Silver Lining in the Cloud | HAN-GINS comments on Tech 1st quarter earnings season | SKYY
The battle continues...
Based on the 1st quarter 2019 earnings it
is clear Amazon and Microsoft are posting impressive results in the Cloud
space, while Google’s remains under pressure in its Cloud business.
Along with many industry analysts, we
continue to expect annual gains of at least 20% p.a. for the foreseeable future
regarding the Public Cloud market.
Google's Alphabet
Alphabet (Google’s parents) posted
disappointing revenues – mostly linked to weaker advertising revenues on their
YouTube video platform. However, these weaker numbers also likely include
weaker Cloud-based earnings than expected. Unfortunately, Google does not
break out their Cloud revenues or earnings as Amazon of Microsoft. The
stock was down 7% on Tuesday in late US trading.
In the Cloud space, Google has some specific
challenges related to its open source structure and ‘free’ services. For
now, we believe companies such as IBM’s recent acquisition of Red Hat, will be
big winners as multinationals seek help transferring and sharing their IT data
across multiple clouds. Proctor & Gamble’s chief technology officer
confirmed they are not keen to bet the farm on any one Cloud provider and thus
spread their usage across all major Cloud platforms[1].
Apple's iCloud
Apple’s iCloud service continues to
perform well. Apple’s services segment (iCloud and Apple Music etc) makes
more money than any single product line. It posted impressive revenues of
$11.5bn. In Apple’s latest earnings, growing consumer confidence has led to
raised earnings expectations for the 2nd quarter this year.
Despite a 17% reduction in iPhone sales this quarter and weaker earnings, with
almost 1 billion such devices, the growth of Apple services remains key.
This helped boost Apples stock 4% in trading after hours[2].
Apple’s eco-system is increasingly generating large services revenues,
including its iCloud. As Apple moves into video streaming and more entertainment-based
content, iCloud is expected to be a big beneficiary, hosting all this new
content. iCloud hosts more 1 billion Apple devices – allowing users to organize
photos, track their devices, store documents and send emails.
Amazon -| smashes through earnings expectations
Amazon’s 1st quarter 2019 profit
far exceeded analysts’ estimates. It demonstrates the company’s focus on
cloud-computing, advertising, and other high-margin businesses continues to pay
off.
Earnings were $7.09 a share, significantly
above average analysts’ expectations of $4.67 a share. Revenue gained 17%
from a year earlier to $59.7 billion – in line with the average estimate of
analysts compiled by Bloomberg[3].
Earnings have grown considerably in recent
quarters by increasing sales in cloud-computing, digital advertising, and
services for third-party sellers on Amazon’s retail site. These are all
more profitable units, than the company’s central online business.
AWS (Amazon Web Services), Amazon’s cloud service, continued its
impressive growth with a 41% sales increase over last year[4].
Sales at AWS rose to $7.7bn
from $5.4bn in 2018. The cloud division continues to be Amazon’s dominant
profit source. AWS revenue represented 13% of total
sales at Amazon up from 10% in the fourth quarter[5].
AWS continues to be the main provider of
cloud servers and storage to companies seeking to outsource their data center
infrastructure. Most of the larger Tech unicorns are using Amazon
including Uber, Lyft and Pinterest. Ride-hailing firm Lyft confirmed in
its prospectus it is contracted to spend at least $300mn on AWS over three
years, from the beginning of 2019 through 2021[6].
Separately, Pinterest in its recent IPO
filing stated it will spend a minimum of $750 million on AWS over a six-year
period that ends in July 2023[7].
CNBC reported that Apple is spending more than $30mn a month, or over $360mn
annually with Amazon. This is to ensure Apple can reliably deliver iCloud
and other services to consumers[8].
Operating income for AWS in the quarter
was $2.2 billion. The unit accounted for about 50% of Amazon’s overall
operating income. AWS’ operating margin was 29%, similar to the prior quarter[9].
Amazon doesn’t provide contributions from
specific customers, but some of those numbers have been made public of late,
thanks to IPO filings from big spenders and documents that have been obtained
by the press.
