As quarterly earnings season kicks off for independent software infrastructure companies, I like to review the performance and announcements from the larger technology providers for signals about the demand environment and trends that may impact the smaller software companies that I cover. The hyperscalers (AWS, GCP, Azure) provide the most obvious corollary. Commentary from adjacent providers can also be useful, whether in consulting, hardware or enterprise software vendors. Thus far, the reports have been instructive.

In this post, I will go through the take-aways of interest from Microsoft Azure, Google Cloud Platform, Amazon Web Services and IBM. In future posts, I will try to batch up earnings reports from other software infrastructure providers taking the same approach of picking out the signals that might be interesting for general trends in the industry. For these posts, I won’t rehash the full performance for a particular company, as the hyperscalers in particular address a lot of unrelated industry segments. Rather, I will try to summarize and cherry-pick the items that are relevant for independent software infrastructure and security providers.

High Level Summary

In 2021, the hyperscalers all experienced either accelerating or sustained high revenue growth on an annualized basis. For AWS, this represented growth near 40% y/y at an enormous run rate over $60B a year. For Azure and GCP the growth rate was even higher, solidly in the mid to upper 40% range, albeit on a smaller scale. Of course, some of the year/year outperformance was facilitated by easier comps coming out of the 2020 slowdown. Regardless, the rate of growth was very impressive, reflecting the durability of cloud spend even at large scale.

Q1 of 2022 demonstrated that this trend was still largely on track. Coming out of Covid, I think we all feared that there might have been a large pull forward in cloud spend that left little to do incrementally. The reality is that we are still in the middle innings of the migration to cloud. I don’t say “early” innings because many enterprises are well on their way in the cloud migration journey. Even as they finish moving infrastructure to the cloud, though, many are just beginning new projects to further automate business processes, launch new channels for customer engagement and improve their B2B interactions with suppliers, partners and industry participants.

Additionally, this application creation and upgrade work is all being performed with a backdrop of sustained spending on security solutions. As enterprises move more of their product and employee operations to digital channels, they want to make sure that they are not introducing new continuity or data privacy risks. While security investment has been robust, many enterprises still find themselves behind the curve.

This is all to say that as we entered 2022, it appeared that software and cloud infrastructure spending tailwinds were continuing. Ironically, the threat that has emerged for software infrastructure demand growth is not a pull forward like other stay-at-home services experienced. Rather, the macro environment is causing many enterprises to reduce expenses, as they react to diminishing consumer demand in some industry categories. This is creating a backdrop of risk to the linearity of cloud spending, as enterprises try to find efficiencies or delay work that isn’t considered critical.

The other factor that is providing a headwind is currency fluctuations. For those software service providers with a large overseas presence and collect fees in the local currency, they get hit with changes in value as they convert to dollars for their consolidated income statement. This impact has been significant in 2022, with companies like Microsoft and ServiceNow reporting an adjustment to revenue recognition up to 6% on annualized revenue growth. This effect is compounded by the currency tailwind that companies were experiencing at this time in 2021. Not all companies include these adjustments and investors can be left to their own projections to understand if some softness is due to currency impact or not.

For Q1 2022, the hyperscaler results largely demonstrated sustained spending rates coming out of 2021. AWS annual growth dipped to 36.6%, down from its 2 year high of 39.5%, but roughly inline with the 3 quarters prior and above the 32% growth from Q1 2021. Azure actually accelerated to 49% growth on a constant currency basis, which was higher than all of 2021. GCP dipped slightly to 43.8%, about a percentage lower than the prior two quarters annualized.

This backdrop appeared to support strong performance for popular software infrastructure providers as well in Q1, demonstrating a rough reliable correlation between hyperscaler growth and the independent providers. Datadog grew by 83%, MongoDB by 57%, Crowdstrike by 61%, Zscaler by 63% and Cloudflare by 54%.

