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Microsoft CEO Satya Nadella: Winning the JEDI cloud contract should cause a 'halo effect'

Brian Sozzi
Editor-at-Large

The impact of Microsoft’s big JEDI cloud contract win at the hands of the U.S. government isn’t lost on CEO Satya Nadella, or Wall Street.

And for Microsoft (MSFT) , the impact could go beyond sucking in $10 billion over 10 years as the contract promises.

“Any big deal has a halo effect,” Nadella told Yahoo Finance in an exclusive interview. “But to me, the most important thing is not to take any deal you won as some guarantee for future success but to stay humble, stay grounded on what we need to continue to do, which is be obsessed about customer needs. That's what got us here.”

So starts the cloud “halo effect” at Microsoft.

What Microsoft won

The Pentagon awarded Microsoft Azure its Joint Enterprise Defense Infrastructure — aka JEDI — contract in October 2019. Total contract value: $10 billion spanning over 10 years. Many tech industry insiders saw Microsoft’s win as a surprise given a long held view Amazon Web Services is a superior product. Those same insiders believe the Trump administration’s dislike for Amazon CEO Jeff Bezos tipped the scale into Microsoft’s favor.

Amazon (AMZN) is now contesting the contract award, as it holds a similar view.

“To us, we've always been very focused as a platform company on public sector. In this case, the Department of Defense has been somebody who has been a customer for many decades. And this represents the natural evolution of that, given what we're doing with the cloud,” Nadella says.

With a screen displaying some of the new Microsoft Azure services and updates in the background, Microsoft CEO Satya Nadella delivers the keynote address at Build, the company's annual conference for software developers Monday, May 6, 2019, in Seattle. (AP Photo/Elaine Thompson)

As it stands right now, Microsoft will be focused on overhauling the U.S. Department of Defense’s entire aging IT infrastructure. The system Microsoft is putting in place must feature beefed up cyber defenses and heavy encryption attributes. Microsoft will also be tasked with erecting artificial intelligence capabilities that could support defense operations.

A big win indeed.

‘The ripple effect’

It shouldn’t come as a shock that Microsoft’s stock has surged more than 15% since it landed JEDI. The headline grabbing contract win could open the door to Microsoft winning more cloud business from the government and enterprise customers and beating rival Amazon.

In short, JEDI has given Microsoft an extra dose of street cred. And now Wall Street is likely to continue to price that into Microsoft’s stock.

“We continue to believe the ripple effect from Microsoft's landmark JEDI deal victory announced by the Department of Defense in October will be felt for years to come on both the government and enterprise fronts and thus indicates a seminal moment in the cloud battle between these two stalwarts,” Wedbush Securities analyst Dan Ives said in a new note to clients.

Ives added, “We believe JEDI is a microcosm (we are seeing a number of other federal cloud deployments up for grabs over the coming months) of what we are seeing play out across the entire enterprise landscape; clearly Amazon won the first phase of cloud spending, but this next phase of cloud will be dominated by Redmond as it gains share and significantly narrows the gap over the coming years.”

Keep in mind, it’s not as if Microsoft is hurting for business in the cloud.

Sales for its cloud Azure business spiked 59% in Microsoft’s most recent quarter. For the 12 months ended June 30, 2019, Azure sales surged 72%.

But hey, every win counts in business.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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