 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. The unraveling of market enthusiasm continued in Q4 of 2022 with the earnings reports from the US hyperscalers, the big three now all in. As we said earlier this year, even the cloud is an immune from the macro headwinds and the cracks in the armor that we saw from the data that we shared last summer, they're playing out into 2023. For the most part, actuals are disappointing beyond expectations, including our own. It turns out that our estimates for the big three hyperscalers revenue missed by 1.2 billion or 2.7% lower than we had forecast from even our most recent November estimates. And we expect continued decelerating growth rates for the hyperscalers through the summer of 2023. And we don't think that's going to abate until comparisons get easier. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we share our view of what's happening in cloud markets, not just for the hyperscalers, but other firms that have hitched a ride on the cloud. And we'll share new ETR data that shows why these trends are playing out, tactics that customers are employing to deal with their cost challenges and how long the pain is likely to last. You know, riding the cloud wave, it's a two-edged sword. Let's look at the players that have gone all in on or are exposed to both the positive and negative trends of cloud. Look, the cloud has been a huge tailwind for so many companies like Snowflake and Databricks, Workday, Salesforce, Mongo's Move with Atlas, Red Hat's Cloud Strategy with OpenShift and so forth. And you know, the flip side is because cloud is elastic, what comes up can also go down very easily. Here's an XY graphic from ETR that shows spending momentum or net score on the vertical axis and market presence in the data set on the horizontal axis, pervasion or called overlap. This is data from the January 2023 survey and the red dotted lines show the positions of several companies that we've highlighted going back to January 2021. So let's unpack this for a bit starting with the big three hyperscalers. The first point is AWS and Azure continue to solidify their moat relative to Google Cloud Platform. We're going to get into this in a moment, but Azure and AWS revenues are five to six times that of GCP for IaaS. And at those deltas, Google should be gaining ground much faster than the big two. The second point on Google is notice the red line on GCP relative to its starting point. While it appears to be gaining ground on the horizontal axis, its net score is now below that of AWS and Azure in the survey. So despite its significantly smaller size, it's just not keeping pace with the leaders in terms of market momentum. Now, looking at AWS and Microsoft, what we see is basically AWS is holding serve. As we know, both Google and Microsoft benefit from including SaaS in their cloud numbers. So the fact that AWS hasn't seen a huge downward momentum relative to with January 2021 position is one positive in the data. And both companies are well above that magic 40% line on the Y axis. Anything above 40% we consider to be highly elevated. But the fact remains that they're down as are most of the names on this chart. So let's take a closer look. I want to start with Snowflake and Databricks. Snowflake, as we reported from several quarters back came down to earth. It was up in the 80% range in the Y axis here. It's still highly elevated in the 60% range and it continues to move to the right, which is positive. But as we'll address in a moment, its customers can dial down consumption just as in any cloud. Databricks is really interesting. It's not a public company. It never made it to IPO during the sort of tech bubble. So we don't have the same level of transparency that we do with other companies that did make it through. But look at how much more prominent it is on the X axis relative to January 2021. And it's net score is basically held up over that period of time. So that's a real positive for Databricks. Next, look at Workday and Salesforce. They've held up relatively well, both inching to the right and generally holding their net scores. Same for Mongo, which is the brown dot above its name that says elastic, it's a little crowded. Elastic's actually the blue dot above it. But generally, SaaS is harder to dial down Workday, Salesforce, Oracles, SaaS, and others. So it's harder to dial down because commitments have been made in advance. They're kind of locked in. Now, one of the discussions from last summer was is Mongo less discretionary than analytics, i.e. Snowflake, and it's an interesting debate. But maybe Snowflake customers, they're also generally committed to a dollar amount. So over time, the spending is going to be there. But in the short term, maybe Snowflake customers can dial down. Now that highlighted dotted red line that bolded one is Datadog. And you can see it's made major strides on the X axis, but its net score has decelerated quite dramatically. OpenShift's momentum in the survey has dropped. Although IBM just announced that OpenShift has a billion dollar ARR. And I suspect what's happening there is IBM consulting is bundling OpenShift into its modernization projects. It's got that sort of captive base, if you will. And as such, it's probably not as top of mind to the respondents, but I bet you the developers are certainly aware of it. Now, the