>> From theCUBE Studios in Palo Alto and Boston,
bringing you data-driven insights from theCUBE and ETR,
this is "Breaking Analysis" with Dave Vellante.
>> Have you ever been driving on the highway
and traffic suddenly slows way down?
And then after a little while,
it picks up again and you're cruising along
and you'll think, "Okay, hey, that was weird.
But it's clear sailing now, off we go,"
only to find out in a bit that the traffic is building
up ahead again, forcing you to pump the brakes
as the traffic pattern ebbs and flows.
Well, welcome to the seesaw economy,
the Fed-induced fire that prompted an unprecedented rally
in tech is being purposefully extinguished now
by that same Fed.
And virtually, every sector of the tech industry is having
to reset its expectations, including the cloud segment.
Hello and welcome
to this week's "Wikibon CUBE Insights" powered by ETR.
In this "Breaking Analysis",
we'll review the implications of the earnings announcements
from the big three cloud players,
Amazon, Microsoft, and Google who announced this week,
and we'll update you on our quarterly IAS forecast
and share the latest from ETR
with a focus on cloud computing.
Now before we get into the new data,
we want to review something we shared
with you on October 14th, just a couple weeks back.
This is sort of a we-told-you-it-was-coming slide.
It's an XY graph
that shows ETR's proprietary net score methodology
in the vertical axis.
That's a measure of spending momentum, spending velocity,
and an overlap or presence in the dataset
that's on the x-axis.
That's really a measure of pervasiveness in the survey.
And the table, you see that table insert there?
That shows Wikibon's Q2 estimates of IAS revenue
for the big four hyperscalers
with their year-on-year growth rates.
Now we told you at the time this is data
from the July '22 ETR survey
and that ETR hadn't released its October survey results
at that time, which is just a couple weeks ago.
And while we couldn't share the specific data
from the October survey,
we were able to get a glimpse and we depicted the slowdown
that we saw in the October data
with those dotted arrows kind of down into the right.
We said at the time
that we were seeing an across-the-board slowdown even
for the big three cloud vendors.
Now fast forward to this past week,
and we saw earnings releases from Alphabet,
Microsoft, and just last night, Amazon.
Now you may be thinking, "Okay, big deal.
The ETR survey data didn't really tell us anything
we didn't already know."
But judging from the negative reaction in the stock market
to these earnings announcements,
the degree of softness surprised a lot of investors.
Now at the time, we didn't update our forecast.
It doesn't make sense for us to do that
when we're that close to earnings season.
And now that all the big three,
all the big four with the exception
of Alibaba have announced,
we've updated, and so here's that data.
This chart lays out our view
of the IaaS and PaaS worldwide revenue.
Basically, it's cloud infrastructure
with an attempt to exclude any SaaS revenue
so we can make an apples-to-apples comparison
across all the clouds.
Now the reason that actual is in quotes is because Microsoft
and Google don't report IaaS revenue,
but they do give us clues
and sort of directional commentary,
which we then triangulate with other data
that we have from the channel and ETR surveys
and just our own intelligence.
Now the second column there
after the vendor name shows our previous estimates for Q3,
and then next to that we show our actuals.
Same with the growth rates.
And then we round out the chart
with that lighter blue color highlights,
the full year estimates for revenue and growth.
So the key takeaways are that we shaved about $4 billion
in revenue and roughly 300 basis points of growth
off of our full year estimates.
AWS had a strong July but exited Q3
in the mid-20% growth rate year over year.
So we're using that guidance,
you know, for our Q4 estimates.
Azure came in below our earlier estimates,
but Google actually exceeded our expectations.
Now the compression in the numbers is, in our view,
a function of the macro demand climate.
We've made every attempt to adjust for constant currency.
So FX should not be a factor in this data, but it sure,
you know, that the currency effects are weighing
on those companies' income statements.
And so look, this is the fundamental dynamic
of a cloud model where you can dial down consumption
when you need to and dial it up when you need to.
Now you may be thinking
that many big cloud customers have a committed level
of spending in order to get better discounts,
and that's true.
But what's happening we think is they'll reallocate
that spend toward, let's say for example,
lower-cost storage tiers or they may take advantage
of better price-performance processors
like Graviton for example.
That is a clear trend that we're seeing
and smaller companies that were perhaps paying
by the drink just on demand,
they're moving to reserve instance models
to lower their monthly bill.
So instead of taking the easy way out
and just spending more,
companies are reallocating their reserve capacity
toward lower cost, those sort of lower cost services.
So they're spending time and effort optimizing
to get more for less,
or get more for the same is really how we should phrase it,
whereas during the pandemic, many companies were,
you know, they perhaps were not as focused on doing that
because business was booming and they had a response.
So they just, you know, spend more, dial it up.
So in general, as they say,
customers are doing more with the same.
Now let's look at the growth dynamic
and spend some time on that, like I think this is important.
This data shows worldwide quarterly revenue growth rates
back to Q1 2019 for the big four.
So a couple of interesting things the data tells us.
During the pandemic, you saw both AWS and Azure
bought the law of large numbers
and actually accelerate growth.