As we progress through 2022, this correlation should continue. With pressure on IT budgets, however, we should expect some slowdown in growth. There should also be spend consolidation towards a smaller set of vendors. This is a typical practice by IT leadership in times of budget pressure, to create savings through absorption of more services onto the larger platform vendors. This can work to the disadvantage of smaller point solution providers or internal DIY and open source efforts. I discussed these consolidation pressures in a prior post.

While that post speculated that spend consolidation would benefit the independent software providers that have already built a platform of services that address multiple categories (like Datadog, Crowdstrike, Cloudflare, Snowflake, MongoDB, etc.), one could also argue that the hyperscalers would benefit from the the same consolidation effects to the disadvantage of these providers. We will see shortly if that is the case.

I think there are a few considerations for this type of consolidation. First, do the hyperscalers even have a comparable offering? In the case of observability, none do. In other categories, like security, analytics and transactional databases, their capabilities are mixed. In some categories this can become a tailwind, as one hyperscaler will partner with a leading independent in order to counteract a technology advantage from another.

This consolidation trend is certainly one to watch. I think leading independent providers in their category, with product offerings that address adjacent categories as well are likely safe. Smaller providers that currently field a niche product and are still working on their strategy to expand into multiple modules are likely at the most risk. In this environment, technology leaders are less likely to support experiments with new or niche offerings. That spend can be mopped up by both the broader independent provider platforms and the hyperscalers.

The one hyperscaler who is emerging as an aggressive competitor across all segments is ironically not AWS. I think Microsoft will be the hyperscaler to watch, as they span so many categories of enterprise software spend beyond just cloud. Lately, they appear least inclined to form strong co-sell relationships with the independents in the categories where their offering is currently sub-par. Even after partnering with an independent, they continue investing in that category to accelerate the development of their own products. We are seeing this in security, AI/ML, data storage and edge. Microsoft is also well-known for their bundling strategy. I don’t think this is a significant threat to the independents now, but will be something to monitor.

As Q2 earnings results are coming in, we are receiving some data points about actual performance from the hyperscalers and soon more and more independents. I plan to discuss signals from the independents in a series of separate posts. In the meantime, we have actuals from the hyperscalers now. I am seeing the following trends:

• Revenue growth for the hyperscalers is slowing down, but demand still appears to be persisting. So far, this deceleration appears to align with the impact we would expect from macro pressures, versus an overall shift away from cloud migrations or digital transformation investments.
• Cloud revenue growth is the highlight for all three hyperscalers, versus their other businesses.
• Large enterprises are still engaged in cloud migration and digital transformation projects. In some cases, they are delaying projects or requiring higher level spending approvals. These are impacting deal close timeframes.
• The strength of the dollar is causing some companies to report their results based on constant currency. This is highlighting a large gap between results on a currency adjusted and actual basis. For example, the constant currency adjustment accounted for 6% of Microsoft Azure reported revenue growth in Q2.
• Demand for security services is strong, but the hyperscalers are starting to launch their own security offerings as well.
• Custom application development is maintaining high growth, as indicated by commentary from some hyperscalers about significant demand for specific services that would power applications (containers, databases).
• Analytics, big data and ML / AI continue to be large themes, as enterprises want to leverage their data to drive efficiencies, improve customer service and identify new opportunities to increase revenue.

These growth and product trends are all emerging against a backdrop of macro-economic uncertainty. So far, it seems that the revenue growth slowdowns can be attributed to pressure on enterprises to reduce spend due to their own business challenges, versus a generalized slowdown in demand for cloud migrations, software infrastructure, digital transformation, etc.

With that set-up, let’s take a look at overall cloud performance and take-aways from individual companies.

Microsoft (Azure)

Microsoft reported their Q4 FY2022 earnings on July 26th, which represents the April – June 2022 period. Microsoft’s cloud infrastructure service (Azure) falls under their Intelligent Cloud business unit. They report total revenue and operating expense for the business unit as a whole, but not down to the Azure level. For Azure, they report revenue growth and provide some commentary on its contribution to expenses.

