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ICONIQ Growth: Q2 2020 Cloud Commentary Report


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ICONIQ Growth: Q2 2020 Cloud Commentary Report

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ICONIQ Growth: Q2 2020 Cloud Commentary Report

  1. 1. Q2 2020 Cloud Commentary
  2. 2. ICONIQ Capital, LLC Important Disclosures 2
  3. 3. 3 Company Financial Profile/ Growth • AWS revenue of $10.8B, an increase of 29.0% Y/Y, up from $8.4B in Q2 FY19 • Though this was the eighth sequential quarter of deceleration, signs that growth this quarter was largely transitory as AMZN helped customers temporary optimize consumption • Backlog remains robust, growing 65% Y/Y • AWS segment accounts for 12.2% of consolidated revenue and 57.5% of consolidated operating income • Azure revenue increase of 50.0% FX- neutral Y/Y (revenue undisclosed) • Commercial Cloud revenue of $14.3B (+32% Y/Y) and Intelligent Cloud revenue of $13.4B (+19% Y/Y) in Q4 FY2020 • Deceleration driven by customers’ clear shift to optimize Azure consumption • Q4 FY20 Commercial Cloud gross margin of 66%, up slightly from 65% in Q4 FY19, driven up by improved Azure margin • $12.0B revenue run rate for Google Cloud in Q2 FY20 (43.2% Y/Y). Despite Y/Y growth deceleration, backlog remains strong with $14.8B in future Google Cloud contracts • GCP Growth remains significantly higher than consolidated cloud revenue. • Q2 FY20 consolidated operating income of $6.4B for Google, down 25.5% Y/Y (unknown portion allocated to GCP) Products • Core focus on developer tools, including code optimization and enterprise search products • Select strength in edge computing and IoT • Significant focus on expanding AI portfolio including partnership with OpenAI, Azure Cognitive Sciences and Bot Framework • “Really focused” on AI engineering teams and investing appropriately, in line with historical GCP engineering focus Footprint • Expansive footprint across many industries/geos • Working closely with companies in struggling industries to selectively scale down usage • Continued investment in infrastructure, with Q2 FY20 purchases of PP&E under finance leases(1) of $3.2B, (4.6%) Y/Y • CapEx of $5.8B in Q4 FY20, up 9% Y/Y (includes assets acquired under finance leases), and 49% Q/Q • Depreciable server life will increase to 4 years • More data center regions than any other cloud provider (added Italy, NZ, Poland) • Q2 FY20 CapEx of $5.4B, down 12.0% Y/Y from $6.1B in Q2 FY19. Reflective of slowed pace of acquiring offices & building office / data centers • Expect modest decrease in total level of CapEx in 2020 relative to 2019, though continued investment into server efficiency Impact of Macro Environment • AWS customer usage remains strong, but growth varies across industries with travel and hospitality clients cutting expenses • Average contract length is over three years, which may suggest long term stability for AWS segment despite COVID-19 headwinds • Though AWS faces short-term headwinds, remain confident in future commercial opportunity as cloud migration stays strong and paring of usage is temporary/selective • Overall, COVID-19 has demonstrated the importance of technology for business resiliency and continuity, with MSFT at the forefront of these needs • Revenue growth trends likely more transitional results of customers working to optimize consumption loads to save money • Cloud offerings remain essential to organizations working remotely • Optimistic around cross-sell and net new customer growth moving forward • Google Cloud remained a key strength in the midst of other struggling business units • Management highlights two trends as growth levers for Google Cloud: the future of work being digitized and the importance of digital collaboration, both of which are enabled by Google Cloud • Of all business lines, strategic focus and long-term investment remains dedicated to growth and opportunity of Google Cloud Source: ICONIQ Growth diligence, AMZN, MSFT and GOOG public filings (1) Under new accounting guidance, leases and capex spending previously referred to as “capital leases” are now referred to as “finance leases” Overview of Select Core Competitors Cloud Provider Landscape Summary Overview – Key Participants
  4. 4. 4 Cloud Commentary Amazon – Q2 2020 Earnings Call & Press Release Theme Commentary Financials • Eighth consecutive quarter of decelerating % Y/Y revenue growth, but on a base of $43.2B run-rate revenue in Q2 • AWS a strong component to consolidated Amazon gross margin expansion • AWS operating profit continues to contribute meaningfully to consolidated Amazon operating profit • Backlog of future AWS contracts growing at 65.0% Y/Y Product • Announced HoneyCode, a fully-managed service for building powerful applications with no programming required • Announced Amazon Kendra, an enterprise search service ,leveraging ML, enabling clients to index and search data across siloes by employing natural language requests • GA of UltraWarm for ElasticSearch Service, a low-cost warm storage tier