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Microsoft just hit its $20 billion cloud goal, almost a year ahead of schedule

Satya NadellaChinaFotoPress via Getty ImagesMicrosoft CEO Satya Nadella.
  • Microsoft’s commercial cloud business just hit $US20 billion in annualized revenue, a milestone CEO Satya Nadella set out for the company in 2015.
  • The growth of Microsoft’s cloud business has been boosted by the cloud-based version of its Office 365 productivity suite and its Azure cloud computing service.
  • However, Azure still lags behind Amazon Web Services cloud in terms of revenue.

Three years ago, Microsoft CEO Satya Nadella called his shot: the company’s so-called commercial cloud business would hit $US20 billion in annualized revenue by the end of its 2018 fiscal year.

At the time, that seemed an ambitious goal. Microsoft’s commercial cloud business was then generating $US6.3 billion in sales on an annualized basis, which it defined as how much revenue the business would take in if it continued on the pace it set in the last month of its most recent quarter.

But on Thursday, Microsoft made good on Nadella’s promise. In its fiscal first quarter earnings report, the company said it has already met and exceeded its $US20 billion goal with three quarters to spare.

In the company’s most quarter, Microsoft’s commercial cloud businesses recorded $US5 billion of revenue, at a 57% gross profit margin. Gross profit margin is the portion of a business unit’s revenues that are remaining after you subtract its direct costs of making or offering its goods or services.

Going forward, Microsoft will no longer disclose the annualized revenue figure for its commercial cloud business. Instead, it will just reveal its recorded revenue.

Microsoft’s commercial cloud business has been on something of a tear. Already last quarter, the business’ annualized revenue was at 94.5% of its $US20 billion goal.

The software giant’s commercial cloud business is anchored by Azure, its cloud computing service, and by the Office 365 productivity suite, both of which are growing like crazy. Azure revenue jumped 90% in the company’s fiscal first quarter, compared with the same period a year earlier. And revenue from the business-targeted version of Office 365 grew 42% over the same period.

Still playing catch-up to Amazon

And Microsoft had other good news for shareholders regarding its Office 365 business. For the first time, the revenue the company generates from selling subscriptions to the cloud version of its productivity suite was higher than the revenue it brought in from selling licenses to the traditional versions of Office.

Still, even with the growth and success of Microsoft’s cloud business, it’s still trailing behind Amazon. The e-commerce company’s Amazon Web Services unit is on track to bring in $US18 billion of revenue in 2017.

Nominally, that’s less than Microsoft commercial cloud revenue, but it’s not an apples-to-apples comparison. AWS competes directly with just Azure. But revenue from Azure is just one component of Microsoft’s total commercial cloud sales.

Microsoft has dedicated itself to closing the gap. Whether it core cloud computing business will ever overtake Amazon remains to be seen. But it definitely looks like the battle won’t be quieting down anytime soon.

Get the latest Microsoft stock price here.

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