The sky is no longer the limit for cloud computing giants, as the slowing economy strikes at one of tech’s biggest growth stories of the past decade.
Two of the top cloud providers, Amazon Web Services Inc. and Google LLC, today revealed revenues in their cloud units, which have boosted their growth and profits for years now, that weren’t bad but are no longer on a rocket ride — at least not enough to overcome big slowdowns in e-commerce and ad spending.
Alphabet’s Google Cloud unit posted a 32% rise in its fourth quarter, to $7.315 billion, with an operating loss of $480 million, down significantly from a loss of $890 million a year ago. AWS’ revenue rose 20%, to $21.3 billion, and its operating income was down less than 2%, to $5.2 billion.
Analysts polled by Zacks Consensus Estimate had been forecasting AWS revenue to rise 22% from a year ago, to $21.7 billion. And UBS analysts last week issued a report predicting only 15% revenue growth this year. Meantime, Zacks’ consensus forecast had Google Cloud revenue rising 32% from a year ago, to $7.3 billion, so it managed to meet expectations but was down from 38% growth in the third quarter.
The results follow slowing cloud growth last week from Microsoft Corp., considered the No. 2 supplier of cloud services.
The slowdown at the cloud giants, however mild so far, is already rippling through the entire industry supplying enterprise technologies, and that downdraft appears likely to continue this year and perhaps beyond. According to TrendForce, Meta now plans to reduce server procurement by about 3% this year from 2022. Meanwhile, Microsoft plan to boost procurement by 13.4%, down from 17.6% last year, with Alphabet planning a 5.3% increase and Amazon a 6.2% rise — the latter under half of its 2022 level.
Overall, Alphabet reported revenue rose just 1%, to $76 billion, and net profit plunged 34%, to $13.6 billion, or $1.05 a share. Zacks had Alphabet revenue at $63.18 billion, up 2.1% from a year ago. The consensus for earnings was $1.17 a share, a 23.5% decline.
Alphabet shares, which had risen about 7%, to $107.74 a share, in regular trading possibly thanks to better-than-expected results from Meta Platforms Inc. Wednesday, were falling about 4% in after-hours trading.
Amazon, meanwhile, overall reported net income fell to just $278 million, down from $14.3 billion a year ago, on a 9% rise in revenue, to $149.2 billion. Particularly striking was an 8% drop in international revenue, and the unit’s operating loss rose 37%, to $2.2 billion.
Amazon’s shares, which also rose more than 7% in regular trading, to $112.91 a share, were falling about 5% after-hours.
“In a sense, Amazon and Alphabet represent the two sides of a consumer focused coin,” Charles King of Pund-IT Inc. told SiliconANGLE. “The former’s dominance of online retail and simplified delivery makes it the site that shoppers many visit first before making purchases. The latter’s dominance of online advertising makes it a vital partner for consumer-centric manufacturers and businesses of every sort. However, that also means, as we see in their respective earnings, that Amazon and Alphabet can trip and stumble when consumers pull back on spending due to economic or political uncertainties.”
Alphabet and Google Chief Executive Sundar Pichai emphasized artificial intelligence as a potential driver as he often does, though his comments take on more urgency given the potential threat from OpenAI LLC’s ChatGPT generative AI services. “Our long-term investments in deep computer science make us extremely well-positioned as AI reaches an inflection point, and I’m excited by the AI-driven leaps we’re about to unveil in Search and beyond,” he said in prepared remarks. “There’s also great momentum in Cloud, YouTube subscriptions, and our Pixel devices.”
Pichai not surprisingly focused on costs as well, including the layoff of 12,000 people in January. “We’re on an important journey to re-engineer our cost structure in a durable way and to build financially sustainable, vibrant, growing businesses across Alphabet,” he said.
And that cost-cutting won’t spare Google Cloud. “While investing for growth, we remain very focused on Google Cloud’s path to profitability,” Chief Financial Officer Ruth Porat said. But she said better efficiency in technical infrastructure, partly aided by AI, may help it close the gap to profits.
For his part, Amazon CEO Andy Jassy also emphasized how his company is reducing costs — including by laying off 18,000 people in January. “We’re working really hard to streamline our costs,” he said on a conference call.
“Both companies are taking a proactive approach to reducing costs and tightening operations,” King noted. “Given their relative performance during the past quarter, Alphabet appears to have more flexibility in approaching those processes and, at this point, seems more likely to succeed.”
Google’s shortfall in revenue came entirely in advertising, as ad sales fell 3.5%, to $59 billion — the first drop in its ad revenue since the start of the pandemic. Even search ads fell 1.6%, to $42.6 billion. YouTube saw a second straight quarter of declining revenue, down almost 8%, to $8 billion.
Online advertising, which accounted for more than 80% of Alphabet’s revenue last year, slowed down significantly last year as advertisers cut spending in response to slowing consumer demand and recession fears. But Google has been seen as potentially weathering that storm better than others thanks to the continuing appeal of search ads that can target more likely buying prospects than, say, the display advertising on most sites, including Facebook and Instagram.
“Despite being seen as one of the most insulated companies in the advertising space relative to peers, Alphabet’s poor quarter is the latest sign that worsening fundamentals and a tough macroeconomic environment are prompting advertisers to cut back on spending,” Jesse Cohen, senior analyst with Investing.com, told SiliconANGLE.
On the cost-cutting front, Google said it plans to reduce office space partly because fewer are needed given the layoffs. Porat said Alphabet expects to take $1.9 billion to $2.3 billion severance charges in the first quarter.
Moreover, she outlined plans to cut costs, including using AI and automation to improve productivity, managing spend with suppliers and vendors more effectively and “optimizing how and where we work.”
Meantime, two antitrust lawsuits, one filed last week and another that goes to trial in September, add additional uncertainty over Google’s longtime dominance of online ads.
Alphabet’s perennially money-losing “Other Bets,” which include the likes of the autonomous vehicle unit Waymo, the smart home products company Nest and the healthcare unit Verily, had an operating loss of $1.6 billion on revenue of $226 million.
However, at least one of the bets, Verily, apparently is getting some traction. Its revenue jumped to $470 million in the first nine months of 2022 from $228 in the same period of 2021, The Information reported today.
Amazon’s $149.2 billion in revenue did beat analysts’ expectations of $145 billion for the fourth quarter, though the 9% growth was well short of the third quarter’s 15% growth. But its adjusted earnings of three cents a share, coming to $278 million, fell well short of analysts’ forecast of 17 cents a share.
The company expects first-quarter revenue of $121 billion to $126 billion, or growth between 4% and 8%. The midpoint of $123.5 billion is below analysts’ estimate of $125.13 billion.
Although international revenue fell 8% in the quarter, it would have risen 5% without changes in foreign exchange rates.
As for cloud, Amazon said it expects the slowing to continue this year. “Our customers are looking for ways to save money and we are looking for ways to help them,” Chief Financial Officer Brian Olsavsky said on a conference call. “We expect these optimization efforts will be a headwind.” He added that he sees cloud growth in the mid-teens so far this year.
Jassy added more color in the call, noting that “most enterprises right now are acting cautiously. You look for ways you can spend less money.” Although that does have an impact on AWS growth, he said, “If it’s good for our customers to be more cost-efficient in the short term, our team is going to spend a lot of cycles on that.”
Jassy added that AWS has a “very healthy new-customer pipeline.” He also continues to believe that in the next 10 to 15 years, most of the growth in information technology spending — more than 90% of which is still in on-premises data centers — will be in the cloud. “That means we have a lot of growth ahead of us in the cloud,” he said.