that provides interactive analytics of log data • GA of sixth-generation EC2 with three ARM-based instances, delivering up to 40% better price and performance • GA of CodeGuru, a developer-quality service leveraging ML for providing recommendations to improve code quality • GA of SnowCone, a portable and secure edge computing and data transfer device • Ga of IoT SiteWise, a managed service that collects and labels data which is used to generate metrics to help industrial customers make data-driven decisions • Announced Amazon Interactive Video Service, a managed service used to set up live, interactive video streams for web or mobile applications Customers • AWS being leveraged by customers like WHO, UNC Health and Orange County United Way to lessen the impact that COVID is having on families, communities and businesses • New customer commitments and migrations from HSBC, IHS Markit, Formula 1, Bundesliga, Capella Space and Genesys who are leveraging AWS to drive digital transformation agendas and deliver dynamic user experiences for their customers • AWS and Slack announced multi-year agreement and migration of Slack Calls capability to Amazon Chime, AWS’ communication service for hosting business calls Summary Outlook • Despite slowdown in % Y/Y revenue growth, management is confident in their ability to successfully serve clients over the longer term, noting they are actively working with select clients to scale down deployments to help them better navigate cost cutting as a result of COVID impact, which is positively influencing the “health of the relationship” • Seeing many companies wishing they had made further progress on cloud deployments and are witnessing migration plans accelerate, which suggests a positive outlook for revenue growth in the long-term Source: ICONIQ Growth diligence, AMZN public filings
  5. 5. 5 Theme Commentary Financials • Azure revenue increased 50% Y/Y FX-neutral (revenue figures not disclosed), down from a 61% Y/Y last quarter and 68% Y/Y in Q4 FY2019. Growth was driven by their consumption-based services as people continue to work and learn from home. • Commercial Cloud surpassed $50B in annual revenue for first time, growing 32% Y/Y. Growth was propelled by continued digitization across business segments, industries, and operations as companies adapt to new customer needs and demands • Closed record number of multi-million dollar commercial cloud agreements while number of $10M+ Azure contracts grew; Commercial bookings growth ahead of expectations due to increased renewals and large, long-term Azure contracts • Continued investment in infrastructure paying dividends as server depreciable life will increase to 4 years moving forward Product • New Azure-Arc-enabled Kubernetes to enhance current control plane build for the multi-cloud, multi-edge world • Increased capabilities in the Azure Stack HCI to help companies bring the cloud to their own datacenters • Acquisitions of Affirmed and Metaswitch are helping to extend Azure to the network edge and support telecom shift to 5G • Continue to differentiate their Azure offering with limitless data and analytics capabilities using a combination of SQL Hyperscale, Cosmos DB, Synapse Analytics, and new Synapse Link (enables live analytics) • New capabilities across Azure Cognitive Services (building application across 49 languages), Microsoft Bot Framework (building bots with low code), and Azure Machine Learning (deploying AI responsibly & safely). • Acquisition of CyberX will assist in securing customers IoT deployments as IoT adoption (and security risks) accelerate Customers • Azure continues to support more datacenter regions than any other provider, adding Italy, New Zealand, and Poland in Q4 • New customers include: Land O’Lakes, National Australia Bank, John Hopkins Medicine, Citrix, Finastra, SAS, and Workday • Usage continues to increase, with Azure Cognitive Services processing 13.5B transactions in June • Breakthrough Innovation of GPT-3 AI model from partnership with OpenAI was trained on Azure AI supercomputer • AI becoming essential across industries, with Azure AI being used by companies from Bridgestone to United Health to EY • Azure Active Directory has over 345M MAU across 200K+ organizations (e.g. GM); Azure Sentinel has 6,500 customers Summary Outlook • Despite some slowdown in SMB segments and on-prem solutions, MSFT cloud business remains in a strong position as more companies understand that cloud technology is essential to business resilience and continuity • Will continue to invest in long-term, strategic opportunities to support customer needs and demands. Strong usage and consumption growth expected as new customers are signed and existing customers cross-sell into other product lines • Intelligent cloud projected to drive $12.55B - $12.8B in revenue in Q1 FY2021 • Management guides they are increasing the depreciable lifetime of a server to four years, which will favorable impact operating income by $900M in Q1 ’21 and $2.7B in FY21 Source: ICONIQ Growth diligence, MSFT public filings Cloud Commentary Microsoft – Q4 FY2020 Earnings Call & Press Release
