Microsoft cloud revenues soar on digital transformation trend

The remote work era spurred on by the pandemic continues to send Microsoft's cloud revenues rocketing skyward, particularly Azure.

The company reported a 50% increase in Azure sales in its second fiscal quarter 2021, with overall sales rising 17% to $43.1 billion. Revenue from productivity software, including Office and LinkedIn, increased 11% to $13.4 billion.

"What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry," said Satya Nadella, Microsoft's CEO, in explaining the significant leap in Azure and other cloud-related revenues to financial analysts yesterday. "Digital capabilities will continue to be the key to users for both resilience and growth."

Corporate users making digital transformation projects a priority was the primary driver in demand for the company's hybrid and other cloud offerings, according to Nadella, who said the number of $10 million-plus Azure and Microsoft 365 contracts rose significantly. Microsoft also saw greater Azure consumption and higher usage of Teams, Power Platform, higher-end security and compliance products.

Some analysts were impressed with the performance of the company's cloud services, although not entirely surprised at their continued momentum.

"There's no question, a lot of companies survived because they adopted Office 365 apps and were able to still log in securely to those applications," said Mark Bowker, senior analyst at Enterprise Strategy Group. "A few key pieces of their business absolutely benefited from COVID-19 forcing people to work from home and helping companies with their business continuity plans."

Analysts believe the continued progress of Azure, Office and other legacy applications in Microsoft's portfolio could close the gap in its cloud competition with archrival AWS.

"AWS has had fantastic success in the cloud with cloud-native applications and services the past several years, but most data centers are built around legacy IT systems, many of which run some flavor of Windows Server," Bowker said. "Going forward, some [Microsoft] users will want to move their workloads to a platform they trust, like Azure. For them Azure is an obvious steppingstone for data center workloads."

Azure's growing strategic importance is clear when comparing cloud revenue to revenue for the company's legacy systems. On-premises Office products declined 26%, while server-based Windows products grew a meager 4%. Since late last year, analysts have strongly suspected that revenues from cloud outpaced those of Windows.

Microsoft's focus these days is clearly on Azure and delivering most things through the cloud.

"Microsoft's focus these days is clearly on Azure and delivering most things through the cloud," said Steve Kleynhans, a research vice president at Gartner. "Windows [Server] is playing more of a supporting role than a lead role these days."

Azure-related products also continue to make inroads. Microsoft said now over 1,000 organizations are using Azure Arc primarily as a way to simplify the management of hybrid clouds, as well as run agile services across on-premises, multi-cloud and edge environments.

Further fueling its momentum, Microsoft also picked up a handful of wins for Azure over the past two quarters, signing deals with Deutsche Telekom, General Motors and PepsiCo over the past two quarters, along with expanding its existing partnership for Azure with SAP.