What earnings reports tell us about the state of the cloud

Cloud computing is still on the rise and starting to eclipse traditional enterprise technologies: That's the takeaway from the latest wave of earnings reports.

AWS, Microsoft and Google Cloud all reported impressive performances in 2019. Meanwhile, enterprise software companies like Salesforce, Atlassian and ServiceNow are showing that the current generation of office workers demand software-as-a-service tools to get things done. Older vendors like Oracle and IBM, bogged down by a customer base entrenched in the data center era, are struggling to capture the growth caused by the shift to the cloud.

So what have we learned after the bevy of cloud computing and enterprise software earnings reports over the last several weeks? There's more than one way to build the next great enterprise tech giant.

AWS is No. 1

AWS continues to be the first place many companies (outside the retail industry, anyway) look for cloud computing, according to a spending-analysis report issued last year by Flexera. Companies spent $35 billion on AWS cloud services in 2019, up from $26 billion in 2018, and $17 billion in 2017.

For years, observers predicted that to grow, AWS would have to go "up the stack" and compete with Microsoft in the office productivity market. Rumors of AWS interest in these applications surged in 2017 after the company sued former executive Gene Farrell for violating the terms of a non-compete agreement to go work for office productivity provider Smartsheet. (The lawsuit was eventually dropped.)

Instead, AWS seems to have recognized that there is a lot of opportunity within the middle of the stack. It has invested in a wide array of databases and embraced technologies like containers and Kubernetes that IT departments want to use. AWS also continues to define what serverless computing will look like, generating a ton of overall revenue growth without needing a spreadsheet app.

AWS is entering rarified air, having recorded a strong sequential increase in revenue every quarter since Amazon began disclosing its revenue in 2015. Sure, growth has slowed as AWS hit this $35 billion mark — but it's still growing at more than 30%.

Microsoft's overnight cloud success — years in the making

While Microsoft taught a generation of office workers how to use spreadsheets and PowerPoint, the company continues to mount an aggressive challenge to AWS in infrastructure computing while it also transitions its massive desktop Office user base to its online Office 365 product. Google was earlier to the cloud-based office productivity software market, but Microsoft has made progress catching up, according to Statista research, and both companies practically own the market for online office tools.

Microsoft's commercial cloud business, which comprises parts of its Intelligent Cloud and Business Productivity divisions, recorded $12.5 billion in revenue during the last quarter of 2019, growth of 39%. Overall Microsoft revenue is only growing at 14%, thanks to slow sales of Windows PCs and servers in the cloud era, which is why it emphasizes the commercial cloud number as a telling metric for its performance.

For these reasons, it's a little hard to compare AWS and Microsoft directly.

A large part of Microsoft's commercial cloud revenue revolves around Office 365 subscriptions, an area in which AWS does not really compete. Similarly, Microsoft continues to withhold revenue figures for its Azure unit, which is the most directly comparable part of its business to AWS. The company does report Azure growth, which was 64% compared to the same period last year, and a report from market research Canalys estimated Azure revenue at $5.3 billion for the fourth quarter of 2019.

Even so, it's clear Microsoft has found success in the cloud by making Office 365 the center of its cloud strategy. While AWS has a huge lead in the infrastructure market, Microsoft Azure is a strong challenger, and will continue to help accelerate growth at Microsoft.

Google's search for cloud revenue

On Monday, Alphabet disclosed that Google Cloud recorded $2.6 billion during the fourth quarter of 2019, the first time it has ever revealed an exact figure for the business. Alphabet CEO Sundar Pichai has forecasted Google Cloud's projected yearly revenue in the past, but the actual number gives us a much better metric for gauging its progress.

For all of 2019, Google Cloud revenue was up 52% to $8.9 billion. That's more than double what Google Cloud recorded in 2017. Pichai said the unit is on track to do $10 billion in revenue during 2020, which underscores the wide margin by which Google trails AWS and Microsoft.

A report last year suggested Google Cloud CEO Thomas Kurian is under pressure to make the unit a top player by 2023. So there's a lot of work ahead.

For enterprise software, focus equals winning

Gone are the days when companies had only a handful of choices for the software they needed to run their businesses. The cloud has opened up enormous opportunities for companies making enterprise software, and more than a decade later, growth in this category remains resilient.

Businesses modernizing their tech infrastructure are turning to cloud companies like Zoom and Twilio for video-conferencing and voice-communications services. Those two companies saw revenue growth of 124% and 75%, respectively, during 2019, according to the BVP Nasdaq Emerging Cloud Index managed by Bessemer Venture Partners.

Median revenue growth for companies on that index was 32% during 2019, well beyond what older companies are seeing. As Box CEO Aaron Levie articulated last year, the modern approach favored by enterprise software buyers is to combine several "best of breed" tools and manage them separately, rather than buying a one-size-fits-all package from a traditional software vendor.

Top choices include Salesforce for sales and marketing management, ServiceNow for building basic "low code/no code" business-process apps, and Box and Dropbox for file sharing and management. While Box and Dropbox are slowing down, posting revenue increases of 14% and 19%, respectively, in their last earnings reports, enterprise software-as-a-service companies in general are enjoying a surge of investment and interest from a customer base used to clunky old business software tools.

Catching up is hard to do

IBM is at least attempting a reboot. It shelled out $34 billion last year for Red Hat. And just last week, it named Arvind Krishna CEO, after years of steady revenue losses and little traction in the cloud market, as the Canalys report shows. The company is still profitable, but a bulk of its business is trapped firmly in the past.

Krishna, who Bloomberg described as the "mastermind" behind IBM's cloud strategy, did not make a ton of progress turning that strategy into dollars. IBM operates a public cloud like AWS, Microsoft and Google, but it is way behind in terms of market share, and most of the "cloud" revenue growth it reported in the last quarter came from Red Hat.

Like IBM, Oracle has struggled to build a bridge to the cloud era. Oracle's public cloud infrastructure is an even smaller operation than IBM's, and so far, the company has resisted the idea of making its top-of-the-line database software available outside its ecosystem. AWS, which has been the target of rants from Oracle's Larry Ellison over the years, recorded more revenue during the fourth quarter of 2019 than Oracle did during its last quarter, which ended on Nov. 30.

What's next?

The march of business application software to cloud servers has slowed a little bit as companies think more strategically about what they want to manage themselves and what they want to outsource, but every large-to-medium-size business in 2020 has a cloud strategy — or is in the process of frantically developing one.

Cloud companies once suggested that everything would eventually move to the cloud, and as the last decade came to a close, it was clear this was optimistic. Even AWS, the cloud pioneer, now sells a rack of servers and networking equipment that allows customers to control their own hardware while plugging into AWS services.

Still, there's plenty of opportunity left for cloud giants and upstarts. The next great startups will almost certainly be constructed on cloud services. And the concept of edge computing — smaller collections of computing power deployed closer to end users than regional cloud data centers — could upend the established pecking order.