other really notable call out here is Cloudflare. We've reported on them earlier. Cloudflare's net score has held up really well since January of 2021. It really hasn't seen the downdraft of some of these others, but it's making major, major moves to the right gaining market presence. We really like how Cloudflare is performing. And the last comment is on Oracle, which as you can see, despite its much, much lower net score, it continues to gain ground in the market and thrive from a profitability standpoint. But the data pretty clearly shows that there's a downdraft in the market. Okay, so what's happening here? Let's dig deeper into this data. Here's a graphic from the most recent ETR drill down asking customers that said they were gonna cut spending, what technique they're using to do so. Now, as we've previously reported, consolidating redundant vendors is by far the most cited approach, but there's two key points we wanna make here. One is reducing excess cloud resources. As you can see in the bars is the second most cited technique and it's up from the previous polling period. The second, we're not showing directly, but we've got some red callouts there. Reducing cloud costs jumps to 29% and 28% respectively in financial services and tech telco. And it's much closer to second. It's basically neck and neck with consolidating redundant vendors in those two industries. So they're being really aggressive about optimizing cloud cost. Okay, so as we said, cloud is great because you can dial it up but it's just as easy to dial down. We've identified six factors that customers tell us are affecting their cloud consumption and there are probably more. If you got more, we'd love to hear them but these are the ones that are fairly prominent that have hit our radar. First, rising mortgage rates meaning banks are processing fewer loans means less cloud. The crypto crash means less trading activity and that means less cloud resources. Third, lower ad spend has led companies to reduce not only their ad buying but also their frequency of running their analytics and their calculations. And they're also often using less data maybe compressing the timeframe of the corpus down to a shorter time period. Also very prominent is down at the bottom left. Using lower cost compute instances for example, Graviton from AWS or AMD chips and tiering storage to cheaper S3 or deep archive tiers. And finally, optimizing based on better pricing plans. So customers are moving from smaller companies in particular moving maybe from on demand or other larger companies that are experimenting using on demand and then moving to spot pricing or reserved instances or optimized savings plans. That all lowers cost and that means less cloud resource consumption and less cloud revenue. Now in the days when everything was on-prem, CFOs what would they do? They would freeze CAPEX and IT pros would have to try to do more with less and often that meant a lot of manual tasks. With the cloud it's much easier to move things around and still take some thinking and some effort but it's dramatically simpler to do so so you can get those savings a lot faster. Now, of course the other huge factor is you can cut or you can freeze and this graphic shows data from a recent ETR survey with 159 respondents and you can see the meaningful uptick in hiring freezes freezing new IT deployments and layoffs. And as we've been reporting this has been trending up since earlier last year. And note the call out. This is especially prominent in retail sectors. All three of these techniques jump up in retail and that's a bit of a concern because oftentimes consumer spending helps the economy make a softer landing out of a pullback but this is a potential canary in the coal mine. If retail firms are pulling back it's because consumers aren't spending as much and so we're keeping close eye on that. So let's boil this down to the market data and what this all means. So in this graphic we show our estimates for Q4 IS revenues compared to the quote actual IS revenues and we say quote because AWS is the only one that reports clean revenue and IS Azure and GCP don't report actuals. Why would they? Because it would make them look even smaller relative to AWS. Rather they bury the figures in overall cloud which includes their G Suite for Google and all the Microsoft SaaS and then they give us little tidbits about in Microsoft's case Azure, they give growth rates. Google gives kind of relative growth of GCP. So we use survey data and other data to try to really pinpoint and we've been covering this for I don't know five or six years ever since the cloud really became a thing but looking at the data we had AWS growing at 25% this quarter and it came in at 20%. So a significant decline relative to our expectations AWS announced that it exited December actually sorry, it's January data showed about a 15% mid teens growth rate. So that's something we're watching. Azure was two points off our forecast coming in at 38% growth. It said it exited December in the 35% growth range and it said that it's expecting five points of deceleration off of that. So think 30% for Azure. GCP came in three points off our expectation coming in 35% and Alibaba has yet to report but we've shaved a bit off that forecast based on some survey data. And you know what, maybe 9% is even still not enough. Now for the