Please ensure Javascript is enabled for purposes of website accessibility

Microsoft's Cloud Business Just Hit a Huge Milestone

By Evan Niu, CFA - Oct 27, 2017 at 8:56PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The software giant hits its target ahead of schedule.

Just in case it wasn't clear by now, Satya Nadella was absolutely the best pick to become Microsoft's (MSFT 2.76%) CEO. While Nadella has backed off slightly from his "mobile-first, cloud-first" mantra that he touted for his first couple years as CEO, incrementally de-emphasizing the mobile aspect of Microsoft's business while betting even bigger on the cloud and other areas like artificial intelligence (AI), Microsoft has been executing incredibly well under his leadership.

The software giant reported fiscal first-quarter earnings Thursday night, and Microsoft's commercial cloud business has hit a huge milestone.

Microsoft CEO Satya Nadella fist pumping.

Image source: Microsoft.

Commercial cloud growth is ahead of schedule

Microsoft's commercial cloud annualized revenue run rate has now hit $20.4 billion. In 2015, Nadella made a bold prediction that Microsoft could hit a $20 billion run rate by mid 2018 (the end of its fiscal year 2018). At the time, it was a rather tall order to fill, since the cloud business was then running at an annualized $6.3 billion. The company would have to triple the size of its business in just three years to hit that target. Microsoft just did it in two.

Chart showing commercial cloud run rate over time

Data source: SEC filings. Chart by author. Fiscal quarters shown.

It's worth clarifying exactly how Microsoft calculates its annualized run rate. The company takes the last month of the quarter and multiplies those sales by 12 to get an annualized run rate.

In contrast, (AMZN 3.66%) calculates the annualized run rate for its Amazon Web Services cloud business by multiplying its most recent quarter's AWS revenue by four. The e-commerce titan also posted earnings last night, and AWS brought in $4.6 billion in sales, which represents an annualized run rate of $18.3 billion.

Stylized picture of servers

Image source: Getty Images.

AWS is the market leader for cloud infrastructure by a wide margin, but Microsoft's commercial cloud also includes other subscription-based offerings like Office 365 and Dynamics 365 that aren't directly related to cloud infrastructure. Microsoft does not directly disclose Azure revenue in absolute terms, which is its cloud infrastructure competitor to AWS and included in the company's broader commercial cloud. Azure revenue jumped 89% last quarter on a constant currency basis.

The cloud business is also incredibly profitable, which is helping Microsoft's overall gross margin. Here's CFO Amy Hood on the call Thursday night:

Our commercial cloud business had another quarter of robust revenue growth and material gross margin improvement. Revenue exceeded $5 billion this quarter, growing 56% year-over-year and gross margin increased 8 points to 57%, with improvement in each cloud service, most notably in Azure.

Our company gross margin was 66%, up 2 points from prior year as sales mix of higher-margin products and services, along with improving cloud margins, more than offset the impact of the growing cloud mix of revenue and LinkedIn amortization cost.

Well done, Nadella. Well done.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$273.24 (2.76%) $7.34, Inc. Stock Quote, Inc.
$2,302.93 (3.66%) $81.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.