 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. While cloud computing is generally seen as a bright spot in tech spending, the sector is not immune from the effects of COVID-19. Look, it's better to be cloud than not cloud, no question. But recent survey data shows that the V-shaped recovery in the stock market looks much more like a square root sign for IT spending in 2020. And even the cloud is going to be negatively impacted, albeit much less so than many other sectors. Hello everyone and welcome to this week's Wikibon Cube Insights powered by ETR. I'm Dave Vellante and in this Breaking Analysis, we want to update you on our latest data and thinking around the cloud computing market with an emphasis on infrastructure as a service. We'll also update our latest quarterly estimates of the big three and show you our typical trailing 12 month view of revenue. Let's start with the macro picture. The reality is that the latest ETR survey of nearly 1200 respondents shows that the vast majority of companies is, the COVID is hitting IT budgets. Notably, 59% of respondents have frozen hiring. That's up from 26% in the last survey, which was taken in March and April at the height of the US lockdown. 24% have laid off employees, that's up from 4%. 41% froze new IT deployments. That's nearly double the percentage from the last survey. Now, on the plus side, there are some shops, 23%, that are accelerating IT deployments and that's up significantly from last quarter. Now, as we've reported, that's coming from the work from home and COVID tailwind segments and cloud computing is obviously one of those. But these spending shifts are not enough to offset the overall outlook for 2020 and likely that's going to continue into 2021. Because the big cloud players, especially AWS and Azure are so large, they're exposed to industries that have been hard hit by the pandemic. As such, we see pockets of spending deceleration, even at these companies. Now, the other piece of data that has our attention is the hybrid and multi-cloud market. It's beginning to show some spending momentum. This is particularly notable within VMware and Red Hat accounts and we've even seen a bit of momentum for Oracle that we'll talk about in a moment. Now, before we dig into the numbers, let's hear the sentiment from some of the customers. What we're showing here are some of the verbatim comments from ETR customers. One of the things I love about this survey is it includes quantitative and qualitative data that I can sort by industry. So I've just pulled up a few examples that underscore some of the broad-based pain that companies are facing. Education, minimum 15% cut across the organization, energy and utilities. We cut projects 10, 15% across the board, financials. We've been asked to cut 20% out of our budget, government, hiring freeze, larger constraints on spending, healthcare and farmer, much more scrutiny from upper management, industrialism, materials and manufacturing. Slowing down is not all projects can be done remotely. IT telco, headcount and projects on hold and pushed into 2021, retail consumer, budget cuts. We lost three months of cash flow, services and consulting. All discretionary projects are frozen. Now these comments predominantly come from large companies that are big spenders. Now in fairness, there are plenty of positives in the anecdotes but I have to say in squinting through the hundreds and hundreds of comments, this pretty much sums up the sentiment. Now this is especially true in the all important US market where we heard in Cisco's earnings call this week, the theme is uncertainty related to the pandemic and this is hitting IT budgets. Now, cloud spending remains at elevated levels but there's definitely pressure. What we're showing here is the net score for the big three cloud players, Microsoft, Amazon and Google. In the three surveys of 2020, net score is ETR's measure of spending momentum. In each quarter, ETR asks buyers, are you spending more or less on a particular platform? And net score essentially subtracts the lesses from the mores. It's a bit more complicated that but that is really the essence. And you can see the deceleration in all three big cloud platforms. Now it's important to point out that these are at elevated levels and they represent strength but there's clear pressure and headwinds on spending even in the cloud. No sector is immune. Now, there are pockets like video conferencing and security that are winning but even in these sectors, it's bifurcated. It's often a story of a firm that is well positioned to gain share like say a Zoom, or we've talked a lot about an Okta or a CrowdStrike or a ZScale or a SailPoint that we've highlighted in previous breaking analysis segments. Now this slide shows data from the ETR survey. The pies compare the spring survey to the summer asking buyers will COVID impact your IT budgets in 2020. In the latest COVID survey, 78% say yes. Now that's up from 63%. See the bar chart below that answers your next obvious question which is how will your budget be impacted and can you see the distribution of the growth? Yes, there it is. You could see the decline, 22% say no change but the red bars that decline are much bigger than the green bars and that's why we continue to forecast IT spending declines of five to 8% in 2020. We think this is even going to spill into the first half of 2020. Who knows, we'll see if it goes beyond. Now let's put the cloud in context. Despite my dire outlook, we have to remember that it's all relative. This chart shows one of our favorite views it plots net score or spending momentum on the vertical axis against the market share on the horizontal axis. Market share is a measure of pervasiveness in the survey and calculates the penetration of the sector as a percent of the overall survey. So what this view tells us is the degree of spending momentum on the vertical axis cloud is elevated relative to other sectors that we're showing here and it shows the penetration of cloud and the data set on the horizontal axis. So cloud shows spending momentum and high penetration relative to other priorities in IT. Note there are dozens of other sectors but we've cherry-picked a few here for context. To wit, other than containers, AI and RPA cloud is outpacing all sectors shown for the net score and only analytics, BI and big data is more pervasive. So cloud, very strong, no doubt cloud is the place to be but the pandemic has created spending friction even in cloud. And what we showed earlier the decline of the net scores for the big three. Now again, we're still holding here at elevated levels. What this chart shows is the sectors of infrastructure as a service that show increasing net scores relative to the last survey. And you can see there are only five areas that show positive increase in net score. This is out of dozens and dozens. Reading the bars left or right, you see VMware cloud on AWS with a very impressive net score of 66%. That's up 700 basis points since the last survey. Next you see Red Hat OpenShift with a 44% net score. That's up 600 basis points. And then VMware cloud which comprises VMware