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Communications Infrastructure

Fritzsche's Forum

The Sun Is Continuing to Shine Through the “Clouds” –   No Immediate Rain in the Forecast

April 26, 2024 | A recent article in Business Insider indicated Amazon is planning to cut its office space footprint by ~ 10 percent over the next three to five years.  The end results of these moves are expected to save the company $1.3B / year in operating expenses.

To put this number in perspective, according to Amazon’s 10K, it leases 29.6 million square feet of office in North America alone.  On a global basis, Amazon leases ~ 54 million square feet of office space.

When asked about this report an Amazon spokesman indicated this move to right size its office footprint was NOT about a return-to-office policy but rather about “improving vacancy rates” and the company is expected to “continue to learn and iterate on our portfolio.

The irony was not lost on me that at a time when the company is aggressively right sizing the square footage of its office footprint it is leaning in HARD on expanding the square footage of its data center one.

While Amazon does not break out the exact data center (that of third parties or its own) component of its CapEx, Amazon’s CFO made the following comments on its Q4’23 earnings call when asked how much AWS related capital it would spend this year:

“We had $48 billion [in capital expenditures] in 2023….a lot of the mix of investment in 2023 was tied to infrastructure. Infrastructure, mostly supporting AWS but also supporting our core Amazon businesses, was about 60 percent of our spend ….. CapEx will go up in 2024. …. as we add capacity in AWS for region expansions, primarily the work we're doing with generative AI projects.”

Scrubbing the math to put THIS number in perspective – even if we assume half of this 60 percent figure he calls out as ‘infrastructure’ spend was directed toward AWS data center deployment, it would imply an annual data center related spend of $14.4B / year – or over 11x the amount Amazon is saving in its current commercial real estate right-sizing moves mentioned above.

And to add further fuel to the “put these numbers in perspective” fire, Amazon’s total 2023 capital spend, represents 2.2x AT&T’s 2024 CapEx guide and 2.8x Verizon’s 2024 CapEx guide.  This is even more amazing when you consider that AT&T and Verizon were the two largest capital spenders in the US (second and third behind the US government!) when I was an analyst only three short years ago.

The scope of Amazon’s data center spend is even more meaningful when considering its recent data center spend.  Recent data center channel check reports  would suggest that Amazon has been one of the more active CSPs in taking down space in Q1’24.  This is noteworthy because Amazon has historically been the CSP which was more reluctant to use third party data centers.  Recent broker checks would indicate Amazon signed (at least!) a 600MW deal in Tahoe Reno, NV with Switch in the past three months.

As Amazon works more with third party data center partners AND uses its own $14B in capital PER YEAR to support AWS infrastructure, a case could be made that Amazon will spend close to $20B / a year in data center infrastructure.

While we know CSP spending and data center demand has been off the charts the last 18 months in the wake of AI demand and infrastructure preparation, I thought these “put in perspective” moments may show HOW big the numbers really are.   And they are indeed VERY big!

While these numbers are HUGE, these capital numbers can be defended when looking at the hyperscaler cloud revenue growth as compared to the telecom players’ topline growth. Even when the telecom carriers’s CapEx spend was at their peak, top line revenue growth was still only in the (low) single digits. For the last “put it in perspective” datapoint, AWS’s revenue annual growth in 2023 was 13.3 percent, a full 1000 bps above AT&T's and Verizon’s revenue growth rate guidance for 2024. The hyperscalers’ ability to translate this CapEx spend into double digit revenue growth likely indicates that this CapEx spend is sustainable for a mighty long time!

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