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Microsoft Azure Partners Upbeat On Sustained High Cloud Growth

'Microsoft's hybrid strategy is resonating,' RBC Capital Markets analyst Ross MacMillan says. 'We think Azure can scale to multiples of its current size as workloads grow on hyper-scale cloud platforms.'

A new survey shows top-level Microsoft Azure channel partners expect sustained high rates of growth and customer adoption of higher-tier cloud services this year.

Certified partners responding to the RBC Capital Markets survey reported their Azure-related business grew approximately 55 percent on a weighted average basis in 2018, and they expect growth of about 50 percent this year.

The survey is encouraging for its view of continued Azure growth and confidence in Microsoft's competitive position in public cloud infrastructure, according to RBC Capital Markets analyst Ross MacMillan.

“The rate of deceleration is relatively modest, which we find encouraging in the context of our assumptions around the durability of growth and sustainability of growth from Azure,” MacMillan told CRN.

RBC Capital Markets polled approximately 10 percent of certified Microsoft cloud platform partners, limiting the sample to those with the highest-level Gold and Silver competencies.

Partners continue to view Azure—the second largest cloud provider to No. 1 Amazon Web Services—as a share gainer versus competitors, according to the report. None of the partners indicated Azure was losing market share and many reported market-share gains, especially against AWS, according to the report.

“Microsoft's hybrid strategy is resonating,” MacMillan wrote in his report. “Nearly 50 percent of partners report an increase in customers using Azure Hybrid Benefit—conversion or re-use of on-premise licenses— for Windows/ SQL Server workloads. We think Azure can scale to multiples of its current size as workloads grow on hyper-scale cloud platforms, and Microsoft maintains a strong second position to leader AWS in Western economies.”

Syracuse, N.Y.-based iV4, which has a Gold Level Microsoft cloud platform competency, saw an approximately 80 percent increase in Azure subscription licensing in the last 12 months, according to CEO Michael Spoont.

“Microsoft’s hybrid services integration is a powerful financial driver that our clients immediately see benefits from,” Spoont said. “We expect to see more of the same in 2019.”

MacMillan singled out the strength of Microsoft’s initiatives around the Internet of Things, artificial intelligence and virtual reality.

At Pythian, a Toronto-based IT consultant, MSP and Microsoft Gold cloud platform partner, the Azure business grew more than 75 percent from 2017 to 2018.

“We don't see any signs of that slowing down anytime soon,” said Paul Vallee, president and CEO of Pythian. “We're also seeing a lot of hybrid cloud workloads as many enterprises are reluctant to have all of their eggs in one basket with a single vendor.”

The survey responses prompted RBC Capital to raise its gross margins forecast for Azure.

Premium services such as Azure AI/machine learning, Azure Site Recovery (disaster recovery as a service) and Azure DevOps were reported as the fastest growing services rather than base-line compute and storage services.

“The survey was confirmatory of the dynamic around improving gross margins for Azure based on the highest growth services being premium services,” MacMillan said. “Higher-tier services…carry higher margins.”

Azure, which accounts for approximately 10 percent of the Redmond, Wash.-based Microsoft’s revenue, posted 76 percent year-over-year growth in the quarter that ended Dec. 31, 2018.

The only modest negative emerging from RBC Capital's survey was that 23 percent of partners said Microsoft Azure had more aggressively discounted prices in the last six months.

“They’re competing with Amazon every day, and they’re competing with Google every day,” MacMillan said.

Pythian’s Vallee said all three major cloud players are doubling down on discounts.

“Microsoft, Amazon and Google are all being very aggressive with discounts or additional benefits such as credits or services funding,” Vallee said. “Microsoft has been aggressive in switching their funding programs from on-prem to Azure, e.g. SQL Server 2008/R2 EOS customer incentives.”

RBC capital raised its stock price target for Microsoft to $130 per share from $124 and reiterated its “outperform” rating on the stock.

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