Microsoft’s Azure Strategy Pays Off

Microsoft (Nasdaq: MSFT) appears to be on a roll on all fronts. The recently announced results sent the stock soaring to record high levels as the company delivered a stellar performance shattering all market expectations. The star of the show was its cloud offering Azure.

Microsoft’s Financials

Microsoft’s Q2 revenues grew 14% to $36.9 billion, significantly ahead of the market’s forecast of $35.67 billion. Net income was up 38% to $11.6 billion, beating the market’s expectations of $10.12 billion. Non GAAP EPS was $1.51, compared with the Street’s forecast of $1.32.

By segment, Productivity and Business Processes revenues grew 17% to $11.8 billion driven by 16% growth in Office Commercial products and cloud services revenue. Analysts had forecast revenues of $11.43 billion from the segment. Within the segment, Office 365 Commercial revenue grew an impressive 27% and Office Consumer products and cloud services revenue increased 19%. It ended the quarter with over 37.2 million subscribers to Office 365. LinkedIn revenue increased 24% over the year.

Revenue from Intelligent Cloud segment grew 27% to $11.9 billion with Server products and cloud services revenue growing 30% driven by Azure’s revenue growth of 62%. Adjusted for currency movements, Azure would have recorded a growth of 64%. The Street was looking for revenues of $11.4 billion from its Cloud business.

Revenue in More Personal Computing also grew 2% to $13.2 billion as Windows OEM revenue increased 18% and Windows Commercial products and cloud services revenue increased 25%. The market was looking for revenues of $12.85 billion from the segment.

Microsoft expects to end the current quarter with revenues of $34.1-$34.9 billion, compared with the market’s forecast of revenues of $34.11 billion.

Microsoft’s Azure Expansion

While Microsoft delivered a strong performance across the board, the results for Azure were the most impressive. According to a Forrester Research report, Microsoft’s Azure accounted for 22% of the global cloud computing infrastructure. Azure is still a distant second from AWS which accounts for 45% of the market share. But in 2018, Gartner had pegged Microsoft’s share at 16% and AWS’s at 47%. Clearly Azure is slowly eating into Amazon’s space.

To continue to grow Azure, Microsoft has been expanding its datacenter presence. It will be the first cloud provider to open a datacenter in Israel and Qatar. It now has 56 datacenters globally. Last quarter, Microsoft also expanded its portfolio of edge appliances. The recently released Azure Stack Edge brings rapid machine learning inferencing closer to where data is generated and its form factors provide cloud capabilities even in the harshest of conditions, making it ideal for a disaster response.

Azure’s biggest differentiating factor is its hybrid nature, and Microsoft continues to leverage that. The recently released Azure Arc is another hybrid computing offering that is a pioneering control plane built for a multi-cloud, multi-edge world that helps meet customers’ complex hybrid needs.

Azure’s biggest win was the recent $10 billion contract from the US Department of Defense. The 10-year contract for the Joint Enterprise Defense Infrastructure (JEDI) is important in Pentagon’s efforts to modernize itself. While it was a big win for Microsoft, the selection has raised some concerns. Prior to the selection, Amazon was expected to be the front runner for the contract. Some believe that the rivalry between the President and Jeff Bezos could have influenced the decision in favor of Microsoft. Amazon has already filed a lawsuit contesting the selection.

Last quarter, Microsoft also announced plans to release Azure Quantum – a full-stack, open ecosystem that enables its customers to leverage the power of quantum computing. Market reports suggest that there will be 175 zettabytes of data by 2025, compared with 40 zettabytes today. Microsoft believes that organizations will need real-time quantum computing capabilities to process this data, and it is building Azure Quantum to provide those services.

Within analytics, Azure Synapse is becoming a big name. Synapse integrates Big Data analytics and data warehousing and enables data scientists to generate immediate insights from structured and unstructured data. Customers like Walgreens Boots Alliance are using Synapse to analyze more than 200 million item-store combinations to ensure that they are always stocked for their customers.

Its stock is currently trading at $168.04 with a market capitalization of $1.28 trillion. It had climbed to a record high of $168.74 in the after-hours trading session this week. It hit its 52-week low of $102.35 in January last year.