Google Cloud and AWS grow, but slow - the macro-economic crisis hits home for platform providers

A tale of two cloud platforms - AWS growth is slowing in the current macro-economic climate, whereas Google Cloud momentum was a bright spot in Alphabets Q4 earnings.  

At Amazon, AWS net sales increased to $21.4 billion in Q4, up 20% year-on-year and now represents an annualized sales run rate of more than $85 billion. But as CFO Brian Olasavsky noted: 

Starting back in the middle of the third quarter of 2022, we saw our year-over-year growth rates slow as enterprises of all sizes evaluated ways to optimize their cloud spending in response to the tough macro-economic conditions. As expected, these optimization efforts continued into the fourth quarter….As we look ahead, we expect these optimization efforts will continue to be a headwind to AWS growth in at least the next couple of quarters. So far, in the first month of the year, AWS year-over-year revenue growth is in the mid-teens.

But there’s  still a healthy customer pipeline with enterprise making longer term plans to commit to AWS, he added:

Some of the key benefits of being in the cloud compared to managing your own data center are the ability to handle large demand swings and to optimize costs relatively quickly, especially during times of economic uncertainty. Our customers are looking for ways to save money, and we spend a lot of our time trying to help them do so. This customer focus is in our DNA and informs how we think about our customer relationships and how we will partner with them for the long term.

There are specific points of weakness in key markets, he went on, such as financial services and mortgage companies: 

As mortgage volumes down, some of their compute challenges or compute volumes are down. Lower trading in crypto. And things tied to advertising - as there's lower advertising spend, there's less analytics and compute on advertising spend as well.

But by and large, what we're seeing is just an interest and a priority by our customers to get their spend down as they enter an economic downturn…there’s things you can do. You can defer. You can switch to lower-cost products. You can run calculations less frequently. You can do different types of storage on your data. So there's ways to alter your cost and your bill in a short period of time. I think that's what we're seeing. 

Caution

Amazon CEO  Andrew Jassy backed up this assessment: 

I think most enterprises right now are acting cautiously. You see it with virtually every enterprise, and we're being very thoughtful about streamlining our costs as well. And when you are being cautious, you look for ways that you can spend less money and where companies can cost optimize. In some cases, they may be used to doing analysis over 90 days of information and they say, ‘Well, can I get away with it for 2 weeks, doing 2 weeks' worth’.  It's not necessarily the best thing long term, but a lot of companies will do that when they're in uncertain economic situation.

The reality is that the way that we've built all our businesses, but AWS in this particular instance, is that we're going to help our customers find a way to spend less money. We are not focused on trying to optimize in any one quarter or any one year; we're trying to build a set of relationships in business that outlast all of us. And so if it's good for our customers to find a way to be more cost effective in an uncertain economy, our team is going to spend a lot of cycles doing that.

He added that since AWS’s launch in 2006, this has been a common theme: 

When it turns out you have a lot more demand than you anticipated, you can seamlessly scale up. But if it turns out that you don't need as much demand as you had, you can give it back to us and stop paying for it. And that elasticity is very unusual. It's something you can't do on-premises, which is one of the many reasons why the cloud is and AWS are very effective for customers.

Jassy concluded: 

I think it's also useful to remember that 90% to 95% of the global IT spend remains on-premises. And if you believe that that equation is going to shift and flip, I don't think on-premises will ever go away, but I really do believe in the next 10 to 15 years that most of it will be in the cloud if we continue to have the best customer experience, which we have to work really hard at and which we're working to do. It means we have a lot of growth in front of us in the AWS business.

Google growth 

Meanwhile over at Alphabet, the Google Cloud business saw year-on-year growth of 32% to take Q4 revenues to $7.3 billion, with Google Cloud Platform being the best performer. But as CFO Ruth Porat noted: 

In Q4, we saw slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop. Google Cloud had an operating loss of $480 million.

She added: 

In Cloud, we remain very focused on the path to profitability…we're at a position now where we've meaningfully closed the gap to profitability, but still are working through as we continue to invest for growth while narrowing what this is on our march to profitability.

Alphabet CEO Sundar Pichai made similar points as his Amazon counterpart, stating: 

It's clear that after a period of significant acceleration in digital spending during the pandemic, the macro-economic climate has become more challenging.

But Google Cloud is still gaining customer and prospect attention, he added: 

Our differentiated products and focused go-to-market strategy continue to drive customer momentum, beginning with real-time data, analytics and AI. Customers are increasingly choosing BigQuery because we unify data lakes, data warehouses and advanced AI/ML into one system and now analyze over 110 terabytes of data per second. Customers like [grocery chain] Kroger can analyze data in multiple clouds without moving data in most cases, and MSCI processes unstructured and structured data at scale.

My take

This is a bit uncharted territories economically. 

Those words from Amazon’s Olsavsky are becoming a repeated standard across the entire enterprise tech sector. His summation is one that bears noting: 

I don't have a crystal ball...but we are going to continue to work for to be there for our customers. We do have new deals. We have new workloads coming to the cloud. The value is there. And whether there's perhaps short-term belt tightening in the infrastructure expense by a lot of companies, I think the long-term trends are still there. And I think the quickest way to save money is to get to the cloud, quite frankly.

So there's a lot of long-term positive in tough economic times. [We] saw that in 2020 when volumes for customers shifted very quickly. It led to a resurgence after that and probably acceleration of people's journeys to the cloud. We’ll just have to see if that happens again with what we're seeing today.