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IaaS revenues dip but bounce-back expected

A drop-off in revenues in the first quarter is a feature of a cyclical market and should not concern the channel too much

Sales of infrastructure as a service (IaaS) might have dropped in the first quarter, but the expectation is that things will bounce back as customer demand returns.

An analysis of the IaaS market from Context, which gets sales numbers directly from Western distributors, indicated that between Q4 of last year and Q1, the revenue growth for the category dropped by 9%.

However, that decline should be a temporary one, according to the analyst, because cyclical patterns will kick back in and customers will be looking for more IaaS support later this year.

Context has been charting the progress of the IaaS market for some time, and found that across the five key markets of the UK, France, Germany, Italy and Spain, there are often drop-offs in the gap between Q4 and Q1. Having identified that pattern, the firm is confident of a recovery and a return to revenue growth.

Customers have also expressed concerns over recent weeks about the rising levels of technical debt, and acknowledged the need to continue investment in cloud and digital transformation efforts.

Pressure on that front would also add to the factors that point to a return to more revenue growth later this year.

Users looking to improve efficiencies have also identified their cloud infrastructure as one of the areas that needs to be investigated, with many users rushing to the cloud in the pandemic and now, at a more leisurely pace, having the time to make more strategic investments.

SaaS sales

There were also signs that after a period of decline, software-as-a-service (SaaS) sales have also started to rally, and the 14% produced in Q1 was ahead of IaaS for the first time since Q3 2021.

“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 for APAC at Context.

There has been a narrowing of the differences in revenues of cloud services and software and licensing sales, with distributors experiencing growth from sales of Software & Licenses of 17% year-on-year in Q1 and cloud services improving by 14%.

“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,” said Vallenduuk. “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,” he added. “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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