Microsoft Earnings Soar on the Heels of Inspire Partner Conference

Microsoft smashed the numbers with its Q4 2019 earnings report, with revenues rising a stellar 12% and hitting on all cylinders with quarterly revenue of $33.7 billion. Notable increases include Azure, growth up 64%; Surface, up 14%; and LinkedIn, up 25%.

It was just back in 2017 when Microsoft eclipsed the $20-billion run rate for cloud offerings; this has now doubled, as reported by Venturebeat.

Source: Microsoft, “Fourth Quarter Fiscal Year 2019 Results” slide deck, July 18, 2019.

Earnings Detail

Here are some of the key numbers to digest if you are a Microsoft customer (and who isn’t) in the enterprise space:

• Productivity and Business Processes:$11 billion revenue, up 14%
  • Office Commercial revenue – up 14%
  • Office Consumer/Cloud revenue – up 6%
  • Dynamics revenue – up 12%
  • LinkedIn revenue – up 25%
  • O365 subscribers touched 34.8 million
  • O365 Enterprise Users (buckle up) – 180 million monthly active users
• Intelligent Cloud:$11.4 billion revenue, up 19%
  • Server and Cloud services revenue – up 22%
  • Enterprise Services revenue – up 4%
  • Azure revenue – up 64%
• More Personal Computing:$11.3 billion revenue, up 4%
  • Windows OEM revenue – up 9%
  • Windows Commercial revenue – up 13%
  • Search revenue – up 9%
  • Surface revenue – up 14%
  • Gaming revenue – decreased 10%

Key Takeaways

It’s clear that the $26-billion LinkedIn acquisition is starting to pay off with the 25% year-over-year growth rate and continued new product launches and deeper integrations with the Dynamics business applications product suite. I would expect a few more quarters at least before we see the impact on revenues from the more recent $7.5-billion acquisition of GitHub.

Azure growth of 64% is stellar by any measure, especially on a growing base number, however there are concerns of Azure deceleration as recent growth rates eclipsed 100%+.I view these concerns as mostly unfounded, as the overall IaaS cloud market is still in the early growth years, as mind-blowing as that may seem in light of over $250 billion in 2018 cloud spend – and growing at 32% annually.

Source: Synergy Research Group, 2018.

Recommendations

1. Customers need to brace for a G&M strategy from Microsoft.New Dynamics license and price models were unveiled at Inspire. I view the changes a G&M – granulize & monetize. Product bundles are being broken down into à-la-carte offerings, which can cut either way in terms of cost impact depending on the number of apps consumed.
2. Prepare for Microsoft to compete head on with Salesforce in the CRM space.The Open Data Initiative (ODI) between Microsoft, SAP, and Adobe coupled with breakthroughs in the Power Platform applications enabling declarative “citizen developer” low-code applications all combined with a new suite of Dynamics365 functionality makes Microsoft a potent competitor.
3. Decide the degree to which your organization is going to adopt the Microsoft platform. It may be too late for many companies, as Microsoft has essentially created the ultimate vendor lock with the O365/M365 bundles. It is critical to evaluate the long-term product roadmap to determine if further vendor lock-in is rewarded with value-adding products and feature improvements. The price of poker is going up for Microsoft customers; it is imperative they receive the value as well.

Bottom Line

Microsoft’s business is hitting on all cylinders. To achieve double-digit revenue growth at their scale is stunning. Customers must realize they are now “vendor locked” to Microsoft and must budget for regular cost increases. Microsoft’s strategy is to bring all of their customers up to market (MSRP) rate pricing; prepare for your discounts to steadily decline.

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