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Microsoft Cloud Gross Margins Significantly Improve

Microsoft CEO Satya Nadella
Satya Nadella

Microsoft's (MSFT) top-line cloud revenues continue to rise rapidly. But perhaps more importantly, the company's cloud gross margins also are improving. Indeed, Microsoft's Q1 2017 earnings could silence critics who wondered if the company can scale its cloud services in a more profitable manner.

Consider these earnings report milestones, which surfaced Oct. 20, 2016:

  • Office commercial products and cloud services revenue grew 5%, driven by Office 365 commercial revenue growth of 51%.
  • Dynamics products and cloud services revenue grew 11% driven by Dynamics online revenue growth. Plus, Dynamics 365 is set to launch Nov. 1.
  • Azure revenue grew 116%, with Azure compute usage more than doubling year-over-year.

Microsoft Cloud Gross Margins

Microsoft CFO Amy Hood

During an earnings call with analysts, Microsoft CFO Amy Hood described the improving commercial cloud gross margins -- which reached 49%, up seven points sequentially, she said.

CEO Satya Nadella offered additional insights. Through a standardized hardware infrastructure, Microsoft gains economies of scale as Azure, Office 365, Dynamics 365 and other cloud services attract more customers, he noted.

Still, the margins will fluctuate as Microsoft occasionally accelerates -- or slows down -- its CapEx hardware spend, both Nadella and Hood said.

Microsoft's cloud margins earlier this year attracted criticism from some Wall Street watchers. Some critics thought Microsoft's financial model wasn't fine-tuned for cloud computing -- especially as rival Oracle's cloud margins were growing. But at the time, Microsoft's Hood said the lower margins were mainly attributable to cloud infrastructure build-outs.

By June 2016, Microsoft's board of directors was carefully studying cloud business models. But apparently there was no need to press a panic button. By July 2016, Hood predicted Microsoft would start to see cloud margin improvements. Fast forward to present day, and that forecast is coming true.

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.