Azure and Office 365 are growing, but not fast enough to catch the competition, says Barron’s

Laurent Giret

Microsoft Cloud

Two weeks ago, Microsoft released their earnings report for the third quarter of the 2016 fiscal year and CFO Amy Hood was happy to report that Microsoft cloud business is growing strong. Indeed, the company revenue in Intelligent Cloud grew 3% (up 8% in constant currency) to $6.1 billion with Azure revenue growing 120% in constant currency with usage of Azure compute and Azure SQL database more than doubling year-over-year.

While Microsoft doesn’t disclose profits and sales its cloud business (which former CEO Steve Ballmer publicly criticized last December), market research company FBR Capital Markets predicted in December 2015 that Microsoft’s Azure could earn $8 billion in 2016, “with Microsoft firmly best positioned as the vendor to compete with AWS on the enterprise cloud front for years to come.”

However, according to a new analysis from Barron’s, Microsoft cloud business may not be able to catch up to Amazon Web Services business despite a currently higher growth rate. To explain this, Barron’s made educated guesses from Microsoft last quarterly earnings numbers to report the following points (via Business Insider):

  • In the most recent quarter, Barron’s estimates that Microsoft Azure generated $560 million in revenue, versus Amazon Web Services’ $2.466 billion.
  • Despite Azure’s reported 120% growth over the same period in 2015, it’s the second quarter in a row where there was a projected $2 billion-ish gap between Microsoft Azure and Amazon Web Services
  • Again despite Azure’s growth, it only accounts for an estimated 12% of Microsoft’s Server Products & Cloud Services revenue, which booked a 6% decline last quarter. With Server Products sinking an estimated $600 million from the last quarter, the $300 million growth in Azure couldn’t offset it.
  • Office 365 commercial revenue was $2.1 billion in the quarter, estimates Barron’s, versus $3 billion for boxed Office commercial sales.

The previous report from FBR Capital Markets was more optimistic about Microsoft cloud revenue, explaining that “Microsoft and Azure have a long runway to cross-sell into their massive enterprise customer bases with a broad platform of cloud offerings for the next few years.”

While Microsoft may not catch up to Amazon in the cloud this year, the company definitely sees the cloud as a major part of its business as a recent report explained that the Redmond giant spent $2.3 billion in capital on its cloud data center this past quarter, which represents a 65% increase in data center expenditures year-over-year. Please tell us in the comments if you think Microsoft’s cloud business will be able to overtake AWS in 2016.