Monday, June 5, 2017

Fast growth continues in the big clouds

Over the past few weeks, the world’s biggest public cloud companies released their quarterly financial reports and not surprisingly, cloud services remain red hot, with several companies continuing to report triple digit growth rates. Here is a round-up of the latest numbers from Alibaba, Amazon Web Services, Google, Microsoft and Tencent.

Alibaba

For its March quarter, Alibaba reported that its Aliyun cloud business grew 103% YoY to RMB 2,163 million ($314 million). The business recorded an adjusted EBITA margin of 8%. For all of FY 2017, Aliyun had an 121% growth rate. Many expect that Aliyun's future growth will be propelled by the parent company's amazing ecommerce operations. For the 3 months ended March 2017, Alibaba reported overall revenue RMB 38,579 million ($5,605 million), an increase of 60% year on year. In addition to the Aliyun cloud revenue, Alibaba also recorded revenue from digital media and entertainment of RMB 3,927 million ($571 million), up 243% year on year. Annual active buyers on Alibaba's China retail marketplaces reached 454 million, an increase of 11 million from the 12-month period ended in December 2016.

Alibaba Group's Daniel Zhang, CEO, stated that it had another outstanding quarter and fiscal year, demonstrating its ability to engage and monetise the half a billion consumers across its platforms. He added that core commerce segment continued its significant growth and strong cash flow at large scale, enabling aggressive investment in cloud computing, digital media and entertainment to drive the digital transformation of the economy and high-quality consumption across China.

AWS

For Q1 2017, Amazon Web Services recorded net sales of $3.661 billion, up 43% from $2.566 billion a year earlier. Operating expenses rose 41% from $1.962 billion a year earlier to $2.771 billion, while operating income rose 47% from $604 million to $890 million.

During the quarter, AWS announced it will open an infrastructure region with three Availability Zones in Sweden in 2018. The company currently operates 42 Availability Zones across 16 infrastructure regions worldwide, with another five Availability Zones across two AWS Regions in France and China expected to come online this year.

Google

Ironically, Alphabet is the least transparent of the major players in disclosing the progress of its cloud initiatives. Google's mission consists in organising all of the world's information, and this data about its own operations would be very useful to investors and for the industry. The Q1 2017 quarterly report merely states that revenue from businesses other than search/advertising amounted to $3.1 billion, up 49% year on year. The other category could include anything from cloud operations, to self-driving cars or Internet balloons. This unit scored a faster growth rate than the core advertising revenue, which grew at an 18.8% annual clip to reach $21.4 billion.

Microsoft

Selected figures for Microsoft’s commercial cloud revenue (includes commercial cloud, Azure, Office 365 commercial, Dynamics 365 and some other properties):

FY15 - $5.8 billion, 44% gross margin.

FY16 - $9.5 billion, 45% gross margin.

FY17 (estimated) - $14.8 billion, ~50% gross margin.

Breaking out specifically for Azure, on the quarterly financial call Microsoft reported that Azure revenue grew 93% YoY, with Azure compute usage more than doubling compared to Q1 2016. Azure Premium services grew even faster, at a triple digit rate, although the company did not elaborate.

In the investor Q&A session, company CFO Amy Hood said she is 'extremely confident' in the Azure business and that with its growth rate it will become an increasing percentage of the company's overall revenue. A slide in her presentation showed a pie chart of revenue for Server products and Cloud Services revenue. In 2015, Azure revenue was only a thin slice, perhaps about 10% (hard numbers not posted). For 2018, the chart showed Azure revenue representing about 28% of the pie.

Microsoft is not guiding to an acceleration in capex next year and has stated that capex rate will remain the same to meet growing customer demand. So, one can assume that Microsoft will be 'sweating' its cloud infrastructure more and more over time. Though the capex budget may not be accelerating, the current levels have enabled Microsoft to rapidly build new data centres around the world while investing in some interesting (and expensive) assets, such as the shared transatlantic cable system with Facebook.

In a Microsoft investor update presentation on May 10, Satya Nadella said he is looking at Azure as a $4.5 trillion opportunity. This very big number represents far more than the cumulative total of moving all IT spending to the cloud. By ensuring that the Azure stack is built into the backend of applications across vertical industries, Microsoft is betting that it will be able to capture value from businesses ranging from autonomous vehicles to precision medicine.

Tencent

On May 17th, China's Tencent Holdings reported Q1 2017 total revenue of RMB 49,552 million ($7.182 billion), an increase of 55% over the first quarter of 2016; operating profit was RMB 19,27. Meanwhile, Tencent's social platforms are booming, with QQ IM now on 860.6 million users, Mobile QQ with 678.0 million users, and Weixin and WeChat with 937.8 million users (up 23% YoY). It is also interesting to note that during the quarter, Tencent's capex was RMB 2,108 million, down 49% YoY.

Mr. Ma Huateng, chairman and CEO of Tencent, said that it delivered a strong set of operating and financial results for the first quarter of 2017, noting that smart phone games, payment related services, digital content subscriptions, PC games and social advertising businesses all contributed to broad-based revenue growth.

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