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Microsoft Azure Cloud Gross Margins: Rising Into Fiscal 2019

Microsoft CFO Amy Hood
Microsoft CFO Amy Hood

The Microsoft Azure cloud business appears to be enjoying the best of both worlds: Growing public cloud revenues -- and rising gross margins.

For the company's Q4 2018, Azure revenues (essentially IaaS and PaaS) grew a whopping 89 percent. Historically speaking, Azure generates lower gross margins that Microsoft's SaaS businesses -- led by Office 365. But the gap is closing, CFO Amy Hood said during an earnings call last week.

"In line with our commitment at the beginning of the year, we improved the gross margin percentage in each cloud service, with Azure seeing the most significant improvement," Hood told investors.

Microsoft Azure Cloud Market Revenues, Milestones

Additional Microsoft cloud revenue highlights for Q4 2018 included:

  • Commercial cloud revenue was $6.9 billion, up 53 percent.
  • Commercial cloud gross margin percentage increased 6 points to 58 percent -- which compares to overall company gross margins of 68 percent.
  • The company's global datacenter footprint expanded 54 regions, more than any other cloud provider, the firm claimed.
  • Microsoft doubled the number of multi-million-dollar commercial cloud agreements and more than doubled the number of $10 million-plus Azure agreements in Fiscal 2018, though the company did release the actual number of deals.

Still, the software giant's growing dependence on Azure will continue to pressure overall company margins a bit, Hood conceded.

"I think we're looking more pressured on gross margin just because the amount of Azure in the mix at the rate is growing," she said. "We’re still not at that point where a $1 of gross margin in the cloud is equivalent to a $1 on-premises... We expect continued improvement in each commercial cloud service, as well as in the overall commercial cloud gross margin percentage."

Still, the rate of improvement will moderate relative to FY18 as revenue mix continues to shift to Azure IaaS and PaaS consumption-based services, she concluded.

Public Cloud Market Share, MSP Partners

Diane Greene

Amazon Web Services (AWS) continues to command about 33 percent of the public cloud market, followed by Azure (13 percent) and Google (6 percent), according to Synergy Research Group.

Of the public cloud providers, AWS has the most mature MSP partner program. Microsoft launched a formalized Azure Expert MSP program earlier this month, and Google continues to strengthen its MSP relationships. The search giant will likely announce more MSP-centric moves during this week's Google Cloud Next 2018 conference in San Francisco, keynoted by CEO Diane Greene.

Amid all that competition, Microsoft sounds pleased with its Azure momentum and associated gross margins.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.