year, the big four hyperscalers generated almost $160 billion in revenue but that was $7 billion lower than what we expected coming into 2022. For 2023 we're expecting 21% growth for a total of 193.3 billion. And while it's lower, significantly lower than historical expectations, it's still four to five times the overall spending forecast that we just shared with you in our predictions post of between four and 5% for the overall market. We think AWS is going to commit in around 93 billion this year with Azure closing in at over 71 billion. This is again, we're talking IS here. Now, despite Amazon focusing investors on the fact that AWS's absolute dollar growth is still larger than its competitors, by our estimates, Azure will come in at more than 75% of AWS's forecasted revenue. That's a significant milestone. AWS is operating margins, by the way, declined significantly this past quarter, dropping from 30% of revenue to 24%, 30% the year earlier to 24%. Now that's still extremely healthy. And we've seen wild fluctuations like this before. So I don't get too freaked out about that, but I'll say this, Microsoft has a marginal cost advantage relative to AWS because one, it has a captive cloud on which to run its massive software estate. So it can just throw software at its own cloud. And two, software marginal costs, marginal economics, despite AWS's awesomeness and high degrees of automation, software is just a better business. Now the upshot for AWS is the ecosystem. AWS is essentially, in our view, positioning very smartly as a platform for data partners like Snowflake and Databricks, security partners like CrowdStrike and Octa and Palo Alto and many others, and SaaS companies. You know, Microsoft is more competitive even though AWS does have competitive products. Now, of course, Amazon's competitive to retail companies. So that's another factor, but generally speaking for tech players, Amazon is a really thriving ecosystem that is a secret weapon in our view. AWS is happy to spin the meter with its partners even though it sells competitive products. You know, more so in our view than other cloud players. Microsoft, of course, don't forget is hyping now, we're hearing a lot. Open AI and ChatGPT, we reported last week in our predictions post how open AI is shot up in terms of market sentiment in ETR's emerging technology company surveys. If people are moving to Azure to get open AI and get ChatGPT, that is an interesting lever. Amazon, in our view, has to have a response. They have lots of AI and they're going to have to make some moves there. Now, meanwhile, Google is emphasizing itself as an AI-first company. In fact, Google spent at least five minutes of continuous dialogue, nonstop, on its AI shops during its latest earnings call. So that's an area that we're watching very closely as the buzz around large language models continues. All right, let's wrap up with some assumptions for 2023. We think SaaS players are going to continue to be sticky. They're going to be somewhat insulated from all these downdrafts because they're so tied in and customers, you know, they make the commitment up front. You've got the lock in. Now, having said that, we do expect some backlash over time on the onerous and generally customer unfriendly pricing models of most large SaaS companies. But that's going to play out over a longer period of time. Now, for cloud generally, and the hyperscalers specifically, we do expect decelerating growth rates into Q3. But the amplitude of the demand swings from this rubber band economy, we expect to continue to compress and become more predictable throughout the year. Estimates are coming down. CEOs we think are going to be more cautious when the market snaps back, more cautious about hiring and spending. And as such, perhaps we expect a more orderly return to growth, which we think will slightly accelerate in Q4 as comps get easier. Now, of course, the big risk to these scenarios is of course the economy, the Fed, consumer spending, inflation, supply chain, energy prices, wars, geopolitics, China relations, you know, all the usual stuff. But as always with our partners at ETR and the Qube community, we're here for you. We have the data and we'll be the first to report when we see a change at the margin. Okay, that's a wrap for today. I want to thank Alex Meyerson who's on production and manages the podcast, Ken Schiffman as well out of our Boston studio, getting this up on LinkedIn Live, thank you for that. Kristen Martin also and Cheryl Knight helped get the word out on social media and in our newsletters and Rob Hough is our editor-in-chief or at siliconangle.com. He does some great editing for us, thank you all. Remember, all these episodes are available as podcasts wherever you listen, just search Breaking Analysis Podcast and publish each week on wikibon.com and siliconangle.com where you can see all the data. And if you want to get in touch just all you can do is email me david.volante at siliconangle.com or DM me at dvolante if you got something interesting, I'll respond. If you don't, it's either because I'm swamped or it's just not tickling me. You can comment on our LinkedIn post as well and please check out etr.ai for the best survey data in the enterprise tech business. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching and we'll see you next time on Breaking Analysis.