cloud foundation and other hybrid and multi-cloud services from VMware. It shows a net score of 42% which is up 400 basis points. Now after that is Red Hat OpenStack. Yes, OpenStack with a 40% net score up 1200 basis points since the last survey. Red Hat sells and supports its OpenStack distro. Now prior to the IBM acquisition, Red Hat would frequently cite OpenStack as a growth business on its earnings calls and this data confirms that there's actually some momentum there. As an example, Red Hat is selling into the telco sector to service providers that want to stand up a private cloud. Why? Well, the big cloud players may not have a local presence and then there may be a data sovereignty requirement in that country. You know, that's just one example. And then finally on the chart we have Oracle. Now for sure there's some sass in there and Oracle's net score is really not inspiring at 12% but it's up from the last survey. So these are the only five areas showing net score expansion from the last survey which talks to the impacts of COVID that we discussed earlier. Now let's take a look at a more granular set of data that cloud services and how they stack up. What we show here are the top 10 cloud services measured by net score or spending momentum. This is for the July survey of 1,195 respondents. The first point is these are solid net scores. So while I'm a bit of a Davey downer today, these are very strong relative to most other parts of the technology stack. Most companies would kill to have this type of momentum. You see Azure functions and Azure platform they lead the pack, but look at VMware cloud on AWS. We've seen this popping up showing strong in recent surveys and it's gaining presence and momentum in the data set. Then there's AWS Lambda, you know functions or serverless this remains strong as you can see it does Google functions and there's AWS, that's the AWS overall and even though it's a bit off in net score terms from previous quarters, as we'll talk about in a moment this is a $40 billion business with net scores that remain elevated. Remember that net scores they can't grow to the moon they're going to fluctuate and the larger the base the harder it is to maintain high net score. So this is very, very impressive for AWS. Google cloud platform is next and you know frankly I'd like to see stronger net scores from Google. GCP is around an eighth of the size of AWS yet AWS still maintains a notably higher net score in each survey. Google continues to struggle with selling into the enterprise. Now look at the last three in the chart you know cloud purists like AWS might say that these hybrid or a multi cloud services aren't in real cloud, you know but to me this is a customer survey if the customer says they're cloud, I'm going to go with that. Now forgetting about the semantics here the point is we've been talking about hybrid and multi cloud for a while and we see VMware and Red Hat with OpenShift two companies that we've predicted are in a strong position to compete for hybrid and multi and they're showing up on customers spending radar. I should also mention that Microsoft is also a leader if not the leader in hybrid multi cloud because it has a massive public cloud presence and numerous relevant services particularly in the hybrid space but they don't show up necessarily as discrete services in the ETR taxonomy but they are in the numbers for sure that probably just peanut butter spread over a number of categories. Now let's put this into context. Here's our old friend the XY graph it's one of our favorites. This time we show specific named vendors in cloud and the Y axis is net score or spending velocity and the X axis is market share or pervasiveness. So as usual we see AWS and Azure separating from the pack. This is such a huge market it's really not a winner takes all space. You know maybe not even a winner takes most and as you can see in the players that we've highlighted in the hybrid multi zone Google's kind of on that bubble but any player here with a net score above 40% in the green as you can see in the upper right hand corner is doing well. Red Hat, VMware cloud, Google and look at VMware cloud on AWS. This service is getting a lot of traction and it better given the effort that both companies have put behind this. AWS has created a special bare metal instance to run this service on its cloud. VMware talks about AWS as its preferred partner. This has been a winner for both companies. AWS gets access to a half a million VMware customers and VMware gets a really solid cloud play. Look where this goes in the future it's going to be interesting to watch. When this service was announced several years ago it didn't take long for AWS to also announce its VMware migration services. But for now it's a win-win for the companies and a win for the customers. Now for context we've included both Oracle and IBM cloud services and you can see where they stand relative to the rest. They're not setting the world on fire but hey as I've said many times they at least are in the cloud game. And importantly both companies are in a good position to migrate their customers mission critical workloads to their own respective clouds. All right I want to wrap by looking at the big three performance this quarter. As has been our custom we like to share our estimates of how the big three U.S. cloud players stack up from a revenue standpoint. This chart shows our IS and PAS revenue estimates for AWS Azure and Google cloud platform. The data shows 2018, 19, 2019 growth and the first two quarters of 2020 with a trailing 12 month view. And here are the key points. Now as always remember AWS reports clean numbers the others we have to squint through 10Ks and 10Qs and triangulate with survey data to come up with the reasonable apples to apples estimate and comparison. First point AWS is now 40 billion. Whoa combined the big three now account for nearly $70 billion in IS and PAS revenue. You know that's more than a sizable chunk of the data center business which is not all this hasn't been necessarily incremental growth to the IT market has been a share shift going on. In other words that share shift is going from on-prem into the cloud. Now the third point is growth is strong but not surprisingly the bigger you get the slower the growth rate rate. In 2018 AWS revenue was 2.7 times greater than that of Microsoft. For the first time however AWS revenue was dropped below 2x that of Microsoft. Said another way Microsoft's IS and PAS revenue was now about 57% of AWS's revenue. Google's growth rate at its size appears to be lagging where AWS and Azure's growth was at earlier points in their respective journeys. For example when AWS put up nearly 8 billion in 2015 in revenue it grew over 70% that year. Azure as you can see at 16 billion in 2019 grew at 65%. Now Google grew 72% last quarter and 59% this quarter so it's no slouch but it's size with its resources. We'd like to see Google pick up the pace and you may have to wait until post COVID. But despite the COVID headwinds in the overall IT market there's no question that this is a cloud world and we just happen to live in it.