to the Cloud continues to accelerate on an international level — in part due to COVID tailwinds as well as increasing adoption of cloud-based products across all sectors.

Across the three primary cloud players, growth remains robust — both Azure and Google Cloud saw an increase in Y/Y run-rate revenue growth this quarter relative to prior quarter, and AWS’s growth remained relatively stable. This growth was bolstered by both increased consumption from current customers as well as several significant new partnerships, including Ford (Google), Wayfair (Google), GM (Microsoft), Cruise (Microsoft), Star Alliance (AWS), and Blackberry (AWS).

While AWS, Azure, and Google Cloud all have strong international presence and plans for growing investments across new geographies, we have also begun to track the emergence of international players Alibaba Cloud and Tencent Cloud. While significantly smaller in scale , we estimate their growth to be similarly strong — with Alibaba Cloud generating $9.9B in run-rate revenue and growing 50% Y/Y. It is worth noting that Alibaba Cloud is the only Chinese company named to the Leader ranking in 2020 Gartner’s Magic Quadrant for database management systems this year.

2. As revenue across all three providers continues to grow, so does their investment into their product roadmaps and infrastructure, with a deepening focus on the healthcare industry this last quarter in particular (likely driven by COVID-19 related demand).

In addition to broadly accelerating migration to the Cloud, COVID-19 has also brought more attention to the healthcare sector than ever before, and this is being reflected across solution roadmaps and priorities:

• Amazon introduced Amazon HealthLake, a HIPAA-eligible service, enabling healthcare organizations to aggregate data from disparate sources and store in AWS
• Azure launched Azure Health Bot, part of its growing vertical solution portfolio, serving Walgreens, CDC and Premera Blue Cross
• Google launched the Intelligent Vaccine Impact Platform, a set of data analytics technologies to support COVID-19 vaccine roll-out as well as the Healthcare Interoperability Readiness Program to help healthcare providers make patient and medical data more accessible and secure
• Tencent Cloud announced availability of intelligent cloud solutions for COVID-19 crowd management in medical and retail settings

3. AWS, the largest public cloud provider, grew its run-rate revenue by 28% Y/Y, with continued momentum heading into Q1 FY2021 — accompanying their strong earnings call with a key leadership change announcement

AWS reported a run-rate revenue of $51B with Y/Y growth of 28% in Q4. AWS was reported as accounting for 52% of Amazon’s consolidated operating income and 10% of consolidated revenue, a reduction from prior quarters but remaining a strategic component of the overall Amazon business model.

In Q4, AWS saw a continuation of strong usage and revenue growth and added more revenue in Q4 than any other quarter. During AWS re:Invent, AWS also announced more than 180 new services and features.

Andy Jassy will replace Jeff Bezos as CEO of Amazon in Q3 of this year. Jassy’s replacement to lead up AWS has yet to be announced.

With several new product announcements, including a number of additional products for Amazon Sagemaker and EC2, AWS successfully attracted a variety of new customers and partnerships in Q3 across several sectors including J.P. Morgan Chase, Viacom, CBS, Twitter, MGM and Nationwide, among many others. Overall, AWS had a healthy quarter of growth and is seeing continued momentum with a $60B backlog of deals.

4. Google continues to expand GCP, with meaningful investments across product, GTM, and infrastructure and a notable focus on healthcare customers and solutions

Google Cloud (including GCP and Google Workspace) saw yet another quarter of strong growth, with $15.3B in run-rate revenue at a stable Y/Y growth rate of 47% — consistent with Q2 results. Although not disclosed, GCP was reported to have a growth rate meaningfully above that of Google Cloud overall. Notably, Google Cloud backlog grew to $30B from $19M in Q3 which demonstrates the success Google Cloud is having with large enterprise clients who are signing meaningful multi-year deals.

Google’s focus on customer success drove significant expansion and revenue retention with customers. Google Cloud has also devoted resources to help with the ongoing pandemic, including a new Intelligent Vaccine solution to help public health agencies develop a more tailored and informed vaccination campaign.

Google’s leadership in multi-cloud and cybersecurity also helped spin up large data center and transformation deals this past quarter, including multi-year deals with Ford, Wayfair and Highmark Health.

For the first time this quarter, Google Cloud also disclosed its operating income with a $5.6B loss for the fiscal year, a signal of its aggressive pace in investments — Google tripled the size of its cloud direct salesforce and significantly expanding partner channels this past quarter. In addition to a continued focus on 6 key industry verticals (healthcare, retail, financial services, media and entertainment, manufacturing, and public sector), management also committed to additional investments in product, GTM, and infrastructure, with a sizable increase in CapEx expected in Q1.

5. With accelerated 48% Y/Y growth this quarter, Microsoft Azure continued its strong fiscal year and made meaningful market share gains on a dollar and % share basis.

Microsoft Azure’s strong Q2 FY2021 was driven by factors including continued adoption of hybrid enterprise products, a strong ecosystem of integrations and vertical solutions, as well as macro tailwinds from increased digital adoption due to COVID.

Azure has been steadily gaining share on a dollar basis in the last three quarters, with an estimated $4.6B of net new run-rate revenue this past quarter. This translates to an estimated 44% share when compared to AWS (GCP is excluded from this analysis given lack of cloud business disclosure). This is a significant increase from the first half of the calendar year, where they had an estimated 36% at the end of FY2020.

We believe their recent partnership with Verily (an Alphabet company) is particularly notable, both as a testament to their strength as a provider in the healthcare space and an anecdotal example of an increasingly popular multi-cloud strategy.

Microsoft Azure also expanded both its footprint and its portfolio of solutions this past quarter. This includes the launch of new data center regions in Chile, Denmark, Sweden and Taiwan, addressing challenges for current partners, and securing more large, long-term contracts with a variety of companies including GM/Cruise, J&J, SAP, Workday and AT&T. Azure also reflected the continued focus on and demand from healthcare for cloud-based solutions — introducing Azure Health Bot to serve Walgreens, the Center for Disease Control and Premera Blue Cross.

Microsoft has also continued to invest into Azure’s hybrid capabilities and now has 1000+ customers on Azure Arc, their hybrid cloud management platform. Notably, Azure’s SMB business on a per seat basis has continued to grow and Microsoft expects a strong 2H FY2021 and improving margin profiles over the rest of the year.

6. International players such as Alibaba Cloud and Tencent Cloud continue to make significant investments to expand their global footprint

The top 2 Chinese cloud providers, Alibaba Cloud and Tencent Cloud, both announced significant plans this year to invest billions of dollars in cloud infrastructure over the next few years.

Alibaba Cloud, with a run-rate revenue of $9.9B this quarter (50% Y/Y) achieved positive EBITDA for the first time this quarter after 10 years. It also announced plans earlier this year to invest $28B in cloud infrastructure over the next three years, with a focus on semiconductor, operating system development, and data center infrastructure.

Tencent Cloud, which sits in Tencent’s Fintech & Business Services segment, reported a run-rate revenue of $9.6B at the end of Q4 2019. Tencent announced even more aggressive plans to invest $70B in cloud infrastructure over the next five years.

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.