Quarter	Actual Growth	CC Growth
Q1 FY2021	48%	47%
Q2 FY2021	50%	48%
Q3 FY2021	50%	46%
Q4 FY2021	51%	45%
Q1 FY2022	50%	48%
Q2 FY2022	46%	46%
Q3 FY2022	46%	49%
Q4 FY2022	40%	46%

For the most recent quarter (Q4 FY2022), Azure revenue grew 40% year/year as reported. Adjusted for currency fluctuations, revenue growth was 46%. The constant currency adjustment provides us with an apples-to-apples comparison to historical periods. The prior quarter (Q3) reported revenue growth was 49% on a constant currency basis. Going back a year, though, growth was 45%, so this quarter’s growth was still roughly inline over the last 2 years.

In terms of guidance for the upcoming quarter (Q1 FY2023), management doesn’t explicitly set a growth target for Azure. As part of the earnings call commentary, management stated that they expect Azure revenue growth to be sequentially lower by 3% in the following quarter on a constant currency basis. This implies that the annual growth target for Q1 FY2023 will be 43%.

Management described some moderation in deals from small to medium-sized business and that long term Azure contracts can cause some volatility in actual revenue recognition in each quarter. With that said, management was very upbeat on the momentum of the business. Given the ongoing macro headwinds and strong growth in the prior year comparables, a forward growth rate of 43% at Azure’s scale is very favorable.

As part of the CEO’s prepared remarks, he made some comments about the strength they are seeing in Azure. I also found it significant that Azure was the first business unit that the CEO discussed, highlighting its importance. I thought these comments were relevant for Azure performance:

• Seeing larger deals and longer term commitments. Reported a record number of $100M+ and $1B+ deals this quarter.
• Azure Arc supports customer workloads across multiple environments (Azure cloud, on-prem, edge). The service is experiencing high demand, with new customer wins at GM, Greggs, UBS and Uniper.
• Called out several mission critical workloads from large enterprises that have transitioned to Azure. Highlights were American Airlines to run key operational workloads (including its data warehouse). Telstra will move its internal IT workloads to Azure.
• Highlighted Microsoft’s relationship with SAP to host ERP workloads on Azure. Several customers have migrated their ERP workloads to Azure, including Kraft Heinz, Fujitsu, and Unilever.
• In May, Microsoft introduced their Intelligent Data Platform to provide a complete data fabric, spanning operational databases, analytics, ML/AI and governance. They report that 65% of the Fortune 1000 use three or more of their data solutions. Highlighted customer usage from LaLiga, Lenovo, Swiss Re and Walgreens.
• As part of their consolidated data strategy, CosmosDB is Microsoft Azure’s NoSQL database for application workloads. The CEO shared that transactions and data volume increased over 100% year/year for the fourth quarter in a row.
• AI services are seeing strong adoption as well. The Azure OpenAI Service is being used to apply language models to advanced use cases like content and code generation. Customer highlights include HSBC, PwC, RTL Group, Shell and Wipro.
• Highlighted GitHub as the most popular developer toolset. GitHub Copilot already has 400k subscribers since they moved it to GA a month ago. Copilot provides code review and suggestions for developers to help them write better code faster, using AI-driven analysis over the full repository of code in GitHub.
• Container Services allow DevOps teams to manage various container types (Docker, Kubernetes, Windows, etc.) within Azure. Revenue was up triple digits percentage.

The metrics for CosmosDB and Container Services provide important signals for other software infrastructure providers. MongoDB is a competitive offering to CosmosDB. It is also available as a hosted, transactional database solution on Azure. Additionally, MongoDB is available on AWS and GCP. If transactions and data volume for CosmosDB more than doubled on Azure, then it’s likely that MongoDB experienced similar elevated growth. Likely not double, but certainly high. Microsoft leadership cited a similar stat in Q1, and MongoDB revenue growth was 57% with Atlas increasing by 82% year/year.

