UPDATED 17:21 EDT / JULY 25 2019

CLOUD

Partly cloudy: As AWS growth slows to 37%, Google Cloud hits $8B run rate

Updated:

Amazon Web Services Inc.’s growth has fallen to its lowest point since it began reporting separate results, up 37% from a year ago, but Amazon.com Inc.’s cloud computing unit still drove most of the second-quarter profits reported today by the retail and tech giant.

Meantime, Google LLC owner Alphabet Inc. today reported better-than-expected earnings and announced a $25 billion stock buyback, news that drove shares up more than 9% in after-hours trading. Update: Shares rose 9.6% Friday. Google Chief Executive Sundar Pichai said on an analyst call that Google Cloud is now at an $8 billion annual revenue run rate, which is double the rate in late 2017, and said it “continues to grow at a significant rate,” though that total remains less than a quarter of AWS’ annual revenue.

Thanks as usual to its cloud computing operation, Amazon today reported a second-quarter profit of $2.6 billion, or $5.22 a share, up from $5.07 a year ago but below analysts’ estimates. Overall Amazon revenue rose 20%, to $63.4 billion. FactSet’s estimate from its poll of analysts was a profit of $5.56 per share on revenue of $62.52 billion.

As a result of the shortfall, Amazon’s shares fell about 2% in after-hours trading. Update: The stock closed down 1.6% Friday.

Investors also may not have liked Amazon’s updated guidance for the current quarter. It called for net sales to grow 17% to 24%, to $66 billion to $70 billion, with operating income between $2.1 billion and $3.1 billion. According to a Bloomberg estimate, analysts expected third-quarter revenue of $67.22 billion and operating income of $4.34 billion.

As usual, Amazon Web Services Inc. accounted for a large proportion of the parent company’s profit despite accounting for only 13% of its overall revenue — and despite growing only 37%, to $8.4 billion, way under the year-ago jump of 49%. AWS operating profit rose to $2.1 billion, 69% of the company’s overall operating income. Analysts had expected AWS revenue to rise 39%, to $8.49 billion, with operating income up 49%, to $2.45 billion.

That slowdown came as a surprise, and it could be significant for AWS. “Increased costs for one-day delivery were baked in and likely helped on the top line, but the unexpected hit to profits came from the slowdown in the cloud business,” said eMarketer Principal Analyst Andrew Lipsman. “Heightened competition from Microsoft and Google could really crimp this high-margin revenue stream over the next few quarters.”

That said, Amazon cited particularly large AWS “customer volumes” in the year-ago quarter, making higher growth in this year’s second quarter challenging. “Nothing to us suggests a tenor change in the business,” Michael Levine, an analyst with Pivotal Research, wrote in a note to clients.

Levine also attributed lower margins to a step-up in hiring AWS salespeople, and “when smart enterprise businesses increase sales head count, it is typically followed by improving sales growth.”

Amazon Chief Financial Officer Brian Olsavksy noted on an analyst call that the 37% cloud revenue growth amounts to an additional $9 billion in its annual revenue run rate. “We’re very happy with the growth in absolute dollar terms,” he said, talking up the pace of adoption of machine learning, database and other cloud services as well as increased interest from large enterprises.

Despite the slowdown, AWS remains one of the key drivers of confidence by investors. “With the ramping ad biz and AWS, Amazon’s cash flows should rise considerably in the coming years,” Cowen & Co. analyst John Blackledge wrote in a recent note to clients.

As for Alphabet, it reported a net profit of 9.95 billion, or $14.21 cents a share, up from a profit of $3.2 billion or $4.54 a share a year ago, when it logged a $5 billion charge from an antitrust fine by European regulators. Revenue rose 19% rise, to $38.94 billion. 

On average, analysts surveyed by FactSet had expected Alphabet to post a profit of $11.10 a share, falling short of what would have been a comparable $11.75 profit without the antitrust charge. Analysts had expected gross revenue of $38.15 billion from Google, or $29.48 billion after accounting for the costs of acquiring traffic.

As always, advertising drove the great majority of Alphabet’s business, with revenues rising 16%, to $32.6 billion, mostly on its search site, YouTube and other of its properties.

“Overall, Alphabet crushed it by delivering solid results that put last year’s disappointments firmly into the rear-view mirror,” analyst Charles King of Pund-IT Inc. told SiliconANGLE. “Alphabet has made cloud a priority, as exemplified by the hiring of Oracle’s Thomas Kurian to aim Google Cloud in a more enterprise-specific direction. It will take a while for that strategy to fully bear fruit, but from what this quarter portends, Google Cloud could have a very bright future.”

That said, Google doesn’t reveal the precise nature of its cloud revenue, in particular how much is the longstanding G Suite applications. Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, noted that because Google includes G Suite in its cloud revenue number, it’s likely Google Cloud Platform is even smaller than it appears relative to AWS.

Google’s cloud computing operation is still a small portion of Google’s overall revenue, but it’s a key focus for investors both because of its growth potential and because of how much Google must spend in data centers, engineers and salespeople to compete.

The one somewhat tangible indication of cloud revenue besides Pichai’s $8 billion run rate comes from Google’s “other revenues” segments, which is mostly cloud but also includes Google Play apps, smartphones and smart speakers. Google said other revenue rose nearly 40%, to $6.2 billion. Analysts had reckoned it would rise 27%, to $5.63 billion.

Chief Financial Officer Ruth Porat said that the Google Cloud Platform again was the third major driver of revenue growth, behind mobile search and YouTube ads, and again led the overall company’s growth in headcount both in engineering and in sales. Google’s overall headcount rose to 107,646 in the quarter, up from 89,058 a year ago.

“GCP remains one of the fastest-growing businesses in Alphabet,” she said, both its infrastructure platform and G Suite. Pichai added that Google plans to triple its cloud sales force over the next few years.

“Using some basic q/q math, we estimate that GCP is growing in the mid 50% range, slightly faster than AMZN albeit less than 25% their size,” Pivotal’s Levine wrote in another note to clients. “We are bullish that under Tom Kurian’s leadership, the company will become a more relevant player in the space, so it is bullish that they are more significant in scale than most expected this early in his tenure.”

Cloud computing remains a significant driver of growth for the three largest providers of public cloud infrastructure services, led by AWS, with Microsoft Corp. a distant but fast-growing second and Google Cloud coming in an even more distant third.

A week ago, shares of Microsoft rose to a new record high after it beat analysts’ estimates on fourth-quarter revenue and profit thanks in part to growing sales from its cloud business. That said, 64% growth in its Azure infrastructure services was the slowest in the last four years. But it’s a sign that at least in market share, it’s still gaining on AWS.

Both companies as well as other tech giants face bigger issues, in particular a new antitrust probe by the Justice Department. But investors are now paying attention as well. “The enhanced regulatory scrutiny that has emerged in earnest over the last several months will also continue to weigh on the multiple,” Cowen’s Blackledge wrote in a recent note to clients on Alphabet.

Photo: photo-graphe/Pixabay

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