By Mackenzie Tatananni

There was a lot to love about Microsoft's latest earnings report, but Azure was a standout, with revenue gaining 33% from the previous year.

Core sequential dollar growth was particularly strong, UBS analysts said Monday, to the point where Azure materially outperformed rivals Google Cloud and Amazon Web Services. The cloud computing segment saw 62% growth from the previous year, dwarfing the 9% growth in AWS and 2% growth in Google Cloud.

UBS noted this was the second consecutive quarter that combined sequential dollar growth was up more than 10%. Most significantly, the progress occurred against a challenging macro backdrop -- and it is difficult to establish why.

Microsoft management cited improved execution, strong demand for Azure's data services, and an uptick in large enterprise migration activity. Migration refers to the process of moving data to the cloud from an organization's own physical location, such as an office or data center.

"What's surprising is that on-prem to Azure migration activity would pick-up smack in the middle of one of the more uncertain macro periods in memory," the UBS team wrote.

There are other theories, too. Microsoft emphasized Azure can have quarterly variability stemming from "in-period revenue recognition depending on the mix of contracts."

UBS thinks this could be the explanation behind what the firm calls a singular "core growth catalyst."

The company disclosed on the earnings call that OpenAI had signed another Azure commitment, following one that "could have been as large as $25 billion over many years," and explicitly referenced OpenAI's use of database service Azure CosmoDB.

Management remained tight-lipped when it came to other details, but the analysts noted OpenAI has emerged as a large customer of Databricks, Snowflake, Datadog, and others.

Assuming OpenAI is using these third-party software offerings on Azure, and OpenAI's two large commitments weren't just for the use of Azure for AI training services, "then it's entirely plausible that these commitments could have been for OpenAI's consumption of core Azure services," the analysts wrote.

While it is difficult to nail down a single explanation, the analysts favor the conclusion that Microsoft saw a disproportionate lift from ramping migration. This could include a shift away from other Microsoft services like its on-premises server business, which has started to see negative growth.

Moreover, "OpenAI could have become a bigger consumer of either native Azure services or of 3rd-party software products running on Azure," the analysts wrote.

Microsoft's demand drivers seem sustainable, but the UBS team finds reason to temper its growth estimates across the board as macro pressures take a toll on competitors.

The firm believes weakness in sequential dollar adds on AWS and Google Cloud could be early evidence of the impact of a tougher IT spending backdrop, which indicates customers are starting to trim back their cloud infrastructure spending.

Look out below.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

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May 05, 2025 15:28 ET (19:28 GMT)

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