 From the SiliconANGLE Media Office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Hello everybody, welcome to this episode of CUBE Insights powered by ETR. My name is Dave Vellante, and in this breaking analysis we're going to take a look at AWS. Today's October 25th, last night, Amazon announced its earnings. It missed, and it lowered guidance, particularly for the all-important Q4 holiday season. But I want to drill into the AWS portion of Amazon's business. When we do these breaking analysis, we'd like to provide data, we'd like to provide content, context, data from our friends at ETR, things that we learn on theCUBE, input from our community. And if you look at AWS in the quarter, they came in at just around nine billion. That was about 35% growth, and people were concerned that that's a lower growth than a year ago. So 35% is year-on-year comparison. They were 46% last year, Q3. Operating margins were also down. I'll talk a little bit about that. They were 25%, which is still pretty strong, but they were down from 31% last year in Q3. The ETR spending data shows that AWS is still strong, but spending is not as robust. That's why they have a positive to neutral rating on Amazon. But Amazon's still a share-gainer. When you look at the AWS customers inside of the ETR survey base, they're spending more on Amazon and less on Oracle. They're spending less on IBM. They're spending less on SAP. We talked about Cloudera last week. They're spending less on Teradata. So they're shifting spend from those legacy platforms. This is AWS customers now into AWS. The other piece is Microsoft's moving. Microsoft has been consistently growing faster than AWS. I'll talk a little bit about that and what it means. So you're seeing AWS revenue slows, business is strong, but Microsoft is gaining, so let's dig into it. Alex, bring up the first slide. What I'm showing here is AWS, the little history on AWS, the quarterly revenue and year-on-year growth rates. And what you can see here is on the left-hand side is the revenue in millions. So you can see they did about nine billion. That's the blue bars this past quarter, just under nine billion. And the right-hand axis is the growth rate. And you can see it spiked up there in 15. And so it slowly came down, spiked back up in 18. You can see Q3 18 was 46%, as I said. And then it's sort of down around 35% in Q3 of 2019. Now, compare that to Microsoft. I think it grew 59% at the most recent quarter. It's been consistently up in the 60s percent growth each quarter. Now AWS will say, look, yeah, that's true, but they're growing from a much smaller base. While that's true, and the other thing that AWS will say is that every year, Amazon's growth is about the entire size of Azure. So in other words, Amazon's growth rate and what they add is about the size of Azure. That's changing. And I'll share some data that will show you that. But this year, AWS will probably add about $10 billion in new revenue. And Microsoft, if you strip out Office 365 and Skype and LinkedIn and all the SaaS stuff and just focus on the infrastructure as a service. So you try to make an apples to apples comparison between AWS and Azure. Azure will be quite a bit larger than that. We think probably in the 14 to 15, maybe even 16 plus a billion. So that narrative is starting to change. Now the next slide that I want to show you is our same quarterly revenue. So you can see that bar chart and the nine billion in phenomenal growth, but also show it's then the red line on the right hand axis is operating margin. And you can see the operating margin moderated here at 25% in Q3 the announcement this week. And you can see a year ago it was 31%. So this has the street a little bit concerned. Now this is still very strong operating margins. Remember AWS, they started selling compute. If you think about Dell and HPE's operating margins, you're talking, they're thrilled if they're in the 10%, they're oftentimes much lower than that in the single digits, sometimes low single digits. But so AWS much, much more profitable. Compare the AWS to some of the other leaders. Cisco, who's got 60% of the networking market. It's operating margin margins have been in the 20 to 27% range over the last several years. Intel, which essentially has or had a monopoly, 28 to 33% Microsoft is pure software play or largely software play, low 30s. And again, a company that had or has a monopolistic like cash flow and profitability. So AWS at that 25 to 30% operating margins, very, very strong. Okay, now I want to shift gears and show you some of the ETR data. What this next slide shows is the net scores from the cloud sector. So what I've done is pulled from the data set just the cloud sector and done some comparisons. Now, what you can see is in the October survey, the end of the entire survey is 1,336. So out of the 4,500 CIOs and IT practitioners that ETR surveys each quarter, 1,300 answered this question. And of those there were 611 Azure accounts, 546 AWS, 215 Google Cloud Platform, 157 Oracle and 107 IBM. So you can obviously see there's multiple clouds per responded. What the net score does, it takes the green which is basically we're spending more and subtracts the red which says we're spending less and it comes up with the net score that you can see in the right hand side. This is just for the cloud sector. Now look at Azure's net score, 71%. That's very, very high. I mean, it's up there with some of the hottest sectors in the industry and some of the pure plays like UiPath, we've talked about UiPath like Snowflake two of the companies that are demonstrating the highest net score in the ETR dataset. AWS still very strong at 63% but not quite as strong as Azure. As we said before, there's a lot of ways to, last week, there's a lot of ways to spend money with Microsoft. Google Cloud Platform strong at 50% but as we know, not nearly the market share of those other two. And I put in Oracle and IBM just for the sake of comparison you can see their net scores are much, much lower. So you can see the cloud continues to do really well but particularly those two cloud leaders maintaining their dominance but, you know, Azure from a growth rate and a spending momentum standpoint is really picking up. Now the next slide that I want to show you underscores the sentiment from ETR. Remember ETR when it released last week, it's October survey results. They said we have a positive to neutral rating on AWS. Why are, were they neutral? Well, some of the things I was saying before is some of that spending momentum is slowing. Why are they positive? This slide underscores that. If you take all sectors, so everything for AWS, not just the cloud stuff, I mean it's all cloud but put in AI, the machine learning, all the database