While Microsoft has become the first cloud vendor to top $100 billion in annual revenue, the world’s #1 cloud vendor faces more-significant challenges than ever before from aggressive and capable competitors, slackening demand, and tumbling growth rates across its vast portfolio.
In particular, both Google Cloud (#3 on the Cloud Wars Top 10) and Oracle (#4 on that list) are growing much more rapidly than Microsoft in the cloud and are picking off blue-chip customers for cloud applications, infrastructure, databases, and cybersecurity.
For its fiscal Q2 ended Dec. 31, Microsoft reported the following key numbers:
- Cloud revenue of $27.1 billion, up 22% (up 27% in constant currency); in Q2 one year ago, cloud growth rate was 32%. For the calendar year, Microsoft Cloud revenue totaled $101.9 billion
- Azure revenue was up 31% (38% in constant currency); in Q2 a year ago, Azure growth rate was 46%
- Dynamics 365 revenue grew 21% (29% in constant currency); in Q2 a year ago, its growth rate was 45%
- Cloud revenue as a percentage of total Microsoft revenue was 51.4%
Those numbers come as the growth trajectory of Microsoft’s cloud business has moderated considerably over the past several quarters. While there are many factors at play behind that trend, I believe the primary ones include:
- The Law of Big Numbers: For the past year, Microsoft’s cloud revenue has ranged between $22.1 billion to $25.7 billion, so the days of 30%+ growth rates are almost certainly a thing of the past. And can anyone out there really work up a good hissy fit because a $100-billion business is growing “only” 22%?
- Global Economic Uncertainty: While the cloud continues to generate huge demand across the globe among executives eager to build digital enterprises, there’s no question that those purchase decisions are taking longer to reach and that some non-essential deals have been put on hold
- The Competition is Intensifying: Five years ago, Microsoft and AWS had most of the market to themselves. But then came the rapid rise of Google Cloud under the leadership of Thomas Kurian, with Google Cloud expected to generate $26 billion in 2022 cloud revenue at a growth rate of about 30%. And then, to make matters even more interesting, Oracle has, against all odds, become a very serious player in the cloud and now sits atop the Cloud Wars Top 10 Growth Chart with cloud revenue growth the past 2 quarters of 45% and 43%
- The Cloud Is More — Much More — than Infrastructure: Microsoft CEO Satya Nadella has frequently pointed to his company’s presence in all three layers of the cloud — infrastructure, platform, and applications — as a competitive differentiator. But Microsoft no longer stands alone in that regard as Google Cloud and Oracle also play at all three levels, while every company in the Cloud Wars Top 10 has built out aggressive platform capabilities
- What the Heck is Going on with Dynamics 365? I’m guessing that Microsoft’s modular cloud ERP suite generated about $4 billion in calendar 2022 (Microsoft’s fiscal year runs July 1 to June 30). That’s a huge number, and this quarter Microsoft said revenue grew a very healthy 21%. But let’s look at that number in the context of growth rates for Dynamics 365 over the past 8 quarters, and we’ll start eight quarters ago and move forward to the most-recent figure: 45%, 49%, 48%, 45%, 35%, 31%, 24%, and 21%. No doubt the growth rate’s declining in part due to the steadily rising revenue base — but look at the numbers over the past five quarters: 45%, 35%, 31%, 24%, and 21%. That is an ugly trend, and there’s just no other way to describe it
Final thought
So it might now be time to shift our perspective on and expectations for Microsoft’s $100-billion cloud business from stunning results quarter after quarter to very impressive growth in the low 20s for a business that did just over $100 billion for the calendar year.
We’ll have more-detailed analyses of these and related numbers and in particular CEO Satya Nadella’s earnings-call commentary in the next few days.
Overall, I expect Microsoft will let loose the AI dogs of war to get the company’s growth numbers back to a level that separated it very clearly from almost every other cloud provider on the planet.
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