Amazon CEO Andy Jassy speaks at the Bloomberg Technology Summit on June 8, 2022 in San Francisco.
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As growth in traditional technology equipment and software slowed in recent years, cloud computing drove spending, reflecting how companies were choosing to run applications and store data.
But in the past two weeks, the biggest names in cloud infrastructure issued stark warnings to suggest that the frantic expansion of the last half-decade is cooling off. Historically high inflation and frequent increases in interest rates by the Federal Reserve have prompted businesses to look for ways to reduce expenses and get more out of their existing infrastructure.
Amazon, Microsoft And Alphabet, the three leaders in the market for cloud-based storage and servers, all reported slowdowns in their respective businesses. On Thursday, Amazon Web Services and Google Cloud, which also includes workplace productivity software, showed revenue for the fourth quarter that came in below analysts’ estimates.
“In Q4, we saw slower growth in consumption as customers adapted to GCP costs reflecting the macro backdrop,” Ruth Porat, Alphabet’s chief financial officer, told analysts on the earnings call.
Google Cloud revenue growth slowed from about 38% in the third quarter to 32% in the fourth quarter. Revenue of $7.32 billion beat analysts’ estimates of $7.43 billion, according to StreetAccount.
Amazon, which led the market 15 years ago and maintains a commanding lead, said AWS revenue growth slowed to 20% from 27%. The unit posted sales of $21.4 billion, compared with analysts’ estimates of $21.87 billion. As recently as 2018, AWS was growing over 45%.
Brian Olsavsky, Amazon’s finance chief, told analysts that large companies worked with AWS in the fourth quarter to reduce their spending due to the tough economy, a trend that began in the middle of the third quarter. He’s not expecting it to reverse any time soon.
“As we look ahead, we expect these optimization efforts to continue to be a major headwind for AWS’s growth for at least the next few quarters,” Olsavsky said.
Amazon CEO Andy Jassy, who started AWS with company founder Jeff Bezos and ran the division until he took the helm at the parent company in 2021, later spoke on the call touting a robust pipeline of cloud migration. However, according to regulatory filings, customers are showing less confidence in long-term deals. Amazon reported commitments of $110.4 billion on contracts with original terms of more than one year. That was up 37% from a prior year, a decline from 57% growth in the third quarter.
Bank of America analysts lowered their forecast for AWS, and now expect 11% growth instead of 15%. This will be down from about 29% in 2022.
“We don’t see LT Cloud trajectory being bent and broken,” wrote the analysts, who have a buy rating on the stock.
The results from Alphabet and Amazon follow reports from Microsoft last week. Microsoft’s Azure unit is second only to AWS in cloud infrastructure.
Microsoft CEO Satya Nadella speaks at the company’s Ignite Spotlight event in Seoul on November 15, 2022.
Seongjoon Cho | Bloomberg | Getty Images
Microsoft said its Azure and other cloud services revenue growth slowed to 31% from 35%, although the company does not disclose the size of the business in dollars.
On the earnings call, chief financial officer Amy Hood said that growth in Azure consumption slowed in December. The company expects Azure growth to slow even further in the first quarter as organizations look for opportunities to run their existing applications in a more cost-effective manner.
CEO Satya Nadella acknowledged that trend, but said it is not sustainable.
“At some point, optimization will take over,” Nadella said on the earnings call. “In fact, the money they save in any optimization of any workload is what they’ll put into new workloads, and those workloads will start to grow.”
Nadella’s view has support from at least some industry experts. Tech research firm Gartner is expecting 26.8% growth in the category for the full year, compared to 25.9% in 2022. Gartner’s forecast is for revenue growth of 2.4% across all of IT.
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