It’s gut check time.
In other words, it’s that time of year when technology companies release their earnings for the third quarter of 2016. Four times a year the press releases and marketing hype are pushed aside for cold, hard numbers. Let’s take a look at two companies which released their earnings last week, and see what’s behind the growth: Microsoft and Amazon.
Microsoft announced quarterly revenue at $22.33 billion which sent their stock to an all-time high above $60 a share. But what analysts were buzzing about was the impressive financial performance from Azure, Microsoft’s cloud service. For the quarter, Microsoft’s “intelligent cloud segment” bought $6.38 billion in revenue or a 116% increase. Pacific Crest Securities called Microsoft’s results, “impressive” and pointed out that Microsoft had grown cloud gross margins from 42% to 49% during the last quarter. In spite of sluggish PC sales, Microsoft is chugging along quiet nicely, with Azure leading the way.
Amazon does not release as much detail with their earnings report, but they still announced $32.7 billion in revenue for the quarter. Amazon Web Service (AWS) led the way with a 55% year-over-year sales growth and accounted for 10% of Amazon’s total revenue. More importantly, AWS realized a $861 million operating profit, or three times the profit of North American retailing. Like Microsoft, Amazon received a huge boost to both revenue and profit from its cloud division.
Investors were thrilled with Microsoft’s results, and its stock soared. That wasn’t the case with Amazon. But both earnings cast a light on how important the cloud is to their bottom lines. Microsoft is the company that made Windows and Office, but it’s clear that Azure is the future of the company. And I’m beginning to wonder if Amazon is a cloud services provider that happens to run an online store.
AWS has been a cloud pioneer for many years now, yet the analysts seem to be more excited about Microsoft’s future. I’ve wondered about this for some time and believe that it comes down to business focus. Amazon would still have huge online retail business if AWS never took off. While AWS is the platform that powers the massive Amazon store, it’s a loosely connected business. Early on, Amazon recognized an opportunity to offer its platform as a service. The billions they invested building out their data centers has turned a profit for Amazon since at least 2014.
Microsoft doesn’t have a retail business to fall back on. So it makes a lot of sense that Microsoft would replace Steve Ballmer with the man who was running their cloud platform group, Satya Nadella. Microsoft must transition from a company selling software to one that offers that software as a service. Bill Gates was able to refocus the company when the internet threatened their business. Nadella is refocusing the company around the cloud, and it’s beginning to pay off. It doesn’t hurt that margins selling software and services (Microsoft) tend to be much higher than those of selling goods (Amazon store).
Microsoft missed the meteoric rise of the smart phone. Well, they didn’t exactly miss it but they failed to capture any significant market share even after they purchased Nokia. And yet, maybe Microsoft is playing the long game. Smartphones sales at Apple, Samsung, LG and others have been flat. A lot of armchair analysts believed Microsoft couldn’t survive without a strong presence in phones. The opportunity in the cloud may turn out to be as big or bigger than phones. Especially with cloud applications gaining traction in the business environment. Office 365 has surpassed 23m+ users globally, and is now the preferred business suite.
Two years ago I attended a presentation at Dixie State University. The speaker was a technical project manager working for a local company. He talked about the cloud and how government agencies were beginning to embrace it. Of course, security was the main sticking point with many agencies. Amazon had released GovCloud which is an isolated instance of AWS they use to host sensitive data and regulated workloads in the cloud. A few business owners chimed in with similar concerns about security. The speaker ended by saying that there were too many smart people working on cloud security for it to be an lingering issue. He said that Amazon and Microsoft had every incentive to make their services as secure as possible. The speaker was bullish on the cloud.
He had reason to be bullish because a new Deloitte report shows that security concerns may no longer be the top concern for business owners. Providing security training to employees along with data encryption is helping to reduce security concerns. As noted by IT Pro Portal, how employees and executives interact with cloud-based applications is more important than where the services are located.
Security issues have always existed. It’s not as if they just showed up one day. The cloud has called attention to them, and this is a positive development. There’s no such thing as 100% secure, but it’s good to know that cloud providers have a dedicated team of security experts.
Microsoft and Amazon are not the only players in the cloud, but they are two of the largest and most influential. Lately we’ve learned how important the cloud is their profitability and growth. Can you imagine telling someone just 10 years ago that Microsoft would be giving away Windows 10 to consumers while growing a robust cloud business for Office applications? Times have changed and Amazon and Microsoft understand they must change as well.
We are still in the early stages of the cloud, but there are a number of exciting developments taking place. IoT, machine learning and artificial intelligence are going to drive business to the cloud like we’ve not seen before. Are you ready?