Is Microsoft’s cloud growth a temporary blip, driven by the fleeting circumstances of the pandemic, or an enduring trend reflecting a larger change in customer mindset?
Wall Street is betting on the latter.
Microsoft will report financial results Tuesday afternoon, July 27, for its fiscal fourth quarter and 2021 fiscal year, which ended June 30, 2021.
Analysts polled in advance expect revenue of $44.1 billion, on average, up 16% from the same quarter a year ago, and profits of $1.90 per share, vs. $1.46 a year ago.
“Our June quarter checks for Microsoft upticked again as the Azure cloud growth story is hitting its next gear of growth in Redmond,” wrote Wedbush analyst Daniel Ives in a July 21 report. “We are seeing deal sizes continue to increase markedly as enterprise-wide digital transformation shifts are accelerating with CIOs all focused on readying their respective enterprises for a cloud driven architecture.”
The growth comes despite the Pentagon’s decision to cancel the $10 billion JEDI cloud contract that it had awarded to Microsoft, over the objections of cloud industry leader Amazon Web Services. The loss of that deal is likely to be a subject of questions from analysts during the earnings conference call with Microsoft CEO Satya Nadella and CFO Amy Hood.
Microsoft’s report also comes amid growing cybersecurity concerns, including cyberattacks that exploited vulnerabilities in Microsoft’s Exchange Server, attributed to hackers affiliated with China’s Ministry of State Security.
But the lasting impact of the cloud has become more clear in recent quarters.
- Windows saw a temporary uptick a year ago, topping $6.1 billion in quarterly revenue for the quarter ended June 30, 2020, as many people working from home bought new machines. But Windows revenue has settled back into a more normal mid-$5 billion range in the quarters since then.
- In contrast, revenue growth for Microsoft Server and Cloud Services has continued to accelerate, reaching 25% year-over-year revenue growth in each of the past two quarters, surpassing $13 billion in quarterly revenue, as shown in the chart above. This reflects the trend that analysts expect to continue.
- Revenue growth in Office and Cloud Services has also continued to accelerate, albeit at a more modest rate, about 12% year-over-year growth in the most recent quarter, to more than $10 billion in quarterly revenue. This includes growth in Office 365, driven in part by adoption of the Microsoft Teams communication and collaboration platform.
These numbers come not from Microsoft’s standard earnings reports for its three big divisions, but from its filings with the SEC, breaking down revenue by “significant product and service offerings.” This is a better way to see trends in its product lines.
The takeaway is that Microsoft is seeing the most growth in parts of its business where it has been able to make the shift to cloud services and subscriptions. This helps to explain why the company is taking a new approach with the introduction of Windows 11 and its vision for Cloud PCs.
Check back with GeekWire on Tuesday afternoon for full coverage of Microsoft earnings.