Microsoft says it's picking up more big Azure contracts

Key Points
  • Microsoft's longer-term cloud contracts are focused on usage and don't show up meaningfully in unearned revenue.
  • Amazon started talking about its cloud revenue backlog last year.
Microsoft CEO Satya Nadella.
Daniel Berman | Bloomberg | Getty Images

Microsoft might not be the biggest cloud provider — that title goes to Amazon — but it is starting to win more long-term cloud deals. On Wednesday the company's chief financial officer, Amy Hood, told analysts on a conference call that the company is picking up more major commitments around using Microsoft Azure, like the five-year deal with Gap Inc. that was announced in November.

The trend points to Microsoft becoming a more mature operator in the cloud business as it seeks to catch up with market leader Amazon Web Services. Last year, Amazon talked for the first time about revenue that had not yet been recognized through contracts that are more than one year long, primarily from AWS. At the end of the third quarter Amazon had $17.8 billion in revenue that hadn't been recognized.

Hood first talked about Microsoft picking up "larger and longer-term agreements" on an earnings call last July. She didn't bring up the subject again on the earnings call in October. Then, on Wednesday, she provided an update.

"Commercial bookings were strong, growing 18 percent and 22 percent in constant currency, driven by solid renewal execution and an increase in the number of larger longer-term Azure contracts," Hood said.

Microsoft's commercial bookings growth for the fiscal second quarter exceeded the 7 percent growth one year earlier, and the 15 percent growth from the fiscal first quarter.

Hood's remarks came a day before Amazon is scheduled to talk about its latest AWS results.

Microsoft's Azure revenue for the four most recent quarters could be more than $9.5 billion, based on an estimate from Brent Bracelin, managing director of KeyBanc Capital Markets. Meanwhile, AWS revenue in the third quarter alone exceeded $6.5 billion.

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