Cloud Giants’ 2019 Data Center Investment a Mixed Bag for Providers

Amazon accelerates data center spending; Microsoft expands in place; Google slows capex growth

Yevgeniy Sverdlik

July 30, 2019

6 Min Read
Google VP Majd Bakar speaking at the Game Developers Conference in San Francisco in March 2019
Google VP Majd Bakar speaking at the Game Developers Conference in San Francisco in March 2019JOSH EDELSON/AFP/Getty Images

It’s earnings season for US-based publicly traded data center REITs, and it comes right after hyperscale cloud platforms, the REIT’s biggest customers, have all reported their results for the previous quarter.

Just as the cloud giants’ data center infrastructure spending trends revealed in their earnings reports and on their earnings calls have an outsize impact on the businesses of hardware vendors like Intel, they are closely tied to the fortunes of the largest data center providers, who build and lease space to house that hardware and make sure it’s powered and cooled around the clock.

In that respect, the three largest cloud platforms’ most recent reports represent a mixed bag for the landlords. At least two of them, Amazon and Microsoft, said they were increasing their technical infrastructure spending substantially this year, but the kind of investment Microsoft is making doesn’t immediately translate to growth for its data center providers. The picture is a lot fuzzier with Google, which is pulling back capital expenditures but isn’t saying whether that affects its total investment in data centers.

After a Break, Amazon Steps Up Data Center Spend

Amazon has been stepping up investment this year in the data center infrastructure that supports its main e-commerce business as well as the profit engine that is its Amazon Web Services cloud computing platform.

Related:Why the N. Virginia Hyperscale Slowdown Doesn’t Worry CyrusOne CEO

Infrastructure spend by Amazon and other hyperscalers, including its main cloud rivals Microsoft Azure and Google Cloud Platform, has fluctuated wildly quarter to quarter and year to year. These fluctuations are what’s behind the “lumpiness” in leasing results that drive earnings for the cloud giants’ data center landlords (the likes of Digital Realty Trust, CyrusOne, and QTS), causing the developers’ stocks to skyrocket when they land a big lease or two during one quarter and to nosedive when they don’t during the following one.

AWS is “such a rapidly growing business, with different timing of investments and global expansion, investment in marketing and other infrastructure,” Amazon CFO Brian Olsavsky said on the company’s second-quarter earnings call last week.

The company reports its data center spend under the “finance leases” category (until recently “capital leases”), and that number has gone up quite a bit this year compared to last. Just in the first quarter Amazon’s finance leases went up 9 percent, Olsavsky said. In contrast, they grew 10 percent for all of 2018.

The slow growth in 2018, however, came after a 2017 in which Amazon’s infrastructure spend went up nearly 70 percent. Its spending isn’t growing at those kinds of rates today, but it has been picking up from last year, with a trailing 12-month growth rate of 21 percent after the second quarter, according to the CFO. “As I mentioned in earlier calls … the investment will be stepping up in 2019, so [we] started to see that in Q2,” he said. (This may appear to contradict the reported slowdown in the wholesale data center market in Northern Virginia, home to the largest AWS availability region, but it doesn’t. Here’s why.)

Related:Amazon’s Relentless Growth in Northern Virginia Continues

Amazon reported $3.3 billion in finance leases for the second quarter. That’s a lot of money, but the returns it gets on this category of investment are worth it. AWS, the business this infrastructure supports, may be responsible for a relatively small portion of the company’s total revenue (about 13 percent in the second quarter), but it brings more profit than any of its other segments, generating cash to fund investment in other businesses.

Google Slows Capex Growth, But Not Necessarily Data Center Spend

Alphabet CEO Sundar Pichai proudly announced in February a plan to spend $13 billion on data center and office construction in the US this year. But, in contrast with Amazon, the Google parent’s total capital spending on those things won’t grow as much as it did last year.

That’s according to Alphabet CFO Ruth Porat. “We expect the overall growth rate [in capex investing] will moderate quite significantly for the full year 2019 versus 2018,” she said on the company’s second-quarter earnings call last week.

This doesn’t automatically mean Google’s data center spend will be down. The data center piece of the full 2019 capex pie will grow relative to last year, Porat said. That growth is designed particularly to support Google’s application of machine learning across all its businesses, as well as growth in cloud, search, and YouTube.

Alphabet reported $6.9 billion in capex for the quarter, up 30 percent from the same quarter last year. In contrast, the second-quarter capex in 2018 was up 90 percent year on year, Porat said.

On average, about 70 percent of capital expenditures Alphabet reported in the last two years was for technical infrastructure, including compute, storage, network, and data centers to house it all, Porat explained. The rest was spent on office facilities.

“Both the split between the two components [infrastructure and offices] and year-on-year growth rates can vary significantly from quarter to quarter, due primarily to the timing of sizable purchases of office facilities,” she said.

In this year’s first quarter, for example, Google spent 80 percent of its capex on technical infrastructure. But in the second quarter, the company made big office purchases, putting technical infrastructure at 60 percent of capex.

While this is more detail about capex spending than Google usually shares, the fluctuating split between the technical infrastructure and office categories from quarter to quarter makes it hard to deduce whether the amount of data center spend is going up or down this year. The total investment may “moderate,” but it’s not clear whether the amount spent on data centers and their innards will moderate as well.

Microsoft Expanding in Place

Microsoft, which after Amazon is the second largest cloud provider, will spend more on data centers in fiscal 2020 (which started this month) than it did over the preceding 12 months, but it’s not a reason for hyperscale data center developers to rejoice.

Most of that spend will be on the computing hardware that goes inside the facilities, not the buildings themselves; the company has plenty of those for the time being, according to Amy Hood, Microsoft’s CFO.

“The majority of the investment today is continuing to build capacity inside existing, incredibly large data centers,” she said on the fiscal fourth quarter earnings call earlier this month.

This confirms what those who track data center real estate dynamics have been telling us: after a rush to expand geographic reach (and footprint in each location) over the last few years, the hyperscale platforms are now signing new leases at a much slower rate as they work through the inventory of data center space they built up during that rush.

Microsoft isn’t completely halting “overall geo-footprint buildout,” Hood clarified. “We will of course continue to do that where it makes sense and where opportunity presents itself.”

One important detail to keep in mind here is that much of the recent rush took place in the top US markets – especially in Northern Virginia, which went through a boom of unprecedented proportions – and some data center providers have now set their sights on expansion in Europe, citing a spike in hyperscale demand in the prime Frankfurt, London, Amsterdam, and Paris markets.

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