Deceleration in Cloud Growth Expected to Continue
Event
Yesterday after market close, Amazon and Alphabet reported their Q4/F22 results.
Impact: SLIGHTLY NEGATIVE read-through for Softchoice and Converge
Cost optimization continues to drive slower growth at AWS and GCP. Amazon reported Q4/F22 AWS revenue of US$21.4bln. The 20% y/y growth is down from 27.5% last quarter and half of the 40% y/y growth posted a year ago. Although its new customer pipeline remains robust, existing customers continue to optimize their cloud spend due to the more challenging macroeconomic environment. Amazon expects these cost-optimization efforts to continue for at least the next couple of quarters, as evidenced by a further deceleration in AWS growth in January to the mid-teens.
Meanwhile, Alphabet reported slowing growth at Google Cloud, with Q4/F22 revenue of US$7.3bln. The 32% y/y growth is down from 38% last quarter and is the slowest growth rate on record. Within Google Cloud, its Google Cloud Platform (GCP) business continues to grow at a faster pace than Google Cloud. The deceleration in growth at GCP was also driven by customers optimizing their cloud spend due to macroeconomic challenges. We believe the cost-optimization activity and the (greater) push for the Google Cloud business to reach profitability could lead to a continued deceleration in growth in the near-to-medium term.
Our take. The Q4/F22 results and commentary for AWS and GCP mirror what we heard from Microsoft last week for its Azure business (details here), with the deceleration in cloud growth expected to continue for at least the next couple of quarters.
Although we understand that the Big Three hyperscalers are providing financial incentives to channel partners like Softchoice and Converge that proactively help customers optimize their cloud spend, we do not believe these incentives will completely offset the financial headwinds from the cost-optimization activity. Accordingly, we expect most if not all of these channel partners to see a similar deceleration in growth in their cloud practices in the coming quarters, which, when combined with an uncertain macroeconomic environment, may lead to more cautious outlooks being provided as Q4/22 results are reported in the coming weeks and months.