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Amy Hood, Microsoft's CFO
- Microsoft's business in recent years puts more of a focus on cloud-computing services.
- Microsoft CEO Satya Nadella was recently named Fortune's Businessperson of the Year. He gave CFO Amy Hood credit for helping grow Microsoft's cloud-computing business.
- We tracked Microsoft's cloud revenue growth as a function of overall revenue, and identified the key factors behind current and future cloud growth.
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Microsoft's cloud offerings are steadily making more of a mark on the company's overall revenue.
Microsoft's history spans more than 40 years, but its current business focus is anything but antiquated. Satya Nadella, who was executive vice president of Microsoft's Cloud and Enterprise group immediately prior to taking the reins as CEO in 2014, adopted a cloud-based strategy from the start.
He took a risk by reducing the prioritization of Windows and Office to make cloud more of a priority, but it paid off. Microsoft now has a place in the cloud world that most deem second to only Amazon Web Services. Microsoft Azure was founded in 2010 as the company's primary commercial cloud offering. According to Gartner, Microsoft's public cloud had 15.5% of total market share in 2018. Amazon had nearly 47.8%, Alibaba had 7.7%, and Google had 4.0%.
To put cloud in internal Microsoft context, commercial cloud yielded the most revenue out of all of Microsoft's offerings in its most recent quarters, FY19 Q4 and FY20 Q1, at $11.0 billion and $11.6 billion respectively. Microsoft became a trillion-dollar company this year.
Industry experts consider cloud the main driver of Microsoft's future growth.
Stifel Nicolaus analyst Brad Reback projects that Microsoft's cloud business will draw in more than $90 billion by 2023. In a research note released Monday, Reback wrote, "The emergence of the hyperscale cloud has fundamentally changed the landscape, allowing Microsoft to now provide many of the services to customers that it used to leave for partners."
Microsoft's cloud success is "clearly attributable to Satya," Microsoft chairman John Thompson previously told Business Insider. Nadella was recently named Fortune's Businessperson of the Year, and he credits CFO Amy Hood for her strategic role in allocating capital to Microsoft's cloud-computing services.
"If you look at what was happening to Microsoft's growth rates, we've had to go through the hard journey of not having growth to having growth at scale," Nadella told Fortune. "That only happens when you can give oxygen to new businesses long before they become growth businesses."
Amy Hood joined Microsoft in 2002, assuming the CFO role in 2013. She's stated that she's worked to redefine the traditional role of a CFO, looking at the bigger picture of what she wants Microsoft culture to look like in addition to her financial responsibilities. Since her appointment, Microsoft's stock has grown nearly 300%.
On Microsoft's latest earnings call, Hood said that Azure had "material growth," pointing to a number of $10 million-plus contracts, though she didn't go into details. Azure grew 59% in the most recent quarter, which is a drop from a previous quarter growth rate of 64%.
To build on Nadella, Microsoft's cloud business can definitely be deemed a "growth business" now: There's a market for cloud offerings across the private and public sectors. Federal CIOs, like David Shive of GSA, Maria Roat of SBA, and Dorothy Aronson of NSF, list cloud migration as a top IT modernization priority. Recently Microsoft secured a $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract with DoD, which further highlights demand, albeit contentious demand, for cloud services. Analysts also say that Microsoft is primed to take advantage of corporate IT budgets as more legacy companies move into cloud, Business Insider has reported.
"It's not just about cloud," Thompson said. "It's about what services you offer in the cloud."
As Business Insider previously reported, analysts look favorably upon Azure's revenue growth in the most recent quarter.
RBC Capital Markets analysts wrote in a research note that: "In a world increasingly moving to the cloud, but still encumbered by legacy investments that sit elsewhere and still drive value today, Microsoft is uniquely positioned to take an increasingly large percentage of corporate IT budgets in a hybrid world."
Here's how much of an impact cloud (and cloud services) have had on Microsoft's overall revenue since 2014:
Bloomberg/Microsoft SEC filings
If Reback is right and Microsoft's cloud business grows nearly sevenfold in the next three years, this steady linear increase could turn more exponential.
Microsoft's overall revenue grew exponentially in the early Gates years as Microsoft established its dominance, and continued to steadily grow through Ballmer's and Nadella's tenures.
We've tracked overall revenue growth through three eras of Microsoft: under Bill Gates (1975-2000), Steve Ballmer (2000-2014), and Satya Nadella (2014-present).
Here's revenue growth from 1986, when the company went public, to 2019:
Bloomberg
The relative nascence of Microsoft's foray into cloud could limit the percentage growth of cloud revenue out of overall revenue.
However, Microsoft's overall revenue grew considerably, crossing the trillion-dollar mark. The company's cloud revenue in its most recent quarters and success with the JEDI contract speak to how its business is grounded more firmly now than ever in the cloud.
In looking ahead to factors that would affect Microsoft's future cloud growth, Nadella said one key aspect would distinguish Microsoft from its competitors (Amazon and Google).
"I think what's going to be important here is, increasingly, trust," Nadella told CNBC's Jon Fortt. "It's not just about capital."
Trust lies not just in the technology, but in a robust business model, a growth-mindset company culture, and consistent alignment with the values and business the company has committed to.
"One of our currencies is what you think, what you say, what you do," Nadella said.
Akin Oyedele contributed to this article.