activity, et cetera, et cetera, et cetera. Everything you can buy from AWS. And then look at the Fortune 500. They're a great indicator obviously is spent. So the big companies notice the net score which is that top line, that top blue line, very consistent. It's elevated and it's in line and it's up, you know, up in the high 60s. So that's very, very strong. The yellow line is market share. ETR defines market share in relative terms. So how much people are spending on AWS relative to other sectors and you can see is a steady, steady rise. So this is why ETR and we remain positive on AWS because also in addition to Microsoft, there's a lot of ways to spend money with AWS and that keeps growing and growing and growing. So you're seeing nice continued market share gains. They continue to be a gainer. Okay, so let me wrap here. As I say, positive to neutral because what's happening is you're seeing that share gain beyond compute. AI, machine learning, analytics, very hot. AWS cited or Amazon cited SageMaker as a tailwind for their business. Database now at AWS is a multi-billion dollar business. Amazon cited Aurora as again, another tailwind. Here's the thing. The reason why we're somewhat neutral on Amazon in AWS specifically is the law of large numbers appears to finally be kicking in, you know, or is it? I had a conversation this spring with a Gartner analyst, John Lovelock and I asked him, can this continue? So let's, Alex, if you would play the video and then we'll come back and talk about it. Can a company that size in your experience continue to grow at that pace? Absolutely, there is nothing stopping AWS from taking advantage of this market. We are nowhere near saturated for cloud changes. Most of software spend is still on legacy and maintenance of software on-prem. There's still a great deal of money being spent on servers and infrastructure and networking equipment and all of that gets bled out into the cloud eventually. So you heard John Lovelock. He said, there's really nothing there to stop AWS. They're going to continue to gain. And so now the question is, will they bounce back to the growth rates that they did before or are those large numbers, large numbers kicking in? Let's talk about Microsoft a little bit. Microsoft is clearly gaining. So in 2017, Microsoft's cloud business when you strip out or you try to strip out, it's a little fuzzy. There's some gray area going on in there, but you do your best. I talked to the folks at Wikibon and Ralph Finoz tracks this stuff very closely, but AWS or Azure was about 33% of AWS's business. If you go to 2018, it was about 41%. So you had Azure starting to crack or get close to the $10 billion mark. In 2019, it's going to be closer to 50% of AWS's business. So if AWS, let's say AWS comes in at 34, 35 billion this year, that puts Azure 13, 14, 15, maybe even 16 billion. So they're starting to get to the high 40s or even that 50% level. So Microsoft is making moves. Microsoft is partner friendly. People in the ecosystem, Amazon, they complain that they sometimes are concerned with Amazon competing with them. Microsoft doing partnerships even with Oracle. So this is kind of interesting that Oracle and Microsoft are partnering. One of the areas that's been difficult to get into the cloud is mission critical workloads. And that's really what Oracle and Microsoft are partnering on. It's giving Oracle customers an option because they may not want to go to the Oracle Cloud. They may not like the Oracle Cloud. They may feel like it's too locked in. They may feel like it's too deficient relative to Azure. They may be a big Microsoft customer. They feel more comfortable with Azure. So the deal between Oracle and Microsoft, the partnership will allow more mission critical workloads to go into Azure. We know that AWS, if you look at the case studies on AWS's website for the database and the database migration they've done, it's been very successful, but it's largely the analytic stuff, the data warehousing, the data marks. It's not a lot of mission critical stuff. And you see Amazon itself is struggling to convert off of Oracle into its own transaction database and that's still taking a long time. They'll certainly tout the successes they've had in the data warehousing, but the transaction stuff is much, much tougher. So that's something that we're watching as part of what we sometimes refer to as cloud 2.0. Will the mission critical workloads migrate into the cloud? Now again, the Microsoft numbers are fuzzy. You've got to peel the onion back, you have to take out Office 365, you've got to Skype in there, what about GitHub, they throw these things in, the companies, they'll all play the kitchen sink game. But here's something I want you to think about. What percent of AWS's business comes from the Amazon retail side? It's got to be substantial. Amazon retail is easily a 10% customer of AWS and likely much, much larger. Could Amazon retail account for $10 billion and AWS's revenue? It's possible. How are transfer costs allocated from quarter to quarter? What does Amazon retail pay? I think they pay rack rates, but we're not sure how those transfer costs are allocated. People talk about breaking up AWS. I read an article last week that said that Jeff Bezos may even spin it off before the government forces them to. I'm not sure that makes sense. I don't think it makes any sense to do that from a business standpoint, because right now AWS is subsidizing Amazon's entry into all these other markets. They're into grocery, they're into content. They're into now logistics. They're vertically integrating into logistics and that's one of the items that they mentioned in their conference call last night, which was their investing in logistics as potentially a future business, another big pillar. Their ad business is really taking off. So you're seeing Amazon, like Microsoft, a lot of ways to spend with those guys. So is this pullback, the stock's down about 34 points today. Is it a buying opportunity? Yeah, probably yes, but Cloud 2.0 undoubtedly and this next phase is going to see tougher competition, particularly from Microsoft, but of course then you've got Alibaba and China Inc and the China Cloud coming in and you've got partners saying, hey, we have to be careful because if we don't move fast, Amazon's going to gobble up some of our business. So they're hedging their bets and you're seeing some of the customers hedge their bets as well. Bottom line though, Amazon remains very, very strong. A leader, a continued sharegainer. So we're very positive on the company and generally in AWS specifically. All right, this is Dave Vellante. Thank you for watching this version, this episode of Cube Insights powered by ETR. We'll see you next time.