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July 31, 2020

ICONIQ Growth: Q2 2020 Cloud Commentary Report

Despite near-term headwinds, the long-term market opportunity and growth potential for cloud platforms remains strong.

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, Microsoft Azure and Google Cloud 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, Microsoft and Google.

In the most recent quarter (Q2’20), the three most significant domestic providers of public cloud services endured a more difficult commercial environment, as the U.S. economy faced the prolonged effects of the current global pandemic. Select industries like travel and hospitality were hit hardest, forcing select companies to pare down cloud instances and usage. As a result, AWS, Azure, and Google Cloud each witnessed material deceleration in Y/Y revenue growth. Despite these near-term headwinds, the long-term market opportunity and growth potential for these cloud platforms remains strong and is expected to show resilience and strength as the economy slowly sheds the effects of the current pandemic and migration to the cloud is accelerated.

Amazon grew 29.0% Y/Y, on a constant currency basis, ending the quarter at $43.2B in run-rate revenue. Management is pleased with the way in which they navigated the turmoil from COVID-19 and the strength of relationship that they have built with their current customer base through help in optimizing cloud consumption through these unprecedented times.

Azure grew 50.0% Y/Y, on a constant currency basis, which is a significant deceleration from the previous quarter where they grew 61.0% Y/Y. Management highlights their focus on artificial intelligence and cognitive services as a factor in their ability to support customer’s cloud computing needs and demands. Among others, Microsoft noted several new impressive customer logos including Johns Hopkins, Workday and National Australia Bank.

Google Cloud grew 43.2% Y/Y, generating $3.0B in revenue this quarter. Notably, they highlight new customer logos include Deutsche Bank, Lowe’s and Dr. Pepper, among others. Longer term, Google is focused on enhancing their artificial intelligence offerings and a continued focus of investment into product R&D.

This post is an overview of our findings, please visit our LinkedIn SlideShare for a copy of the full report.

1. Long-term prospects for public cloud vendors remain positive, despite near-term growth headwinds as a result of COVID-19.

COVID-19 has forced many enterprises to pull-forward digital transformation initiatives. On the other hand, many sectors hit hardest by the global pandemic were forced to cut costs and restrict budgets, leading to many organizations slashing their cloud instances. Among other contributing factors, the three largest public cloud vendors all experienced contraction in their % Y/Y revenue growth rates. Despite these near-term headwinds, management teams point to the deep relationships they have built with their client base, in addition to their expanding product suites, as factors that will enable them to experience stable growth over the long-term.

2.Amazon’s AWS segment posted its eighth consecutive quarter of YoY revenue growth deceleration, but continues to be the largest public cloud provider. Their strategic positioning is bolstered by an expanding product suite and long-term relationships with key enterprise clients.

Many of the world’s largest enterprises, including HSBC, Formula 1 and Slack are selecting AWS as their platform of choice for digital transformation. Despite facing near-term headwinds with various clients in the travel and hospitality sector, AWS is well positioned to be a dominant platform for the foreseeable future. This is, in part, evidenced by their backlog of AWS contracts, which grew 65.0% Y/Y this quarter.

AWS is a highly strategic, and profitable, business unit with Amazon. This quarter, AWS accounted for just 12.2% of Amazon’s total consolidated revenue, but a staggering 57.5% of their consolidated operating income. As they prepare to handle future compute loads, Amazon purchased PP&E under finance leases totaling $3.2B this quarter, which is down slightly at (4.6%) Y/Y. Finally, management stated they are well-positioned longer-term, noting their average AWS contract length is over three years long. There is also anecdotal evidence that they are witnessing cloud migration plans accelerate as a result of COVID-19. This confluence of factors illustrates that Amazon is a well-positioned, dominant platform within the public cloud market for the long-term.

Microsoft’s deep investment into the Azure infrastructure has paid dividends.

3. Though growth slowed to 50% Y/Y this quarter, Microsoft Azure continues to grow it’s presence in the public cloud. Microsoft’s broad and deep offerings across Azure, Commercial, Cloud, and Intelligence demonstrate their ability to meet customers expansive and changing needs.

Continuing trends seen in the prior quarter, Microsoft reported strong but decelerating growth, primarily driven by increased usage and consumption of their cloud-based offerings. Microsoft’s deep investment into the Azure infrastructure has paid dividends as they continue to support the most datacenter regions of any cloud provider, meet customer demands at scale, and improve the depreciable life of their servers (up from 3 to 4 years). Though overall revenue continues to grow (exact figures not disclosed, estimated $20Bn run rate at end of 2019), revenue y/y growth decelerated to 50% y/y constant currency, down from 61% the prior quarter.

Moving forward, Microsoft will continue to invest in long-term, strategic opportunities to adapt to the ever-changing needs of customers. Continued commitment to their cloud offerings, across Azure, Commercial Cloud, and Intelligent Cloud, will differentiate Microsoft from their competitors and allow them to expand market presence. Acquisitions of companies like Affirmed, Metaswitch, and CyberX, along with focus on improving AI, ML, and edge capabilities will enable Microsoft to continue to grow their presence within their current customer base and land more multi-million dollar contracts. While being aware and cognizant of the near-term macro-environment, Microsoft has positioned itself to help customers get through this crisis, and come out stronger in the long-term.

4. GCP continues to grow their platform of offerings and establish a foothold for themselves within machine learning and compute-intensive services.

Google Cloud, and specifically GCP, remains an essential piece of Google’s growth and strategy. In Q2 2020, Google Cloud grew 43.2% Y/Y to $3.0B in revenue and a $12B revenue run-rate, with many estimating GCP’s growth as significantly higher. Google Cloud primarily relates their slowed revenue growth to lapping of the pricing model change implemented last year, while GCP continued to grow at a similar rate to the prior quarter. Similar to AWS and Azure, Google Cloud saw a slowed Y/Y growth rate, though their future growth trajectory remains strong.

Overall, Google Cloud performed slightly below expectation this quarter, though long-term focus and investment into Google Cloud and GCP remains high. Continued traction is expected as more enterprises shift to the cloud, Google scales its GTM motion, strengthens partnerships, and secures more large, long-term contracts with a variety of companies and governments. Google’s prolonged investment into more data centers, cloud regions, server efficiencies, and head count for Google Cloud demonstrates its commitment to competing closely with other public cloud providers.

A common theme among AWS, Azure and GCP was ongoing commitment to the cloud and their customers. While exact impacts of COVID-19 are real, the businesses all remain diversified in multiple areas which has helped stabilize growth. Though Y/Y growth decelerated in comparison to prior years, dedication to the cloud remains consistent as the cloud businesses have remained a key lever of growth through these uncertain times. Strategic investments to improve operating costs and create a differentiated product offering remain top of mind for all of these providers.

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 visit out LinkedIn SlideShare for a full copy of the report.