Container Services and CosmosDB growth also imply that demand for resources that support custom software application development is high. The CEO talked about how many of their customers are investing in the creation of custom applications to better serve their customers, partners and employees. These applications consume not just Container Services and CosmosDB, but would likely need other software infrastructure support. Notably, this could represent observability, driving demand for solutions like Datadog.

Additionally, the CEO discussed the Cybersecurity segment. He mentioned that security is a top priority for every organization. Microsoft has been rapidly building out their security offering for enterprises and offer products in Identity, Zero Trust, SIEM, XDR and IoT. The CEO claims that these offerings are winning share from competitors across all major segments. Finally, he highlighted that revenue for their security suite was up 40% year/year. Interestingly, this growth rate is lower than that for leaders in XDR, SIEM and Zero Trust. It’s possible sequential quarterly growth for Microsoft’s offerings is higher if they are indeed winning share.

Finally, the CEO highlighted Microsoft’s new managed threat detection and response service through Microsoft Security Experts. He called out Bridgewater Associates as a new customer, using Microsoft Security Experts to supplement their own internal security monitoring capabilities.

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Google (GCP)

Alphabet (Google) reported their Q2 FY2022 results on July 26th as well. Google reports results for the Google Cloud Platform (GCP) as part of the Google Cloud business unit. This also includes Google Workspace, their cloud-based collaboration tools for enterprises, with offerings like Gmail, Docs, Drive, Calendar and Meet. On the call, management stipulated that GCP grew faster than Google Cloud overall, but we don’t know by how much or the relative revenue split. GCP growth was driven by significant demand for infrastructure and platform services.

Quarter	Total Revenue	Annual Growth	Seq Growth
Q3 FY2020	$3.44B	45%	14.5%
Q4 FY2020	$3.83B	47%	11.2%
Q1 FY2021	$4.05B	46%	5.6%
Q2 FY2021	$4.63B	54%	14.4%
Q3 FY2021	$4.99B	45%	7.8%
Q4 FY2021	$5.54B	45%	11.0%
Q1 FY2022	$5.82B	44%	5.0%
Q2 FY2022	$6.28B	36%	7.8%

In the most recent quarter, Google Cloud overall grew by 36% year/year. This is down from the prior quarter’s growth rate of 44% and the prior year of 54% in Q2 FY2021. That was an unusually high growth quarter. Also, for the year/year trends, we don’t know the impact of Google Workspace performance on these numbers.

In his opening remarks, Google’s CEO made some general comments about the performance of Google Cloud. He said that momentum on the cloud is continuing and that they saw demand across all geographies in Q2. They also launched their public sector offering in June, targeting government agencies.

Earlier this month, Google announced that they will be slowing their hiring and sharpening their focus, given the macro-economic backdrop. On the earnings call, the CEO mentioned that they will continue hiring in engineering and other technical roles. They are also using this time to improve productivity and
re-align staff with their long-term priorities.

One underlying theme is Google’s investment in AI. This is primarily applied towards practical use cases in Search, Google Translate, Safe Browsing on Chrome, YouTube and features of their Android phones. As these AI capabilities are refined, the underlying AI/ML infrastructure developed by Google could be leveraged to build advanced software services on Google Cloud. This has the potential to make their AI/ML capabilities richer than those of the other hyperscalers.

The CEO emphasized a few points when discussing adoption and progress on the Google Cloud Platform:

• Experienced continued demand across all geographies. Highlighted wins with Target in the U.S., H&M Group in Europe, Banco BV in LatAm and Bio Farma in Asia.
• Launched Google Public Sector in June, which helps U.S. government agencies and public institutions accelerate their digital transformations. Highlighted a few wins, including New York State, Arizona State University, U.S. Forest Service and State of Rhode Island.
• Emphasized leadership in Data Cloud services through their unification of data lakes, data warehouses, data governance and machine learning into a single platform that works across clouds. Referenced a variety of customer engagements for data analytics, with companies like SC Johnson, Northwell Health, the Golden State Warriors, SWISS Air, Engie and Ford.
• Companies are leveraging Google’s open Cloud infrastructure to modernize their IT systems on Google’s Cloud, their own data centers and at the edge. Customers include Beta Bank, Mayo Clinic, Deutsche Telekom, WiPro, Anthem and AMD.
• Cybersecurity is a newer area of focus for Google. They have always provided secure cloud infrastructure, but are now introducing new products that help customers detect, protect and respond to a broad range of threats. Customers of security products include GitLab, Highmark Health, Iron Mountain, Caribou Coffee and Etsy.

