 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. Have you ever been driving on the highway and traffic suddenly slows way down and then after a little while it picks up again and you're cruising along and you think, okay, hey, that was weird, but it's clear sailing now. Off we go, only to find out in a bit that the traffic is building up ahead again, forcing you to pump the brakes as the traffic pattern ebbs and flows. Well, welcome to the seesaw economy. The Fed induced fire that prompted an unprecedented rally in tech is being purposefully extinguished now by that same Fed. And virtually every sector of the tech industry is having to reset its expectations, including the cloud segment. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we'll review the implications of the earnings announcements from the big three cloud players, Amazon, Microsoft and Google who announced this week. And we'll update you on our quarterly IaaS forecast and share the latest from ETR with a focus on cloud computing. Now, before we get into the new data, we want to review something we shared with you on October 14th, just a couple of weeks back. This is sort of a, we told you it was coming slide. It's an XY graph that shows ETR's proprietary net score methodology on the vertical axis. That's a measure of spending momentum, spending velocity and then overlap or presence in the data set that's on the X axis. That's really a measure of pervasiveness in the survey. And the table, you see that table insert there? That shows Wikibon's Q2 estimates of IaaS revenue for the big four hyperscalers with the year on year growth rates. Now, we told you at the time, this is data from the July 22 ETR survey and that ETR hadn't released its October survey results at that time. This is just a couple of weeks ago. And while we couldn't share the specific data from the October survey, we were able to get a glimpse and we depicted the slowdown that we saw in the October data with those dotted arrows kind of down into the right. We said at the time that we were seeing an across the board slowdown even for the big three cloud vendors. Now, fast forward to this past week and we saw earnings releases from Alphabet, Microsoft and just last night, Amazon. Now you may be thinking, okay, big deal, the ETR survey data didn't really tell us anything we didn't already know, but judging from the negative reaction in the stock market to these earnings announcements, the degree of softness surprised a lot of investors. Now, at the time we didn't update our forecast, it doesn't make sense for us to do that when we're that close to earning season. And now that all the big three, all the big four with the exception of Alibaba have announced, we've updated and so here's that data. This chart lays out our view of the IS and PAS worldwide revenue. Basically it's cloud infrastructure with an attempt to exclude any SaaS revenue so we can make an apples to apples comparison across all the clouds. Now, the reason that actual is in quotes is because Microsoft and Google don't report IS revenue, but they do give us clues and directional commentary which we then triangulate with other data that we have from the channel and ETR surveys and just our own intelligence. Now, the second column there after the vendor name shows our previous estimates for Q3 and then next to that, we show our actuals. Same with the growth rates and then we round out the chart with that lighter blue color highlights the full year estimates for revenue growth. So the key takeaways are that we shaved about $4 billion in revenue and roughly 300 basis points of growth off of our full year estimates. AWS had a strong July but exited Q3 in the mid 20% growth rate year over year. So we're using that guidance for our Q4 estimates. Azure came in below our earlier estimates but Google actually exceeded our expectations. Now the compression in the numbers is in our view a function of the macro demand climate. We've made every attempt to adjust for constant currency so FX should not be a factor in this data but it's sure that the currency effects are weighing on those companies' income statements. And so look, this is the fundamental dynamic of a cloud model where you can dial down consumption when you need to and dial it up when you need to. Now you may be thinking that many big cloud customers have a committed level of spending in order to get better discounts and that's true but what's happening we think is they'll reallocate that spend toward, let's say for example, lower cost storage tiers or they may take advantage of better price performance processors like Graviton for example. That is a clear trend that we're seeing and smaller companies that were perhaps paying by the drink just on demand they're moving to reserve instance models to lower their monthly bill. So instead of taking the easy way out and just spending more companies are reallocating their reserve capacity toward lower cost. So those are lower cost services. So they're spending time and effort optimizing to get more for less whereas or get more for the same is really how we should phrase it. Whereas during the pandemic many companies were, you know, they perhaps were not as focused on doing that because business was booming and they had a response so they just, you know, spend more, dial it up. So in general, as they say, customers are doing more with the same. Now let's look at the growth dynamic and spend some time on that because this is important. This data shows worldwide quarterly revenue growth rates back to Q1 2019 for the big four. So a couple of interesting things the data tells us. During the pandemic you saw both AWS and Azure buck the law of large