Summary: Microsoft reported its FY3Q21 (CY1Q21) results, which showed more momentum for the Azure cloud business.
Details: No total revenue number is available for Azure, but the growth rate is disclosed. For the recent quarter, Azure’s revenue grew 50% y/y and 46% y/y on a constant currency basis. This was better than management expected and was driven by strength in what is described as the consumption-based part of cloud – ie. existing customer growth and uptake in add-on services. Management also pointed to another increase in the number of large customers locking in to long-term Azure contracts, while there was continued improvement in Azure’s gross margin. In the previous quarter, Azure also grew 50% y/y, though the rate in constant currency was 48% y/y. But overall, Microsoft kept the momentum going through the quarter. Like AWS, Microsoft has seen a stabilization in the rate of cloud growth in the second half of last year and is showing signs that it could be seeing some acceleration.
Verticals: Microsoft continues to build more vertically-oriented offerings. The recent acquisition of Nuance, a healthcare technology firm, is aimed at helping push Microsoft further into this important vertical. In the past quarter, Microsoft also released a number of industry cloud offerings for sectors such as financial services, manufacturing and non-profits.
Database adoption: Microsoft disclosed increased uptake of SQL Server on Azure of 129% y/y.
On-premise: An interesting data point, albeit one that is not surprising, was the continued decline in Microsoft’s on-premise business as cloud continues to take over as the predominant consumption model. The decline in traditional on-premise business segments was described as declining in the high teens.
Bookings and portfolio: Commercial bookings were up 39% and on the earnings call one of the questions was around how fast these customers could start to consume and spend across the Microsoft portfolio, particularly on Azure, which is increasingly a margin driver. Management suggested this is actually happening quite quickly and that they like to think holistically about the Microsoft portfolio rather than on a product by product basis. Given the larger deal sizes and the push to digital transformation in the enterprise space, Microsoft is increasingly looking to bookings as a key metric. They are confident that once customers are in, it is a matter of time (and sometimes quite quickly) before they start moving and expanding workloads and consuming more Azure cloud infrastructure.
Angle: Microsoft continues to push forward in cloud infrastructure and the story is similar to the one we are seeing at AWS. Growth rates have stabilized and there are multiple signs that things may accelerate as the economy begins to move into a post-pandemic environment and outsourcing continues to be top of mind. The one difference between Amazon and Microsoft remains the breadth of the Microsoft portfolio, which is an effective tool for drawing in customers and building relationships that can translate directly to cloud infrastructure.
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