Second quarter results of tech giants (i.e., Amazon.com, Inc., Microsoft Corporation and Alphabet Inc‘s Google) have disclosed that there is a significant shift in dynamics of technology industry. Experts believe that enterprise expenses on cloud infrastructure services saw an increase of $10 billion year-over-year to touch $65 billion, exhibiting 18% growth rate, which is only slightly down from 19% growth in the prior quarter. They view that current economic climate has restricted some growth in cloud spending. That being said, the market continues to expand at strong rate even though there are certain short-term challenges.
Collectively, Amazon.com, Inc., Microsoft Corporation and Alphabet Inc‘s Google held ~65% of market share.
In 2Q, Amazon’s AWS saw net sales of $22.14 billion, exhibiting 12.16% year-over-year rise from $19.74 billion and 3.7% growth from the prior quarter’s $21.35 billion. AWS revenue made up ~16.5% of Amazon’s total revenue for 2Q. Operating income of the cloud business came in at $5.37 billion in comparison to to Amazon’s total operating income of $7.68 billion. AWS expanded its infrastructure footprint to address increased customer demand as it launched AWS Local Zones in Auckland, New Zealand, and Manila, Philippines, and Amazon CloudFront location in Nigeria.
Microsoft’s Azure public cloud saw year-over-year growth of 26% in its revenues in the quarter ended June. This was more or less consistent with the prior quarter’s 27% growth. Total cloud revenue touched $30.3 billion, which exhibits 21% increase year-over-year, including cloud revenues from server and Windows commercial products and the Office suite.
Alphabet’s Google Cloud saw revenue of $8.03 billion, which exhibits 27.96% year-over-year growth and 7.7% sequential increase from the prior quarter’s $7.45 billion. Operating income for Google Cloud came in at $395 million, a turnaround from $590 million loss in the same quarter of the last year. Increase in operating income was mainly because of revenue growth, partially offset by rise in compensation expenses. Additionally, operating income benefited from decrease in costs because of the change in estimated useful lives of the company’s servers and network equipment.
Just to let our readers know, Google Cloud consists of infrastructure and platform services, collaboration tools, and other services for the enterprise customers. Google Cloud makes revenues from fees which is received for Google Cloud Platform services, Google Workspace communication and collaboration tools, and several other enterprise services.
Moving forward, industry veterans predict a slight slowdown in cloud spending growth because of macroeconomic influences, enterprise cost-cutting measures, challenges in China, and the strong existing market base. However, higher adoption of AI use cases in cloud services should support the growth momentum.
In 2Q23, Amazon.com, Inc. saw net sales of $134.4 billion, increasing 11%, as compared to $121.2 billion in 2Q22. If we exclude $0.3 billion unfavorable impact from year-over-year changes in foreign exchange rates across 2Q23, net sales saw a growth of 11% in comparison to 2Q22. Operating cash flow of the company saw a growth of 74% to $61.8 billion for TTM, compared with $35.6 billion for the TTM ended June 30, 2022.
For 3Q, Amazon.com, Inc. expects net sales of between $138.0 billion – $143.0 billion, or to grow in the range of 9% and 13% in comparison to 3Q22. This guidance expects favorable impact of ~120 basis points from foreign exchange rates. Operating income of the company is anticipated between $5.5 billion and $8.5 billion in comparison to $2.5 billion in 3Q22. These guidance numbers assume no additional business acquisitions, restructurings, or legal settlements.
Intelligent Cloud business of Microsoft Corporation saw revenue growth of $3.2 billion or 15%. Server products and cloud services revenue saw an increase of $3.1 billion or 17% because of Azure and other cloud services. Azure and other cloud services revenue increased 26% as a result of growth in consumption-based services. On the other hand, server products revenue fell 1%.
Enterprise Services revenue went up by $75 million or 4% because of growth in Enterprise Support Services, offset in part by fall in Industry Solutions (earlier known as Microsoft Consulting Services).
Operating income from Intelligent Cloud business grew $1.7 billion or 20%. Gross margin (GM) grew by $2.3 billion or 16% because of growth in Azure and other cloud services and change in accounting estimate. GM percentage grew slightly. If we exclude the impact of change in accounting estimate, GM percentage fell 2 points because of sales mix shift to Azure and other cloud services and lesser Azure and other cloud services margin.
Google Cloud revenues went up by $1.8 billion and $3.4 billion from 3 and 6 months ended June 30, 2022 to 3 and 6 months ended June 30, 2023, respectively. This growth was mainly supported by Google Cloud Platform followed by Google Workspace offerings. Google Cloud’s infrastructure and platform services led the growth in Google Cloud Platform.
In Conclusion
The future growth of tech giants like Amazon, Microsoft and Alphabet Inc’s Google are a strong indication that the technology industry is undergoing a significant shift in dynamics. With an increase of $10 billion in enterprise expenses on cloud infrastructure services, it is clear that these technology companies are well-positioned to generate long term growth. Cloud services will be the driving force behind this sector’s success and these results clearly demonstrate why they should be seen as a major gamechanger for this industry.
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