numbers and actually accelerate growth. AWS especially saw progressively increasing growth rates throughout 2021 for each quarter. Now that trend as you can see is reversed in 2022 for AWS. Now we saw Azure come down a bit but it's still in the low 40s in terms of percentage growth while Google actually saw an uptick in growth this last quarter for GCP by our estimates. As GCP is becoming an increasingly large portion of Google's overall cloud business. Now unfortunately Google Cloud continues to lose north of $850 million per quarter whereas AWS and Azure are profitable cloud businesses. Even though Alibaba is suffering its woes from China and we'll see how they come in when they report in mid-November, the overall hyperscale market grew at 32% in Q3 in terms of worldwide revenue. So the slowdown isn't due to the repatriation or competition from on-prem vendors in our view. It's a macro related trend and cloud will continue to significantly outperform other sectors despite its massive size. You know on the repatriation point it's just still doesn't show up in the data the A16Z article from Sarah Wong and Martin Casado claiming that repatriation was inevitable as a means to lower cost of goods sold for SaaS companies. You know while that was thought provoking it hasn't shown up in the numbers. And if you read the financial statements of both AWS and its partners like Snowflake and you dig into the quarterly reports you'll see little notes and comments where there are ongoing negotiations to lower cloud costs for customers. AWS and no doubt execs at Azure and GCP understand that the lifetime value of a customer is worth much more than near-term gross margin and you can expect the cloud vendors to strike a balance between profitability near-term profitability anyway and customer retention. Now even though Google cloud platform saw accelerated growth we need to put that in context for you. So GCP by our estimates has now crossed over the $3 billion for quarter market actually did so last quarter but its growth rate accelerated to 42% this quarter. And so that's a good sign in our view. But let's do a quick little comparison with when AWS and Azure crossed the $3 billion market and compare their growth rates at the time. So if you go back to Q2 2016 as we're showing in this chart that's around the time that AWS hit $3 billion per quarter and at the same time was growing at 58%. Azure by our estimates crossed that mark in Q4 2018 and at that time was growing at 67%. Again, compare that to Google's 42%. So one would expect Google's growth rate would be higher than its competitors at this point in the maturity of its cloud which it's really not when you compare to Azure I mean they're kind of comparable now but today but you'll go back to that $3 billion mark but more so looking at history you'd like to see its growth rate at this point of the maturity model at least over 50% which we don't believe it is. And one other point on this topic you know my business friend Matt Baker from Dell often says it's not a zero sum game meaning there's plenty of opportunity to exist to build value on top of hyperscalers and I would totally agree it's not a dollar for dollar swap if you can continue to innovate but history will show that the first company in makes the most money, number two can do really well and number three tends to break even. Now maybe cloud is different because you have Microsoft software estate and the power behind that and that's driving its IaaS business and Google ads are funding technology buildouts for Google and GCP. So we'll see how that plays out but right now by this one measurement Google is four years behind Microsoft and six years behind AWS. Now to the point that cloud will continue to outpace other markets. Let's break this down a bit and spending terms and see why this claim holds water. This is data from ETR's latest October survey that shows the granularity of its net score or spending velocity metric. The lime green is new adoptions so they're adding the platform. The forest green is spending more, six percent or more of the gray bars spending is flat plus or minus five percent. The pinkish colors represent spending less down six percent or worse and the bright red shows defections or churn of the platform. You subtract the reds from the greens and you get what's called net score which is that blue dot that you can see on each of the bars. So what you see in the table insert is that all three have net scores above 40% which is a highly elevated measure. Microsoft's net score is above 60% AWS well into the 50s and GCP in the mid 40s. So all good. Now what's happening with all three is more customers are keeping their spending flat. So a higher percentage of customers are saying our spending is now flat than it was in previous quarters and that's what's accounting for the compression but the churn of all three even GCP which you reported last quarter from last quarter survey was 5x the other two is actually very low in the single digit so that might have been an anomaly. So that's a very good sign in our view. Again customers aren't repatriating in droves. It's just not a trend that we would bet on maybe makes for a fud or good marketing head fakes but it's just not a big deal and you can't help but be impressed with both Microsoft and AWS's performance in the survey. And as we mentioned before these companies aren't going to give up customers to try and preserve a little bit of gross margin. They'll do what it takes to keep people on their platforms because they'll make up for it over time with added services and improved offerings. Now once these companies acquire a customer they'll be very aggressive about