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Cloud-revenue growth slows as companies cut spending due to COVID-19

Although cloud-computing platforms continued to thrive in the first full quarter amid COVID-19, overall growth in the sector declined due to the pandemic's impact on certain industries and businesses.

Every major cloud provider reported year-over-year growth in their respective cloud revenues during the June quarter. However, cloud executives said many companies started pulling back their more complex enterprise migration and transformational cloud projects in favor of prioritizing the most crucial IT tasks in response to the economic fallout of the pandemic. This resulted in a quarter-over-quarter decline in growth for all platforms.

Cloud market leader Amazon Web Services Inc.'s revenue grew by 29% year over year to $10.81 billion — its slowest quarterly growth rate since the company started breaking out AWS numbers in 2015.

Speaking during the company's June quarter earnings conference call, Amazon.com Inc. CFO Brian Olsavsky said AWS revenue was impacted by companies cutting expenses, especially in more challenged sectors like hospitality and travel.

"We're looking for ways to help them save money, including things like scaling down the usage where it makes sense or benchmarking their workloads against our architectural best practices," Olsavsky said. "That's not going to help our usage growth in the short run, but it helped those customers."

Amazon Web Services' closest competitor, Microsoft Corporation's Azure, experienced a similar trend in its June quarter. The company's intelligent cloud segment, which also includes server products and enterprise services, reported revenue of $13.37 billion, up 17.4% year over year. Looking at just Azure, the cloud service's revenue grew 47% year over year, compared to 59% in the prior quarter.

Alphabet Inc.'s Google LLC reported second-quarter revenue of $8.13 billion for its nonadvertising services, including cloud, up 31.6% year over year. Revenue for Google Cloud alone grew 43% year over year to about $3 billion. That compared to revenue growth of 52% for Google Cloud in the first quarter. This was the third quarter for which Google detailed revenue for Google Cloud apart from its other businesses.

Google's cloud division also includes revenue from G Suite, the company's collaboration and productivity apps for business. Speaking during the company's earnings call, Google CFO Ruth Porat attributed the lower Google Cloud revenue growth to a "lapsed" price increase.

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International Business Machines Corp.'s cloud and cognitive software segment reported second-quarter revenue growth of 3.3% year over year to $5.75 billion. That included a 29% year over year growth from its cloud and data platforms and 17% growth for Red Hat, reported revenue of $867 million. In comparison, this segment grew 5.5% in the first quarter.

While Oracle Corporation's fiscal quarter ended May 31 instead of June 30, it also experienced a similar trend in its cloud revenue growth for the most recent quarter. The company's cloud services and license support segment, which includes Oracle's subscription business as well as licenses and support services for cloud and on-premises IT environments, grew revenue 0.7% year over year to $6.85 billion. In comparison, the segment grew 4% in the quarter ended Feb. 29.

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Despite the slower growth seen across the sector, cloud executives said they expect growth will ramp up again as the pandemic eases, with companies likely to resume their digital transformation efforts as soon as the economy moves into recovery. Executives said the pandemic could also push those businesses that were still on the fence about transitioning to the cloud to reassess their strategy.

A survey of 575 IT end-user decision-makers by S&P Global Market Intelligence's 451 Research unit in June found that 20% of respondents said COVID-19 impact was accelerating migrations of workloads to the cloud, while another 2% said they would start the migrations because of the pandemic. Sixteen percent said they were accelerating the adoption of cloud-native software development practices.

Melanie Posey, a research vice president at 451 Research, said the pandemic is likely to prompt more organizations to jump into the cloud as part of their contingency planning for any potential future crisis. However, she cautioned that growth may not be as significant as it was in the past few years.

"As the cloud market starts getting into large numbers, it could make it hard to accelerate growth as there is not as much demand left in the market to sustain that level of growth," Posey said. "I don't think we're there yet, but it's entirely possible that demand will tap out eventually, because the cloud is not some magic market that is immune to market trends."