AWS especially saw progressively increasing growth rates
throughout 2021 for each quarter.
Now that trend, as you can see, is reversed in 2022 for AWS.
Now we saw Azure come down a bit,
but it's still in the low 40s in terms of percentage growth
while Google actually saw an uptick
in growth this last quarter for GCP by our estimates
as GCP is becoming an increasing large portion
of Google's overall cloud business.
Now unfortunately, Google Cloud continues
to lose north of $850 million per quarter,
whereas AWS and Azure are profitable cloud businesses.
Even though Alibaba is suffering its woes from China,
and we'll see how they come in
when they report in mid-November,
the overall hyperscale market grew at 32% in Q3
in terms of worldwide revenue.
So the slowdown isn't due to the repatriation or competition
from on-prem vendors in our view,
it's a macro-related trend
and cloud will continue to significantly
outperform other sectors despite its massive size.
You know, on the repatriation point,
it just still doesn't show up in the data,
the a16z article from Sarah Wong and Martin Casado,
claiming that repatriation was inevitable
as a means to lower the cost of goods sold
for SaaS companies.
You know, while that was thought-provoking,
it hasn't shown up in the numbers.
And if you read the financial statements
of both AWS and its partners like Snowflake
and you dig into the quarterly reports,
you'll see little notes and comments
with our ongoing negotiations
to lower cloud costs for customers.
AWS and no doubt execs at Azure and GCP understand
that the lifetime value of a customer is worth much more
than near-term gross margin.
And you can expect the cloud vendors to strike a balance
between profitability, near-term profitability anyway,
and customer attention.
Now even though Google Cloud Platform
saw accelerated growth,
we need to put that in context for you.
So GCP by our estimates has now crossed
over the $3 billion per quarter market,
actually did so last quarter,
but its growth rate accelerated to 42% this quarter.
And so that's a good sign in our view.
But let's do a quick little comparison
with when AWS and Azure crossed the $3 billion mark
and compare their growth rates at the time.
So if you go back to to Q2 2016,
as we're showing in this chart,
that's around the time that AWS hit $3 billion per quarter
and at the same time, was growing at 58%.
Azure by our estimates crossed that mark in Q4 2018
and at that time, was growing at 67%.
Again, compare that to Google's 42%.
So one would expect Google's growth rate would be higher
than its competitors at this point
in the maturity of its cloud, which, you know,
it's really not when you compare to Azure.
I mean, they're kind of you know comparable now today,
but you'll go back, you know, to that $3 billion mark.
But more so looking at history,
you'd like to see its growth rate at this point
of a maturity model at least over 50%,
which we don't believe it is.
And one other point on this topic.
You know, my business friend Matt Baker
from Dell often says it's not a zero sum game,
meaning there's plenty of opportunity that exists
to build value on top of hyperscalers,
and I would totally agree.
It's not a dollar-for-dollar swap
if you can continue to innovate.
But history will show that the first company
in makes the most money, number two can do really well,
and number three tends to break even.
Now maybe cloud is different
because you have Microsoft software estate
and the power behind that
and that's driving its IAS business,
and Google Ads are funding technology buildouts
for Google and GCP.
So you know, we'll see how that plays out.
But right now, by this one measurement,
Google is four years behind Microsoft
and six years behind AWS.
Now to the point that cloud will continue
to outpace other markets,
let's break this down a bit in spending terms
and see why this claim holds water.
This is data from ETR's latest October survey
that shows the granularity of its net score
or spending velocity metric.
The lime green is new adoptions,
so they're adding the platform.
The forest green is spending more, 6% or more.
The gray bars, spending is flat plus or minus, you know, 5%.
The pinkish colors represent spending less down 6% or worse.
And the bright red shows defections
or churn of the platform.
You subtract the reds from the greens
and you get what's called net score,
which is that blue dot that you can see on each of the bars.
So what you see in the table insert is
that all three have net scores above 40%,
which is a highly elevated measure.
Microsoft's net score is above 60%,
AWS well into the 50s, and GCP in the mid-40s.
So all good.
Now what's happening with all three
is more customers are keeping their spending flat.
So a higher percentage of customers are saying,
"Our spending is now flat than it was in previous quarters,"
and that's what's accounting for the compression.
But the churn of all three,
even GCP which we reported
from last quarter survey was 5X,
the other two is actually very low in the single digits.
So that might have been an anomaly.
So that's a very good sign in our view.
You know, again, customers aren't repatriating in droves.
It's just not a trend that we would bet on.
Maybe mix for a fud or, you know, good marketing head-fakes,
but it's just not a big deal.
And you can't help but be impressed with both Microsoft
and AWS' performance in the survey.
And as we mentioned before,
these companies aren't going to give up customers
to try and preserve a little bit of gross margin.
They'll do what it takes to keep people
on their platforms 'cause they'll make up for it over time
with added services and improved offerings.
Now once these companies acquire a customer,
they'll be very aggressive about keeping them.
So customers, take note.
You have negotiating leverage, so use it.
Okay, let's look at another cut at the cloud market
from the ETR data set.