Google only provides guidance around the impact of currency fluctuations at the consolidated level and by geographic regions. For the second quarter, they quantified the overall currency fluctuation as creating a 3.7% headwind to revenue growth. Google generates about 53% of their revenue outside of the U.S. For the year-ago quarter, currency represented a “significant tailwind”. This provides some narrowing of the revenue growth gap between 54% in Q2 2021 and 36% this quarter. Also, Google didn’t provide forward guidance for GCP performance next quarter.

Amazon (AWS)

Amazon reported their Q2 2022 results on July 28th. AWS generated $19.739B of revenue, growing 33.3% annually and 7.0% sequentially. This is down from 36.6% annual growth in Q1, but the sequential increase is higher than Q1’s 3.7% off of a large Q4. Additionally, Amazon does not provide an adjustment for currency fluctuations at the AWS level. For the company’s overall revenue, they reported about a 3.1% impact on annualized growth attributable to currency fluctuations.

Quarter	Total Revenue	Annual Growth	Seq Growth
Q3 FY2020	$11.60B	29.0%	7.3%
Q4 FY2020	$12.74B	28.0%	9.8%
Q1 FY2021	$13.50B	32.1%	6.0%
Q2 FY2021	$14.81B	37.0%	9.7%
Q3 FY2021	$16.11B	38.9%	8.8%
Q4 FY2021	$17.78B	39.5%	10.4%
Q1 FY2022	$18.44B	36.6%	3.7%
Q2 FY2022	$19.74B	33.3%	7.0%

While AWS’ Q2 growth rate dropped to 33.3%, it is higher than all four quarters in 2020. Additionally, if we were to add in the 3.1% year/year currency impact, the growth rate would be close to that of Q2 2021. The $19.7B of revenue in Q2 did exceed analyst expectations for $19.4B, which is why most news articles proclaimed that AWS outperformed.

At a nearly $80B run rate, I think 33% growth as reported is extraordinary. Additionally, the sequential growth rate picked up in Q2 over Q1 and would point to a 31% annualized growth rate. As another data point on long term growth, Amazon reports an “AWS backlog” metric. This represents long term spending commitments under contract for customers. It is similar to RPO. The value was reported as being up 65% year/year and 13% sequentially in Q2. The weighted average remaining life term for those commitments is 3.9 years. In Q1, these values were 68% year/year growth and a duration of 3.8 years. While the annualized growth rate dipped slightly and the term duration extended, these are very healthy growth rates for booked commitments. Similarly, the sequential growth rate in Q2 for this metric reflects strong additions of large customer spending contracts.

Looking to other highlights from the earnings release, Amazon reported the following:

Customer commitments. The earnings release enumerated many new customer commitments, including Delta Airlines, Riot Games, British Telecom, Jeffries, Geisinger, SKF and Eni. What is important about all of these highlights is that they included not just the typical “lift and shift” migrations from on-premise to cloud, but also commitments to significantly expand their suite of applications, harness large data set with AI/ML capabilities and launch new customer service offerings.

Delta Air Lines selected AWS as preferred cloud provider to accelerate its digital business transformation and reimagine the travel experience. Using AWS, Delta will deliver new digital travel services, streamline its operations, enhance customer service from the booking process to the flight experience, and provide cloud training to employees globally.

