Infrastructure-as-a-service (IaaS) revenue growth dropped 9% between Q4 2022 and the first quarter of 2023, but is likely to bounce back later this year as cyclical trends return and organisations work through their cloud challenges, according to CONTEXT, the global IT market intelligence company.
CONTEXT data on distributor sales in the top five markets in Europe – the UK, France, Germany, Italy and Spain – reveals that IaaS revenue growth has regularly fallen: from a peak of 50% year-on-year (YoY) in Q4 2021 to just 13% in Q1 2023, although there was a brief upward blip in Q2 2022.
Software-as-a-service (SaaS) growth has also been in steady decline since Q2 2021, when revenues increased by 41% YoY, but has staged a comeback over the past two quarters. In Q1 2023, it was 14%, surpassing that of IaaS for the first time since Q3 2021.
In 2021, cloud services revenue growth had been trending significantly higher than that of software and licences, but it fell sharply from a high of 38% in Q4 2021 to just 9% in Q3 2022. Revenues from sales of software/licences have remained steady and surpassed those of cloud services in Q3 2022. However, the pattern of growth in both sectors is closer than at any point in the past two years.
In Q1 2023, distributors saw revenues from sales of Software & Licenses grow by 17% YoY, whereas those from cloud services were up by only 14%.
To understand why, it helps to look at a study from Swiss cloud vendor SoftwareOne. It finds that 93% of CIOs expect IT budgets to increase in 2023 – most of them saying it is because of increased spending on cloud services. There are multiple reasons for this, including inflation, over provisioning of cloud resources and the impact of inefficient “lift and shift” approaches. Some 83% of CIOs expect IT budgets to increase in 2023. But most also expect increased spending on cloud services, leaving 83% believing they will be asked to do more with less.
The research also highlights that 72% of CIOs admit technical debt will negatively impact digital transformation in 2023. Much of this debt may have accrued during the pandemic when organisations rushed projects and applications into production.
“The fall in IaaS revenue growth the CONTEXT data shows over the past few quarters could, therefore, be the result of IT leaders trying to deal with challenges like over provisioning and lift and shift by squeezing more from their budgets or optimising their current investments”, said Chris Vallenduuk, Regional Director (APAC) at CONTEXT. “The recent stabilisation of cloud services growth and the narrowing of performance between this sector and software/licences, may imply steadier spending than the reactive investments we saw during the pandemic. It could also signify that technical debt is finally under control. If that is the case, we can expect a further acceleration in cloud services growth – as long as digital transformation projects pick up. This bodes well for 2023, especially if combined with a cyclical bounce-back in IaaS spend of the sort we saw in Q2 2022.”
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