keeping them. So customers take note, you have negotiating leverage so use it. Okay, let's look at another cut at the cloud market from the ETR dataset. Here's the two-dimensional view again. It's back, it's one of our favorites net score or spending momentum plotted against presence in the dataset. That's the x-axis, net score on the vertical axis. This is a view of ETR's cloud computing sector. You can see we put that magic 40% dotted red line in the table showing and then the table insert shows how the data are plotted with net score against presence i.e. n in the survey. Notably only the big three are above the 40% line of the names that we're showing here. There are others, I mean we put snowflake on there, it'd be higher than any of these names but we'll dig into that name in a later breaking analysis episode. Now this is just another way of quantifying the dominance of AWS and Azure, not only relative to Google but the other cloud platforms out there. So we've taken the opportunity here to plot IBM and Oracle which both own a public cloud. Their performance is largely a reflection of them migrating their install bases to their respective public clouds and or hybrid clouds and that's fine. They're in the game. That's a point that we've made a number of times. They were able to make it through the cloud not whole and they at least have one. But they simply don't have the business momentum of AWS and Azure which is actually quite impressive because AWS and Azure are now as large or larger than IBM and Oracle. And to show this type of continued growth that Azure and AWS show at their size is quite remarkable. And customers are starting to recognize the viability of on-prem hybrid clouds like HPEs, GreenLake and Dell's Apex. You know, you may say, well, that's not cloud but if the customer thinks it is and was reporting in the survey that it is, we're going to continue to report this view. You know, I don't know what's happening with HPE. They had a big down tick this quarter and I don't read too much into that because their end is still pretty small at 53. So big fluctuations are not uncommon with those types of smaller ends, but it's over 50. So, you know, we did notice a negative within a giant public and private sector which is often a bellwether. Giant public private is big public companies and large private companies like a Mars, for example. So, you know, it looks like for HPE it could be an outlier. We saw within the Fortune 1000 HPEs cloud looked actually really good and had good spending momentum in that sector when you dig into the industry data within ETR's dataset. Obviously we're not showing that here but we'll continue to monitor that. Okay, so where's this leave us? Well, look, this is really a tactical story of currency and macro headwinds. As you can see, you know, we've laid out some of the points on this slide. The action in the stock market today which is Friday after some of the soft earnings reports is really robust. You know, we'll see how it ends up in the day. So maybe this is a sign that the worst is over but we don't think so. The visibility from tech companies is murky right now as most are guiding down which indicates that their conservative outlook last quarter was still too optimistic. But as it relates to cloud that platform is not going anywhere anytime soon. Sure, there are potential disruptors on the horizon especially at the edge but we're still a long ways off from the possibility that a new economic model emerges from the edge to disrupt the cloud. And the opportunities in the cloud remain strong. I mean, what other path is there really? Private cloud was kind of a band-aid until the on-prem guys could get there as a service models rolled out which is just now happening. The hybrid thing is real but it's defensive for the incumbents until they can get their super cloud investments going super cloud implying capturing value above the hyperscaler capex. You know, call it what you want. Multi cloud should have been the meta cloud but Uber cloud, whatever you like. But there are opportunities to play offense and that's clearly happening in the cloud ecosystem with the likes of Snowflake, Mongo, HashiCorp, Hammer Spaces as startup in this area, Aviatrix, CrowdStrike, Zscaler, Octa, many, many more. And even the projects we see coming out of enterprise players like Dell, like with Project Alpine and what Pure Storage is doing along with a number of other backup vendors. So Q4 should be really interesting but the real story is the investments that companies are making now to leverage the cloud for digital transformations will be paying off down the road. This is not 1999 where you had, you might have had some good ideas and admittedly a lot of bad ones too but you didn't have the infrastructure to serve as customers at a low enough cost like you do today. The cloud is that infrastructure and so far it's been transformative but it's likely the best is yet to come. Okay, let's call this a wrap. Many thanks to Alex Morrison who does production and manages the podcast. Also Ken Schiffman is our newest addition to the Boston studio. Kristen Martin and Cheryl Knight helped get the word out on social media and in our newsletters and Rob Hoth is our editor-in-chief over at SiliconAngle.com who does some wonderful editing for us. Thank you. Remember all these episodes are available as podcasts wherever you listen, just search Breaking Analysis Podcast. I publish each week on wikibon.com at SiliconAngle.com and you can email me at david.volante at SiliconAngle.com or DM me at dvolante or comment on my LinkedIn posts and please do check out etr.ai. They got 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.