Amazon Earnings Report, Q2 2022

Delta’s multi-year agreement with AWS to serve as their preferred cloud provider underscores a dual-pronged benefit. In addition to providing the core cloud infrastructure for their software applications, Delta plans to launch new software services to improve customer service, increase operational efficiency and mine data for new business insights. These efforts will generate more usage of cloud infrastructure services, driving more revenue for AWS and ancillary software infrastructure service providers.

As part of this, Delta is also introducing a global employee skills training program to “increase cloud adoption and develop new client-facing and internal capabilities.” By making employees more cloud software aware and providing some basic technology skills, new software automation efforts will be increasingly introduced by the employees themselves versus a top-down approach driven by IT.

Product Highlights. Amazon called out a few major product announcements that occurred during the quarter.

• Further improvements to CPU performance available from EC2. They announced the general availability of their next generation of compute-optimized instances powered by Graviton3 processors. These deliver up to 25% better performance than their previous Graviton2 powered instances. These improvements make AWS EC2 more competitive from a price performance point of view than comparable offerings based on x86 instances.
• AWS is continuing to push their capabilities for analytics. They introduced serverless options for Redshift, Managed Streaming for Kafka (Amazon MSK) and Elastic Map-Reduce (Amazon EMR). These offerings provide an alternative to products from Snowflake, Confluent and Databricks. However, serverless capabilities are expected at this point and Amazon’s addition doesn’t represent a major leap forward in the competitive position.
• To help enterprises migrate mainframe-based workloads to the cloud, Amazon announced the general availability of AWS Mainframe Modernization. It provides a platform for migrating and modernizing on-premise mainframe workloads to a managed runtime environment on AWS, supported by analysis, transformation, development and operations services. AWS offers subject experts for various mainframe installations to facilitate the migration. I think this is particularly exciting, as it will help unlock the large backlog of entrenched legacy workloads within enterprises. As those move to the cloud, they can consume other software infrastructure services for observability, security and data management.
• Introduced in December 2021, AWS announced the general availability of AWS Cloud WAN. Cloud WAN provides a managed service to help customers create a global network that spans multiple locations and networks. This removes the need to configure and manage different networks individually by connecting Amazon Virtual Private Clouds, Transit Gateways and on-premises locations. Customers can spin up AWS Site-to-Site VPN, AWS Direct Connect or third-party software-defined WAN (SD-WAN) products. The Cloud WAN service provides a central dashboard that generates a complete view of the network to helps customers monitor network health, security, and performance. This product has some overlap with network transit and security services provided by Cloudflare and Zscaler. However, its scope is fairly limited and would be primarily applicable to managing network connectivity for AWS resources, versus an enterprise network that spans resources from multiple providers.

Partner Network. Finally, Amazon highlighted the breadth of their partner network, which includes more than 100,000 systems integrators and independent software vendors that have adapted their technology to run on or integrate with AWS. Of these, Amazon used the earnings release to call out their strategic relationship with MongoDB. AWS was named MongoDB’s Cloud (Co-Sell) Partner of the Year. This is based on jointly winning new deals and helping shared customers modernize their applications. Obviously, a highlight at this level reflects positively on MongoDB and their partnership with AWS for co-selling.

As investors will recall MongoDB announced a significant expansion to their relationship with AWS in mid-March. At the core is an effort to get enterprises to migrate software applications off of on-premise data centers to the cloud. The collaboration with MongoDB allows AWS to go to market with these customers with a more comprehensive offering. This partnership is aligned against the other cloud vendors, who also want to land these large application workload migrations to the cloud as well.

It is a six-year agreement, spanning a broad range of tactics. The deal includes shared sales and marketing efforts, developer relations activities, technology integrations and commercial incentives. MongoDB and AWS will work together to develop joint capabilities for customers around serverless, better use of AWS’ Graviton processors and the AWS Outposts service, which extends AWS’ support for on-premise infrastructure. Finally, MongoDB will expand into more AWS Regions globally and Amazon’s US Public Sector hosting with FedRAMP authorization. The latter will open up MongoDB to more government contracts.

