AMG Earnings Q3 18: Time to Panic?

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The big three cloud providers announced their earnings late last week, and they proved, depending upon your perspective, that public cloud computing continues on its path to infrastructure domination, or that cloud growth is slowing which proves public cloud will end up being a relatively small part of the overall IT market.

What should you think?

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First, the numbers:

AWS turned in $6.7B during the July to September period, with growth up YoY 46%. Microsoft, whose “true” cloud numbers are harder to calculate (it includes them in a category that also contains Office365), saw Azure growth of 76% (down from 90%+ the previous quarter. Google lumps its cloud offering numbers into “Other,” which includes Google Play and the like; the overall category was up 29%.

In aggregate, AMG turned in (an estimated) $10.7B in revenues, still growing at around 60%. Undeniable, however, is that their growth rate has dropped since last quarter. So, naturally, there are some doomsayers, who state that all of Amazon’s businesses are slowing down. Others note that it’s not just Amazon, the growth of all cloud providers is slowing.

Explanations for the decreasing growth rate abound. There’s talk of how the law of big numbers makes it difficult to keep up torrid growth rates. Others state that the infatuation with public cloud is wearing off and enterprises are starting to repatriate applications back to internal data centers. And, of course, there’s the old standby of enterprises building their own private clouds, obviating the need for a public deployment option. No matter the reason, the conclusion is clear: The prospects for AMG are diminishing.

There’s another way to look at this, of course. The AWS growth rate, which, as I’ve noted several times in the past, is the most important number in the entire technology industry, is 46%! That’s huge.

AWS’s growth rate drop is less than 10% from the previous quarter. It’s still higher than it was for all of 2017. One quarter of slower growth doesn’t predict an ongoing trend.

To my mind, getting verklempt over the AMG growth rate misses the larger picture regarding public cloud computing. While not dismissing the growth rate issue, here are three items to keep in mind:

This is still a huge growth rate

There isn’t another market in the world that wouldn’t like to be at $45B+ growing at 60%. Just to put that in perspective, in a year’s time that means the market grows to over $70B.

Meanwhile, most traditional vendors are overjoyed to grow 5% or 6%.

This kind of growth is unprecedented in a market of this scale. There’s no sign that it’s about to drop into the rates traditional vendors see. So the foreseeable future looks like a giant market continuing to explode. Just to put this into perspective, the chart below shows what AMG revenues look like at an overall 40% growth rate for the next six years.

Cloud has subscription-like characteristics

Traditionally, one of the problem with software companies is that every quarter starts an uphill battle from $0: a deal sold last quarter doesn’t help make the numbers this quarter. Online businesses that sell subscriptions start new quarters with an assured revenue number of something like 90% of the previous quarter.

Cloud is a lot like a subscription business. If you deploy a production application into Azure this quarter, there’s a pretty good chance you’re going to run it next quarter as well. And the quarter after. So just as Salesforce starts each quarter with a solid base of revenue upon which to grow, so too do AMG. Obviously, there’s a lot they have to do to earn that money — keeping the cloud services up and reliable, providing support, and so on — but their subscription characteristics allows them to focus on growing their customer base.

The economy’s digital transformation is still in the early stages

We are still in the early stages of the digital transformation of our economy. While most companies have rolled out mobile apps, and prefer customers to contact them via the web rather than by phone, the fundamental redesign of products and services as software offerings is still nascent.

I believe that the next decade will bring more change to our economy than seen in all of the 20th. And all of that change will be powered by software.

And where do those digital transformation applications run? The public cloud. These applications change frequently. They experience large swings in load. They expose APIs to allow external developers to build on their platform capabilities. Their fundamental nature is at odds with traditional on-prem infrastructure.

So there will be huge demand for cloud computing, driven by companies responding to the changing nature of how businesses operate.

So, how verklempt should you be about this quarter’s slowing growth rate of the big three providers. In a phrase, not much. We are in the midst of a multi-decade change to a software-based economy, and there’s bound to be a little flutter in the long-term trend. But, as the stock market saying goes, “the trend is your friend”. Another is “don’t fight the tape.” Put simply, AMG continue to grow into the dominating role they will play in the future, so figure out how you want to respond to the unstoppable force of cloud computing.

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