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Big Tech’s cloud computing surge won’t offset the pandemic’s financial pitfalls

Reuters
Can Big Tech weather the pandemic?
  • Amrita Khalid
By Amrita Khalid

Tech reporter

Published This article is more than 2 years old.

The world is spending more time online and indoors due to the pandemic, which should be a win for the world’s biggest tech companies. But earnings calls from Alphabet, Microsoft, and Amazon this week paint a more complicated picture of how the pandemic has impacted their business.

Thanks to a global shift toward remote work, school, and increased time spent indoors, the demand for cloud services has soared. In earnings calls this week, Alphabet, Microsoft, and Amazon all reported a considerable boost in cloud revenue. But the surge in cloud spending only really benefited Microsoft, which isn’t as vulnerable to two areas hard-hit by the pandemic: advertising and shipping and logistics. 

Beyond the impacts of cloud services, Alphabet’s earnings, which rely primarily on Google advertising revenue, took a hit this quarter as businesses cut back on ad spending. And despite record sales on Amazon, the company expects to churn through that revenue pretty quickly to mitigate the risk of coronavirus in its facilities. Here’s a look at how each company has weathered the storm. 

Amazon

In many ways, Amazon seems like it was a company made for the current pandemic. That’s been made clear in the first quarter of 2020: Amazon reported $75.5 billion in sales, beating investor’s expectations.

While online retail has been at the forefront of Amazon’s business during the pandemic, $10.2 billion of those sales came from AWS, Amazon’s cloud platform—a 33% increase from last year. Customers of AWS include Slack, Zoom, and 3M, the mask manufacturer, which announced a deal with AWS back in February.

“From online shopping to AWS to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon’s business as never before,” wrote Jeff Bezos, Amazon founder and CEO, in an earnings release. “But it’s also the hardest time we’ve ever faced.”

Overall, Amazon earned a net income of $2.5 billion for the first quarter, 30% down from the first quarter of 2019. And the company made clear that spending is likely to skyrocket during the pandemic. It said it will spend an estimated $4 billion, or all of its forecasted operating profit for the second quarter, on personal protective equipment for its workers, sanitizing warehouses and facilities, and higher wages for workers. It’s unclear how exactly the company plans to carry out this plan, or when it will come to fruition.

“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” Amazon said in the press release accompanying earnings.

Microsoft

Meanwhile, everything seems to be coming up roses for Microsoft. The Redmond, Washington-based company generated $35 billion in sales in the first three months of 2020, a growth of 15% that beat analyst expectations. Azure, Microsoft’s cloud business, saw a 59% boost in sales as companies shifted to remote office work. Microsoft’s productivity and business division, which includes the commercial Office 365 suite, LinkedIn, and subscriptions, saw a 15% increase in sales. 

“We delivered double-digit top line and bottom line growth once again this quarter, driven by the strength of our commercial cloud,” said Microsoft CEO Satya Nadella on an earnings call on April 29. “As Covid-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months.”

The rest of Microsoft’s businesses echo that growth. More people are gaming while stuck indoors, which has led to a surge in Xbox sales, Xbox Game Pass subscriptions, and in-game content. Microsoft’s Surface laptops and tablets are also selling well. Sales of Xbox consoles grew by 2% and Surface devices grew by 1% in the first three months of 2020, compared to the same point last year. 

And while the company in February predicted supply chain issues in China to impact hardware sales, that hasn’t panned out. “The supply chain in China returned to more normal operations at a faster pace than we had anticipated,” said Microsoft chief financial officer Amy Hood. 

The company generated $11 billion in revenue for its personal computing products, which includes Surface devices. All told, a global demand for cloud computing, hardware, and office management software has been good for Microsoft.

Alphabet

For Alphabet-owned Google, the pandemic is a mixed bag. Revenue from Google’s cloud computing services, which include remote workplace tools like G Suite, is up. Google Cloud brought in $2.8 billion in the first three months of 2020, up from $2.6 billion last quarter. In the past few weeks, Loblaw, a Canadian food retailer, New York State’s unemployment services website, and Wayfair, the online home decor site, have all signed up for Google’s cloud offerings to deal with considerable spikes in traffic.

But it’s still not enough to offset the losses from advertising, which generates the majority of Google’s revenue. More people are spending time on Google’s search engine and watching YouTube videos than ever, but companies are no longer buying ads amidst economic uncertainty.

During the first quarter of 2020, Google ad revenue amounted to $33.8 billion, down from $37.9 billion in the last quarter of 2019. Advertising revenue for YouTube and Google Search also dropped. Google Search ad revenue fell by roughly $3 billion, from $27.2 billion in the fourth quarter of 2019 to $24.5 billion. Revenue for YouTube ads fell by $679 million from last quarter. 

Google CEO Sundar Pichai directly linked the ad sales decline to the pandemic in an earnings call on April 28. “In March, we experienced a significant and sudden slowdown in ad revenues. The timing of the slowdown correlated to the locations and sectors impacted by the virus and related shutdown orders,” said Pichai during the call. 

Google faced a similar ad slump during the 2008 recession, as companies spent less on ads and consumers bought less. But in 2020, Google’s offerings have expanded to include everything from Google Classroom to Chromebooks to Pixel wireless earbuds—all of which are seeing heightened demand as companies and schools undergo a digital transformation.

More than 100 million students and educators now use Google Classroom, double the number that did in the beginning of March. Meet, Google’s videconferencing platform, is adding 3 million users per day. For the past five weeks, sales of Chromebooks, particularly popular in classrooms, have increased by 100% each week according to the NPD Group. 

Overall, that means Alphabet reported $41.2 billion in revenue in the first quarter of 2020, up 13% from last year, and a profit of $6.8 billion. It’s unclear exactly when Google will recover losses due to advertising, and the worst may be yet to come. “We anticipate the the second quarter will be a difficult one for our advertising business,” said Google finance chief Ruth Porot during this week’s earnings call. 

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