IBM

While not considered one of the big three hyperscalers, IBM’s results can provide some insight into IT spending, particularly for consulting. Overall, IBM beat revenue projections for Q2, with revenue growing 9.3% y/y to $15.5B. Analysts expected $15.2B in revenue. They also reaffirmed their FY2022 full year revenue guidance, with revenue growth landing in the “high end of its mid-single digit model.”

Consulting services was a highlight, growing 18% year/year in revenue to $4.8B. In Q2 2021, Consulting was up just 11% y/y, so they are experiencing some acceleration in this segment. Consulting Services includes the following areas of focus:

• Business Transformation. Services that enable clients to apply technologies at scale to transform key workflows, processes and domains end-to-end. This includes finance & supply chain, talent, strategy, business process design and operations, data and analytics, and system integration. These services deploy AI in business processes to exploit the value of data, including a full ecosystem of partners like SAP, Adobe, Salesforce and Oracle.
• Technology Consulting. The skills to architect and implement cloud platforms and strategies to transform enterprise experience and enable innovation, including application modernization on the hybrid cloud with Red Hat OpenShift.
• Application Operations. Application and cloud platform services required to operationalize and run cloud platforms. Manage, optimize, and orchestrate application and data workloads across environments through both custom applications and ISV/ERP packages.

The fact that these segments of IBM’s consulting business saw 18% year/year growth on average is a fairly positive indicator that the largest enterprises are still engaged in digital transformation and cloud migration projects.

Investor Take-Aways

Overall, I was pleased with the results from the hyperscalers. These provided some evidence of continued momentum in cloud infrastructure spend. In theory, that should support a tailwind of demand for independent software infrastructure providers. This is based on the presumption that if enterprises are continuing to invest in digital transformation and cloud migration, that they will also apply that spend to supporting services like observability, content delivery, analytics, application services and database workloads. Of course, transition to digital channels and remote work will also drive more spend on Zero Trust, network security, endpoint/workload protection, application security and identity solutions.

As we have a slew of earnings reports coming for independent software infrastructure providers, the key question will be how much these tailwinds carry each independent provider. For the most part they should help. In some categories, it is possible that the hyperscalers are consolidating spend. Vendor consolidation becomes a more visible force as IT budgets come under pressure. I think niche solution providers with an offering easily duplicated by the hyperscalers are at most risk.

Those providers with an offering that is sufficiently differentiated from one or more hyperscalers should see more benefit from spending tailwinds and less competitive encroachment. This will vary by provider, but leaders in their respective categories should be okay. I won’t perform an analysis of each company, but can offer a framework of questions for investors to consider for their favorite software infrastructure provider:

• Does the company offer a solution that is considered best-of-breed in one or more categories?
• Where there is overlap with hyperscalers, can the provider still claim a significantly better offering than one or more of them?
• Does the independent provider have a strong co-selling relationship with one or more hyperscalers, that may allow support from one hyperscaler to offset competitive infringement or bundling from another?

With all that said, cloud spending was generally lower for the hyperscalers as compared to last year’s performance. Management commentary referenced some slowing and deal closure elongation, due to the macro-economic environment. Investors should brace for similar trends with independent software providers, where year/year growth rates will likely be lower. We will want to monitor for the case where an outsized downward impact can’t be fully attributed to macro spend slowdown. In those cases, competitive pressure from the hyperscalers or other providers may be exacerbating the overall IT budget reduction. As macro-economic conditions improve again and IT budgets refresh, these would be the companies that lag their peers.

As we receive earnings reports from the independent software providers over the next few weeks, I will be watching for more signals of the durability of cloud spending and the shifting competitive dynamic.

NOTE: This article does not represent investment advice and is solely the author’s opinion for managing his own investment portfolio. Readers are expected to perform their own due diligence before making investment decisions. Please see the Disclaimer for more detail.

Additional Reading

• Muji at Hhhypergrowth has dug into various product trends emerging from the hyperscalers. He also goes into detail on the security landscape and how the hyperscalers are evolving their security offerings.