- Azure posted a yet another quarter of 60%-plus revenue growth.
- Its revenue growth accelerated, while AWS' decelerated.
- The platform seems well-positioned to continue growing and becoming a prominent growth driver for Microsoft in the near future.
Microsoft’s (NASDAQ:MSFT) Azure revenues were thought to be slowing down, but the company proved naysayers wrong once again. Azure’s revenue growth actually accelerated during Q2 FY20, and the platform recorded a yet another quarter of 60%-plus revenue growth. But its growth won’t stop here. There is reason to believe Microsoft’s Azure will continue to grow at blistering rates and become a prominent growth driver for the company as a whole in coming quarters.
(Image source, Image labeled for reuse)
Let me start by giving credit where it’s due. Many firms have tried to crack their way into the IaaS and PaaS space, but to no avail. After all, the barriers to entry involve enormous capital expenditures, ambitious leadership, aggressive roadmaps and think tanks that are well-versed with up-and-coming trends in the cloud. But Microsoft was able to make its way into the industry quite successfully in spite of Amazon Web Services (AMZN) dominating the space nearly all by itself. This, in my opinion, is a truly commendable feat.
Having said that, Azure has posted 60%-plus year-over-year revenue growth in 13 of its 14 last quarters. Its growth slid slightly below the 60%-mark during Q1, and that was enough to spark speculation over its prospects. Where some said that challenging macroeconomic conditions are weighing down on Azure’s growth, others argued that Azure is downright incompetent against AWS. But Microsoft proved the naysayers wrong by posting an acceleration in Azure’s revenue growth in the very next quarter.
(Source: Business Quant)
Now, I do expect Azure’s growth to eventually slow down at some point in the future. Its revenue base is growing by a significant amount every quarter, and it can’t keep growing at these monumental rates forever. But the fact that Azure posted revenue acceleration, instead of deceleration, in the last quarter suggests that the platform may still have enough juice to keep its growth momentum going for a few more quarters at least.
As far as numbers go, Microsoft doesn’t reveal Azure’s financials, and it only publishes its revenue growth figures for every quarter. Gartner estimates that Azure’s revenues amounted to over $5 billion within the IaaS space during 2018, which amounts to about 5% of the company’s overall revenue during the period. Needless to say, posting stellar growth rates on this already sizable base figure is bound to make Azure a prominent revenue driver for the overall company by 2020-21.
(Source: Business Quant)
Besides, it was believed that challenging macroeconomic conditions due to escalating trade tensions between the US and China in the last quarter would disrupt Azure and AWS’ growth momentum. But that clearly hasn’t happened; AWS’ revenue growth decelerated in Q4 CY19, while Azure’s accelerated.
Microsoft’s management noted during the conference call that this acceleration in Azure’s revenue growth wasn’t driven by one-time events, but by sustainable factors with recurring revenue value - new deals, strong growth in SaaS and expanded list of integrations driving adoption. From the company's Q2 earnings call:
We did have a very good and healthy, broad-based consumption growth, especially in IaaS and PaaS...some of these new PaaS workloads like Synapse and Cosmos DB and Arc are really starting to add some momentum in that part of the stack as well, which is important... We did have a good SaaS component quarter in addition to the healthy base, and that does result in some movement in that number from quarter-to-quarter.
This raises the question: What lies ahead for Microsoft Azure?
What Lies Ahead
I’ve said this before and I’ll say it again that, contrary to the general belief, the cloud space still isn’t a zero sum game. More and more customers are adopting multi-cloud strategy - a scenario where we use multiple cloud platforms as supplements or as redundancy measures, than sheer replacements.
This chart from a RightScale report reveals that Azure’s adoption rate has increased amongst the surveyed respondents. But in addition to that, it’s also worth noting that the sum of all the percentages shoots well above the 100% mark due to the growing adoption of the multi-cloud approach. So, Azure’s growth isn’t necessarily coming at AWS’ expense or vice versa, and thus, I believe that there’s room for both the platforms to continue grow and coexist in the cloud.
Besides, Gartner forecasts that IaaS and PaaS cloud spend will continue to rise over the coming years. This implies that cloud vendors - such as Azure, AWS and Google Cloud - will have plenty of growth opportunities to tap in the foreseeable future. Obviously, these growth opportunities won’t just fall into the laps of cloud vendors, and their think tanks would have to strategically tap these pockets of growth.
(Source: Business Quant)
There’s another thing to note here. Microsoft issued a warning last month stating that the coronavirus outbreak has disrupted its supply chain and it may hurt the company's revenues in the coming quarterly results. From the press release:
Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.
In its press release, the software giant didn’t mention that its Azure or cloud revenues could be hampered, and it actually went on to say that the remaining components of its Q3 guidance remain unchanged. This highlights the resilience of its Azure revenues, and that should come across as a relief for the company’s shareholders amidst this fear-stricken and panic-driven market environment.
Microsoft Azure’s think tank has proven itself to be highly effective at identifying and tapping emerging trends within the cloud. The company doesn’t sit idle and rely on industry tailwinds to fuel its growth, but proactively works to gain an edge over competitors. For instance, Microsoft launched Azure Arc last year (still in preview, read more here) to capitalize on the growing adoption of hybrid and multi cloud installations.
So, I believe that Azure will remain as one of the prime beneficiaries of the growing IaaS spending trends and the rising adoption of multi cloud. Azure seems well-positioned to become a prominent growth driver for Microsoft and amount to over 10% of its overall revenue by the end of this fiscal year.
Author's Note: I'll be writing another report on Microsoft next week, you can stay updated by clicking the "Follow" button at the top. Thanks!
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