In New York, shares gained about 1% on
Thursday in extended trading. The stock has jumped 27% in 2019 alone. Amazon has been one of the best-performing large
tech stocks this year. It is currently the third most valuable company in
the world, behind Microsoft and Apple.
With quarterly sales growth of less than
20% for the first time since 2015, shareholders are seeking greater
profit. A significant portion now comes from their Amazon Web Services
division, which leads in the growing cloud computing market - for selling
computing power and data storage. AWS revenue gained almost 42% from a
year earlier to $7.7 bn. The unit’s operating income was $2.2 billion, or 50
percent of Amazon’s total[10].
Sales in Amazon’s “other” segment, which
is mostly advertising, increased 34 percent, to 2.72 billion. The company’s
digital advertising franchise has grown into the third largest in the U.S.,
trailing only Alphabet Inc.’s Google and Facebook Inc.[11].
Amazon’s employees grew 12% - with a total
headcount now of 630,600 employees.
Microsoft reaches $1 trillion market cap
Microsoft’s
Azure is rapidly becoming a stronger competitor, winning some impressive deals
in the retail space. Microsoft announced this week that Azure’s revenue surged
73% in the 1st quarter (2019). This helped the company also
top analyst estimates for both profit and sales.
Microsoft
and AWS are the two finalists competing for a $10bn US Department of Defense
contract, known as JEDI. Oracle and IBM dropped out earlier[12].
On 25th April 2019, Microsoft
became the 3rd US company to reach a $1trillion market cap.
This is after shares surged over 5% on Thursday to anew intraday high
exceeding $131[13].
This latest rally ensure
Microsoft has now joined fellow internet giants Apple and Amazon to ever reach
a $1trillion market cap. While Apple and Amazon did achieve this feat in
2018, it’s the first time for Microsoft.
Microsoft shares bounced on
first quarter 2019 results showing huge gains in its Azure cloud-computing
business, plus sales of its Windows operating system rebounded. The company
posted a 14% gain in quarterly sales from a year earlier.
Microsoft recorded sales of
$30.6bn for the quarter, with revenue at the company’s cloud-computing Azure
unit surging 73% from a year earlier. Profits climbed nearly 19%, far surpassing
analyst expectations[14].
[14] https://www.ft.com/content/123d1e7e-66c2-11e9-9adc-98bf1d35a056
| April, 2019
[1] https://www.cnbc.com/video/2019/04/30/the-booming-cloud-landscape-is-due-for-a-contraction-pg-tech-chief.html | April, 2019
[2] https://www.cnbc.com/2019/04/30/apple-earnings-q2-2019.html | April, 2019
[3] https://www.bloomberg.com/news/articles/2019-04-25/amazon-s-spending-is-earnings-key-as-investors-fixate-on-profits | April, 2019
[4] https://www.cnbc.com/2019/04/25/amazon-earnings-q1-2019.html | April, 2019
[5] https://www.cnbc.com/2019/04/25/aws-earnings-q1-2019.html | April, 2019
[6] https://www.businessinsider.com/pinterest-ipo-amazon-web-services-2019-3?r=US&IR=T | March, 2019
[7] https://www.cnbc.com/2019/04/26/slack-to-spend-at-least-250-million-on-aws-over-five-years.html | April, 2019
[8] https://www.cnbc.com/2019/04/25/aws-earnings-q1-2019.html | April, 2019
[9] https://www.cnbc.com/2019/04/25/aws-earnings-q1-2019.html | April, 2019
[10] https://www.cnbc.com/2019/04/25/amazon-earnings-q1-2019.html | April, 2019
[11] https://www.bloomberg.com/news/articles/2019-04-25/amazon-s-profit-surges-on-cloud-computing-advertising-gains?utm_source=google&utm_medium=bd&cmpId=google | April, 2019
[12] https://www.cnbc.com/2019/04/24/microsoft-q3-2019-earnings.html | April, 2019
[13] https://www.wsj.com/articles/microsoft-hits-1-trillion-market-value-for-first-time-11556201153 | April, 2019
[14] https://www.ft.com/content/123d1e7e-66c2-11e9-9adc-98bf1d35a056 | April, 2019