  6. 6. 6 Theme Commentary Financials • Google Cloud decelerated meaningfully to 43.2% Y/Y generating $3.0B in revenue vs. 52.2% Y/Y revenue growth in Q1 FY20 • Slowed revenue growth partially due to G Suite lapping the price increase initiated in April 2019 • Strong confidence for future of Google Cloud, reflected by increase in long-term, multi-year contracts and a backlog of $14.8B • Increased administrative and fixed costs partially attributed to cloud division, as the most sizeable head count increases were in technical and sales roles within Google Cloud division Product • Keen focus on the Google Cloud Go-To-Market organization and strengthening partner network • GCP growth and customer adoption led by infrastructure offerings and broad data and analytics product suite. Continued focus on R&D and enhancing AI offerings • More broadly, G Suite has introduced an integrated workspace for Gmail, Chat, Meet, and Drive on mobile to aid continued collaboration as people continue to work and learn from home Customers • Customers continue to choose Google Cloud to drive digital innovation and increase operating efficiencies • Highlighted commercial customers include Keurig, Dr. Pepper, Deutsche Bank, Lowe’s, Telefonica, and Orange • Moreover, Google Cloud is working with many government agencies to help deliver care during COVID—including governments in Oklahoma, New York, Arizona, Italy, and Spain • Broad use cases for G Suite tools, from financial advisory to telemedicine to teaching • Management highlighted Q2 Google Meet usage peaked at 600M participants in one week, as well as PWC employees conducting nearly ten million hours of videoconferencing in a single month • Average revenue per seat and absolute seat growth witnessed in G Suite install base Summary Outlook • Expect modest decrease in CapEx in 2020 relative to 2019. This is driven by a slower pace of acquisition and slower ground- up construction for both office facilities and data centers due to COVID-19 • As in the past, will continue to invest strategically in Google Cloud as it remains a key lever of growth. Expect investment in head count for Google Cloud on both the engineering and sales side, along with long-term investment in data centers, cloud regions, and improvements in server efficiency. • Management did not provide quantitative forward guidance on Google Cloud revenue or profitability but noted a large backlog of $14.8B for Google Cloud contracts Cloud Commentary Google – Q2 2020 Earnings Call & Press Release Source: ICONIQ Growth diligence, GOOG public filings
  7. 7. 7 Cloud Commentary AWS Revenue Growth AWS Quarterly Revenue ($M) – Constant Currency Basis  AWS Q2 FY20 revenue of $10.8B, up 29.0% Y/Y  Eighth consecutive quarter of decelerating, but impressive Y/Y revenue growth  Largest sequential decline in % Y/Y revenue growth since Q1 FY19 $2,566 $2,886 $3,231 $3,536 $3,661 $4,100 $4,584 $5,113 $5,442 $6,105 $6,679 $7,430 $7,696 $8,381 $8,995 $9,954 $10,219 $10,808 63.9% 58.2% 55.0% 47.0% 42.7% 42.1% 41.9% 44.6% 48.6% 48.9% 45.7% 45.3% 41.4% 37.3% 34.7% 34.0% 32.8% 29.0% 0% 10% 20% 30% 40% 50% 60% 70% $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY2016 FY2017 FY2018 FY2019 FY2020 AWS Revenue % Y/Y Revenue Growth (constant currency basis) Source: ICONIQ Growth diligence, AMZN public filings
  8. 8. 8 Cloud Commentary Azure Revenue Growth Illustrative ICONIQ Growth Estimate: Azure % Y/Y Revenue Growth(1) – Constant Currency Basis Source: ICONIQ Growth diligence, MSFT public filings, William Blair (1) Microsoft does not disclose revenue figures directly attributed to Azure, and only discloses Azure revenue % Y/Y growth  In Q2 FY2020, sell-side analysts estimated Azure revenue at a ~$20B run rate  ICONIQ Growth estimated historical Azure revenue figures by leveraging historical Azure revenue growth rates provided by management, as well as published broker research estimates  Microsoft’s Azure segment grew 50% Y/Y on a constant currency basis in Q4 FY2020, a significant decline from the 60%+ growth over the prior year 94.0% 98.0% 89.0% 98.0% 89.0% 85.0% 76.0% 76.0% 75.0% 68.0% 63.0% 64.0% 61.0% 50.0% 0% 20% 40% 60% 80% 100% 120% $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY2017 FY2018 FY2019 FY2020 Azure Revenue (ICONIQ Growth Estimate) % Y/Y Revenue Growth (constant currency basis)
  9. 9. 9 Cloud Commentary Google Cloud Revenue Growth Google Cloud Quarterly Revenue ($M) – Constant Currency Basis Source: ICONIQ Growth diligence, GOOG public filings  Google Cloud has maintained a 45.7% CAGR over the past 7 quarters  Growth of Google Cloud decelerated meaningfully in Q2’20  Google does not disclose actual GCP revenue, though it is noted that GCP continues to grow significantly faster than the consolidated Google Cloud business $1,709 $1,825 $2,100 $2,379 $2,614 $2,777 $3,007 53.0% 52.2% 43.2% 0% 10% 20% 30% 40% 50% 60% $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY2019 FY2020 Google Cloud Revenue % Y/Y Revenue Growth (constant currency basis)