Here's the two-dimensional view.
Again, it's back, it's one of our favorites.
Net score or spending momentum plotted against presence.
And the data set, that's the x-axis.
Net score on the vertical axis.
This is a view of ETR's cloud computing sector.
You can see we put that magic 40% dotted red line
in the table showing,
and then at the table insert shows how the data are plotted
with net score against presence, IE in the survey.
Notably, only the big three are above the 40% line
of the names that we're showing here.
There are others, I mean, if you put Snowflake on there,
it'd be higher than any of these names,
but we'll dig into that name
in a later "Breaking Analysis" episode.
Now this is just another way of quantifying the dominance
of AWS and Azure, not only relative to Google,
but the other cloud platforms out there.
So we've taken the opportunity here to plot IBM and Oracle,
which both own a public cloud.
Their performance is largely a reflection
of them migrating their install bases
to their respective public clouds and/or hybrid clouds.
And you know, that's fine, they're in the game.
That's a point that we've made,
you know, a number of times.
They're able to make it through the cloud,
not only or at least have one,
but they simply don't have the business momentum
of AWS and Azure,
which is actually quite impressive
because AWS and Azure are now as large or larger
than IBM and Oracle.
And to show this type of continued growth
that Azure and AWS show at their size is quite remarkable.
And customers are starting to recognize the viability
of on-prem, you know,
hybrid clouds like HPE's GreenLake and Dell's APEX.
You know, you may say, "Well, that's not cloud."
But if the customer thinks it is
and it was reporting in the survey that it is,
we're going to continue to report this view.
You know, I don't know what's happening with HPE.
They had a big downtick this quarter,
and I don't read too much into that
because their end is still pretty small at 53.
So big fluctuations are not uncommon
with those types of smaller ends, but it's over 50.
So you know, we did notice a negative
within the giant public and private sector,
which is often a bellwether.
Giant public-private is big public companies
and large private companies like Mars for example.
So you know, it looks like for HPE, it could be an outlier.
We saw within the Fortune 1000,
HPE's cloud looked actually really good
and it had good spending momentum in that sector
when you dig into the industry data within ETR's data set.
Obviously, we're not showing that here,
but we'll continue to monitor that.
Okay, so where's this leave us?
Well look, this is really a tactical story
of currency and macro headwinds.
As you can see,
you know, we've laid out some of the points on this slide.
The action in the stock market today, which is Friday,
after some of the soft earnings reports is really robust.
You know, we'll see how it ends up in the day.
So maybe this is a sign that the worst is over,
but we don't think so.
The visibility from tech companies is murky right now
as most are guiding down,
which indicates that their conservative outlook last quarter
was still too optimistic.
But as it relates to cloud,
that platform is not going anywhere anytime soon.
Sure, there are potential disruptors on the horizon,
especially at the edge,
but we're still a long ways off from the possibility
that a new economic model emerges from the edge
to disrupt the cloud.
And the opportunities in the cloud remain strong.
I mean, what other path is there? Really, private cloud?
It was kind of a bandaid
until the on-prem guys could get there
as the service models rolled out,
which is just now happening.
The hybrid thing is real, but it's,
you know, defensive for the incumbents
until they can get their supercloud investments going.
Supercloud implying capturing value
above the hyperscaler CapEx.
You know, call it what you want,
what multicloud should have been,
the metacloud, the ubercloud, whatever you like.
But there are opportunities to play offense
and that's clearly happening in the cloud ecosystem
with the likes of Snowflake, Mongo, HashiCorp,
Hammerspace is a startup in this area,
Aviatrix, CrowdStrike, Zscaler, Okta, many, many more.
And even the projects we see coming
out of enterprise players like Dell,
like with Project Alpine and what Pure Storage is doing
along with a number of the backup vendors.
So Q4 should be really interesting,
but the real story is the investments
that companies are making now to leverage the cloud
for digital transformations will be paying
off down the road.
This is not 1999 when we,
you know, might had some good ideas
and admittedly, at a lot of bad ones too,
but you didn't have the infrastructure to service customers
at a low enough cost like you do today.
The cloud is that infrastructure,
and so far, it's been transformative.
But it's likely the best is yet to come.
Okay, let's call this a wrap.
Many thanks to Alex Morrison who does production
and manages the podcast.
Also, Ken Schiffman is our newest edition
to the Boston Studio.
Kristin Martin and Cheryl Knight helped get the word out
on social media and in our newsletters.
And Rob Hof is our editor-in-chief over
at siliconangle.com who does some wonderful editing for us.
Thank you.
Remember, all these episodes are available as podcast.
Wherever you listen,
just search "Breaking Analysis" podcast.
I publish each week on wikibon.com and siliconangle.com.
And you can email me at david.vellante@siliconangle.com
or DM me @dvellante or comment on my LinkedIn posts.
And please do check out etr.ai.
They got the best survey data
in the enterprise tech business.
This is Dave Vellante for "theCUBE Insights" powered by ETR.
Thanks for watching,
and we'll see you next time on "Breaking Analysis".
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