Cloud and the logic of short-term gains
The decline in IT infrastructure revenue fell for the second consecutive quarter during the three months ending September 2019 should be an indication of a depressed services market but the very opposite is the case.
According to the International Data Corporation’s (IDC) worldwide quarterly cloud IT infrastructure tracker report, cloud IT infrastructure products – consisting of server, enterprise storage and Ethernet switches – saw sales decline to 1.8 %, year-on-year, for the quarter, while spending on cloud IT environments reached $16.8 billion.
The decline was attributed mostly to public cloud spending, which fell 3.7% year-on-year to $11.9 billion – yet when considered sequentially, this resulted in a rise of 24.4%. Regardless, public cloud spending still made up most of all cloud IT environment spending.
Meanwhile, private cloud vendor revenue growth saw stable growth, according to IDC, with a year-on-year rise for the quarter of 3.2% to nearly $5 billion.
Despite the quarterly softening, spending on cloud IT infrastructure accounted for 53.4% of vendor revenues, the second time over a yearly period and the second time since IDC started tracking IT infrastructure developments.
As a result, according to IDC spending on cloud IT infrastructure is now consistently surpassing spending on non-cloud IT infrastructure, which saw a decline of 7.7% year-on-year.
On the ground
Not that you’d know any of the above based on Q4 results from multinationals released last month. Microsoft, IBM, Intel and Apple all had positive quarters but underpinning the good news wasn’t the performance of core products like Windows Macs but in services like the Azure platform and Apple TV+.
For consumers, the high point of Microsoft’s fourth-quarter calendar 2019 results was the fact that Microsoft reported $1.98 billion in Surface sales alone – almost, but not quite, making Surface a $2 billion business. Overall, Microsoft reported profits of $11.6 billion during the second quarter of its fiscal 2020 calendar, up 38% from a year ago, from revenue of $36.9 billion, up 14% from the same period.
The More Personal Computing business of Windows, Xbox, and Surface still generates the most revenue at $13.2 billion but Microsoft’s growth is primarily being driven by the Intelligent Cloud business, and specifically Microsoft Azure. The Intelligent Cloud business recorded $11.9 billion in revenue, growing by a massive 27%.
Within that business, Azure grew by 62% just by itself. In all, Intelligent Cloud once again edged out Microsoft’s Productivity and Business Processes ($11.8 billion) in terms of revenue. However, Office and Microsoft Dynamics and related services saw 17% growth, fuelled by 20% growth in Office 365 consumer revenue from its 37.2 million consumer subscribers.
IBM reported surprise growth in Q4, boosted by its high-margin cloud computing business, sending its shares up more than 4%.
Revenue from the cloud business, which is crucial as IBM pivots away from its established businesses including mainframe servers, rose 21% to $6.8 billion.
Then CEO Ginni Rometty had been trying to shift the company’s focus to the cloud through acquisitions and also by selling some of IBM’s legacy businesses. IBM bought Linux maker Red Hat Inc in a $34 billion deal last year, its biggest acquisition so far, in a push to expand its subscription-based software business and counter falling software sales and declining demand for mainframe servers. Revenue from the cloud and cognitive software segment, which includes Red Hat, rose 8.7% to $7.2 billion.
IBM has said that it would report only a portion of Red Hat’s actual revenue for some quarters, while recording all its expenses as required by US accounting standards. The global technology services segment, which caters to some of the world’s largest data centers, reported $6.9 billion of revenue, down 4.8% from the previous year.
Content still king
In the consumer space, the performance of Apple’s iPhone and its popular AirPods almost overshadowed the performance of Apple Music and the new Apple TV+ streaming offering. The number of active iPhones, computers and other devices owned by customers grew by 100 million to more than 1.5 billion over the past year, and Apple executives set a new target of 600 million paid subscribers for music, TV, gaming and other services by the end of this year.
Apple reported $91.8 billion in revenue for the quarter ended 28 December, compared with analyst estimates of $88.5 billion, according to IBES data from Refinitiv. The company forecast $63 billion to $67 billion in revenue for the quarter ending in March, ahead of estimates of $62.4 billion, showing it believes that its phones and other devices such as AirPods wireless headphones will continue to sell well during what is often a slow time of year.
Services revenue of $12.7 billion were below analyst estimates of $13 billion yet up from $10.9 billion the year before. Many investors think that services revenue eventually will boost Apple’s gross margins, which were 38.35% in the December quarter compared with estimates of 38.06%.
The shift toward services, however, depends on Apple continuing to grow its base of users and sign them up for recurring subscriptions that analysts view as potentially more lucrative than hardware sales, which can be inconsistent because they are large purchases that consumers make only every few years. Apple said it now has more than 1.5 billion active installed devices and 480 million subscribers to both its own and third party paid services, compared with 1.4 billion devices and 360 million subscribers a year earlier.
Niall Kitson with IDG Reporters