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Microsoft Receives Cloud Revenue Boost From Pentagon

It is not exactly a return of the JEDI, but it could still boost Microsoft Corporation’s (MSFT) bottom line. Microsoft is one of the two beneficiaries of a Pentagon cloud computing contract to modernize IT systems. The government agency is soliciting bids for its Joint Warfighting Cloud Capability (JWCC) program, a replacement to the $10 billion Joint Enterprise Defense Infrastructure (JEDI) initiative from 2019.

Key Takeaways

  • Microsoft is among the beneficiaries of a Pentagon contract for cloud computing technology to modernize its systems.
  • The contract is a replacement to the $10 billion JEDI procurement program, scrapped earlier this year, that Microsoft won in 2019.
  • The tech giant could boost its bottom line with the current contract because it runs into billions of dollars and seeks unlimited services for a limited period of time.

The JEDI contract, which was intended to modernize and unify the Pentagon’s piecemeal IT systems through cloud capabilities, was for a single provider. It was awarded to Microsoft, but it was put on hold after, Inc. (AMZN) protested, claiming that the award was “politically corrupted” by President Trump, who had a public spat with Amazon CEO Jeff Bezos. The JEDI contract was Microsoft’s first cloud computing win from the Pentagon, while Amazon has been a services provider to the agency since 2014. The JEDI contract was scrapped earlier this year. 

The JWCC has a similar mandate, but it is more open-ended in a couple of respects. First, it has solicited bids from other commercial cloud providers, including Oracle Corporation (ORCL) and Alphabet Inc.’s (GOOGL) Google. In its press release, the General Services Administration (GSA) stated that it “anticipates” awarding two contracts from the program to Amazon and Microsoft because they meet the Pentagon’s requirements for such systems. 

Second, the contract is indefinite delivery, indefinite quantity (IDIQ) and has no ceiling on the dollar amount committed to the initiative. An IDIQ contract is for unlimited services for a limited period of time. The GSA stated in its press release that it expects to spend multiple billions of dollars on JWCC.

How Does Microsoft Benefit?  

Spending on cloud computing by federal agencies has surged in the past couple of years. They spent $6.6 billion on cloud computing in fiscal 2020, a marginal increase from the $6.1 billion in 2019. The pace is expected to pick up in the coming years. The Department of Defense (DoD) itself has committed to spending a total of $798 million on cloud capabilities in 2022, with a majority of that budget earmarked for commercial cloud versus developing in-house capabilities.

At the time of the JEDI contract award, the Pentagon was poised to spend $40 billion over several years on cloud computing systems. As a frontrunner in helping transition the agency to cloud systems, Microsoft could garner a substantial share of that amount and boost its top line. The company’s competitor Amazon had revenue of $200 million in 2014 from federal contracts. That figure had ballooned to $2 billion by 2019.