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Latest Earnings Numbers Prove the Cloud Is Going Mainstream

I don't usually write about financial performance, but last week's results show the continued growth of cloud computing.

July 27, 2015
Cloud Computing

The continued growth of cloud computing was on ample display last week, as companies from Amazon and Microsoft to Netsuite and SAP showed big increases in revenue for their cloud infrastructure and software as a service (SaaS) offerings.

It's been clear for a long time that most businesses should think of cloud services first and only use on-premises solutions when they fit a particular business case. In other words, think of cloud as a necessity, not an option. I don't usually write about financial performance, but last week's results show that this kind of thinking has gained significant momentum.

Amazon received the most attention, as this was the second quarter for which the company broke out the performance of Amazon Web Services. It showed sales up 81 percent from the previous year, to $1.82 billion for the quarter, and AWS contributed $391 million of operating income – fabulous numbers by any measure. This puts AWS on track to do around $8 billion in annualized cloud revenue – which would be a huge business even as a standalone company.

Microsoft also said it is on a trajectory to do $8 billion in annualized "commercial cloud" revenue (which I'm taking as not counting consumer services such as MSN). Microsoft's mix is a bit different – while Amazon Web Services offers mainly infrastructure and platform services, Microsoft not only offers competing Azure services, but also includes its own Office 365 and Dynamics software-as-a-service (SaaS) products. Overall, Microsoft said its commercial cloud revenues were up 88 percent in revenue over the previous year, and that it is on target to offer $20 billion in revenue in fiscal 2018. (For perspective, Microsoft's total revenues in fiscal 2015, which just concluded, were $93.6 billion, so cloud is just 8 percent this year, maybe rising to 20 percent in 2018.)

Microsoft said that more than half of its Office enterprise agreement renewals last quarter were for Office 365, and said the number of commercial Office 365 users has grown 75 percent year on year. This is in addition to the 15 million consumer Office 365 subscriptions not counted in the commercial cloud numbers. It's pretty impressive.

Even IBM showed great cloud numbers: it said its "cloud revenues" were even higher - $8.7 billion over the past year, with revenue up 70 percent year over year in the first half of 2015. Those numbers include some services that others might not count as "cloud;" but IBM said its "as-a-service" business was on a $4.5 billion annual run rate, which is still quite substantial. This includes both infrastructure-as-a-service offers, like Softlayer, along with data and analytics-as-a-service, through businesses such as Cloudant and Watson Analytics.

I remain surprised that Google's commercial cloud business, which would include services like its Cloud Engine and Google for Work, isn't larger. The company, which had a great quarter in other respects, doesn't split out cloud directly, but includes it in a larger "other" category that also includes the Google Play store from Android, and Chrome and Nexus hardware sales. Overall, the Google "other" category showed $1.7 billion in revenue in the quarter, up 17 percent year over year, although most analysts think the bulk of that is from the Play store.

Meanwhile, the companies that sell mainly SaaS products also look very strong.

Salesforce, which is by far the largest pure SaaS company, reported earlier that its latest quarterly revenues were $1.51 billion, up 23 percent from the prior year, and that it is now on a $6 billion annual run rate. For the same period, Workday reported $251 million in revenue in its most recent quarter, up 57 percent from the previous year. Oracle, which has cloud and on-premises software, said its SaaS and platform as a service revenues were $416 million, up 29 percent from the previous year, while its infrastructure as a service offerings were $160 million, up 25 percent.

Last week, SAP, which owns SaaS providers such as Success Factors and Concur, reported that its cloud revenue totaled €552 million (about $612 million) in the quarter, up 129 percent year on year. Netsuite reported revenues up 35 percent to $177.3 million.

Although these growth rates are impressive, the more traditional software business remains much larger – consider that Microsoft's total revenues for its most recent quarter were $22 billion; Oracle's were $10.7 billion; and SAP's were about $5.5 billion.

All this signifies to me that we've reached the point where cloud services are rapidly becoming the way that most businesses want to deploy new services and applications. Although this transition has been slower than one might have predicted–like anything that deals with enterprise computing—it seems cloud services have turned a corner and are rapidly picking up steam.

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About Michael J. Miller

Former Editor in Chief

Michael J. Miller is chief information officer at Ziff Brothers Investments, a private investment firm. From 1991 to 2005, Miller was editor-in-chief of PC Magazine,responsible for the editorial direction, quality, and presentation of the world's largest computer publication. No investment advice is offered in this column. All duties are disclaimed. Miller works separately for a private investment firm which may at any time invest in companies whose products are discussed, and no disclosure of securities transactions will be made.

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