Alphabet’s decision to open the corporate kimono on the performance of its Google Cloud business saw the firm announce that for full fiscal year 2020, this division brought in revenues of $13.06 billion, up 47% from $8.91 billion in the prior year.
But it was another number that caught the eye - a loss of $14.6 billion on the cloud business over the last three years. And losses remain the order of the day for now - for the full year 2020, Google Cloud turned in a loss of $5.61 billion, 21% more than the $4.64 billion loss reported in 2019. Q4 operating loss was $1.2 billion.
It’s case of playing the long game here, insists CFO Ruth Porat, citing what she pitches as “investing aggressively given the substantial market opportunity” as the strategy in play:
Cloud's operating loss reflects that we have meaningfully built out our organization ahead of revenues, with respect to the substantial investments in our go-to-market organization as well as engineering and technical infrastructure. Operating loss and operating margin will benefit from increased scale over time.
There are clear signs that this is paying off, she argues:
For example, we are on track to meet our near-term goal of tripling the size of the Cloud Direct sales force and have greatly expanded the partner channel. We've also substantially improved our product offering while rationalizing our approach to focus on our 6 key industry verticals. And we've invested in expanding our network of locations for compute capacity to support Cloud, ending 2020 serving customers in 24 regions and 73 zones.
Per Porat’s assessment, momentum in revenue growth and customer wins is what is key, noting a near tripling in backlog year-on-year as being “nearly all attributable” to cloud:
Although increases in backlog do not directly correlate to revenue trends, the growth in backlog demonstrates the success Google Cloud is having with large enterprises, which are signing meaningful long-term commitment agreements.
Customer deals are getting bigger, adds Alphabet CEO Sundar Pichai, pointing to “several billion-dollar deals” in 2020 and noting that deals over $250 million more than tripled year-on-year. On Monday, Ford signed a six-year deal with Google to provide cloud computing services:
We announced our multi-year partnership with Ford, which is using Google Cloud, Android and other Google apps and services to transform their business. Google Workspace, the industry's only cloud-native communication and collaboration solution, is helping companies meet their evolving hybrid workplace needs. Workspace is driving innovation at many of the fastest growing companies. Additionally, this quarter, we expanded our partnership with SAP. They'll extend their usage of Google Cloud for their cloud solutions, including SAP Business Technology Platform, to provide the best experience for our joint customers.
But again, it’s a long game with a big potential win on offer, he says:
We see how early customers are in the shift. We see the large total addressable market ahead and, definitely, the market dynamics. Our momentum, in the context of the market, is what is the framework which we are thinking about, the scale of investments and the pace of investments. Obviously, it's an area in which the longer you are in, the cohorts add up and so contributes more and the economies of scale starts working as well. But we are definitely investing ahead to making sure we are able to serve the customers globally across all the offerings they are interested in, and that's how we are thinking about it.
Meanwhile at AWS...
The benefits of that long-term roadmap that Pichai cites can be seen at rival Amazon, the clear ‘gorilla’ in this cloud market. Fifteen years after its launch, Amazon Web Services (AWS) turned in record quarterly revenue of $12.742 billion, a growth rate of 8% year-on-year and contributing 10% of overall Amazon turnover.
Full year revenue for AWS was $45.37 billion, up 30% year-on-year from $35.026 billion in fiscal 2019, while operating income was $13.53 billion, up from $9.02 billion. In its 10K filing with the Securities and Exchange Commission, this growth rate is attributed to “increased customer usage and cost structure productivity”.
Certainly AWS continues to rack up the customer logos, this past quarter alone including Western Union, Klarna, Fox Corporation, the NFL, the Seattle Seahawks, BP, Formula One Group, BP, Novartis and Best Western Hotels & Resorts, among others.
In the event, the stellar numbers from Amazon were overshadowed by the announcement that founder Jeff Bezos is stepping down as CEO, to become Executive Chair, while Andy Jassy, who has been driving AWS since the beginning, gets his reward by stepping into Bezos shoes.
Bezos will still be heavily involved, emphasised CFO Brian Olsavsky on the post-results analyst call:
Jeff is not leaving. He is getting a new job. He’s going to be Executive Chair of the Board, super important role….Jeff will be the Executive Chairman of the Board. He will be involved in many large one-way-door issues, meaning the more important decisions, things like acquisitions, things like strategies and going into grocery and other things.Jeff’s always been involved with that, and that’s where will keep his time focused on in his new role.
As for Jassy’s ascension:
Those of us who know Andy are excited to see him take on this greater responsibility. He is a visionary leader, a great operator, and he understands what makes Amazon such a special innovative company.
That still leaves the question of who takes the helm at AWS. For now, all that’s being said on that front is, per Olsavsky:
We will be working on backfilling the AWS role and we will talk more about that in the future.
So, as things stand, AWS remains the clear cloud platform market leader, followed up by Microsoft Azure with Google Cloud Platform playing a distant catch-up. But if it really is a long game, then there’s still a lot at stake and big wins like Ford this week do nothing to discount Google as a contender.
For now though, it’s also a tale of two balancing acts. Google’s soaring ad business means it can afford to play the long game to which Pichai and Porat allude. In Q4, the ad operation, including YouTube, accounted for 81% of Alphabet's $56.9 sales, up 23% year-on-year.
Meanwhile AWS helps to prop up Amazon’s e-commerce arm. Q4 AWS - operating income of $3.56 billion on revenue of $12.74 billion; Q4 Amazon Retail - operating income $3.3 billion on revenue of $112.8 billion.