Why Microsoft's AT&T Contract Could Have 'Measurable Impact' On Azure Cloud Revenue

Although Microsoft Corporation MSFT is playing catch-up with its cloud rival Amazon, Inc.'s AMZN AWS, the software giant is slowly and steadily making strong inroads, according to a Street analyst.

The Microsoft Analyst: Rosenblatt Securities analyst John McPeake reiterated a Buy rating on Microsoft with a $301 price target.

The Microsoft Takeaways: Microsoft and telecom giant AT&T Inc. T announced Wednesday a deal under which the latter will run its mobility network on the former's Azure, McPeake said in a note.

AT&T is the second-largest mobile operator in the U.S., with 96.3 million subscribers and 186.1 million connected devices at the end of the first quarter, the analyst said.

AT&T has spent about $14.6 billion in capex over the trailing 12 months, with the vast majority of the expenditures being made on its networks, he said.

The deal could be worth well over $1 billion per year to Microsoft Azure over time, McPeake said.

Microsoft will assume responsibility for both software development and deployment of AT&T's Network Cloud immediately and bring AT&T's existing network cloud to Azure over the next three years, the analyst said.

The transaction will include onboarding of AT&T employees, which could moderate the margin impact a bit, he said.

Microsoft will also be acquiring network IP from AT&T that can be integrated into Azure for operators going forward, McPeake said.

"We think the deal announced today with AT&T will have a measurable impact on Azure revenues."

MSFT Price Action: At last check, Microsoft shares were trading near-flat at $270.95.