Amazon's AWS Still King of IaaS Despite Microsoft's Surging Numbers
- By Sangara Narayanan
Amazon.com Inc. (AMZN) may have already lost the number one cloud player crown in terms of revenue to Microsoft Corp. (MSFT). Microsoft's annualized commercial cloud run-rate hit $18.9 billion this quarter, which means its revenue during the last month of the quarter was more than $1.57 billion. Amazon Web Services reported revenues of $4.1 billion, an average of $1.36 billion per month.
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While the gap is too small to conclusively say Microsoft is in the lead - mainly due to the fact Microsoft uses run-rate to provide its cloud numbers while Amazon uses regular quarterly data for revenue numbers - the rate of growth accelerated for the company during the recent quarter. In contrast, it was nearly flat for Amazon when compared to the previous quarter.
Microsoft reported a cloud run-rate of $18.9 billion during the fourth quarter of 2017, up 56.2% from $12.1 billion a year ago. Amazon Web Services reported $4.1 billion during the recent quarter, up 42% from $2.886 billion a year ago.
Both companies have taken different routes to expand their reach. For Microsoft, it was the blistering growth of its Office 365 Commercial revenue, which grew 43% during the quarter, thus pushing the productivity and business processes segment's revenue up 21% .
Last year, productivity and business processes grew by just 5% . As more and more customers opt for Office 365 over the traditional standalone software, revenue from this business has been on a steady rise. It is Microsoft's SaaS (software as a service) portfolio that has been pushing it higher and higher with each passing quarter.
Meanwhile, Amazon Web Services continues to be the leader in the IaaS (infrastructure as a service) segment, posting strong double-digit gains quarter after quarter for the past several years. Although revenue growth has been on a steady downward slope, it has more to do with the company's increasing size than the company not doing well in the market.
During the second quarter, revenue grew by 42.07% compared to 58.2% growth last year. If you look at the growth in terms of absolute dollars, revenue increased by $1.214 billion during the quarter, compared to $1.062 billion last year.
Amazon Web Services, despite its size, is still increasing its revenues by billions year over year. But in terms of percentages, the growth rate looks as if it is on a steady decline.
Both Microsoft and Amazon continue to remain strong in their respective segments. Their operating margins are holding up despite rapidly increasing competition.
Amazon Web Services reported an operating margin of 22.3% for second-quarter 2017, lower compared to 24.9% in the comparable quarter of 2016.
Microsoft's productivity and business processes segment had an operating margin of 32.6% in fourth-quarter 2017 compared to 42.88% last year. The addition of LinkedIn to the segment was the major reason for the drop in operating margins for Microsoft, but even then an above-30% margin is about as good as you can get in the software industry.
Microsoft and Amazon continue to enjoy above-average margins while expanding at a rapid clip, which clearly shows both companies still remain on top within the cloud industry. It is the new entrants who need to figure out a way to catch up to them. So do not be fooled by Amazon Web Services' ugly sales growth curve. The truth is, the business remains as good as it ever was.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
This article first appeared on GuruFocus.
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