Microsoft Q1 2017 – Revenue Growth Dependent on Cloud Adoption

Microsoft had a relatively strong start to their new fiscal year with total revenue coming in above analyst expectations at $22.3B (Non-GAAP).  Analysts were expecting $21.7B.  It is important to note that Microsoft would have come up short taking GAAP results into consideration.  Under GAAP, Microsoft’s total revenue was $20.5B for the quarter.  Non-GAAP results have been focused on since they exclude the net impact from Windows 10 revenue deferrals and thus more appropriately highlight the momentum in Microsoft’s business.

Microsoft achieved revenue growth in two of Microsoft’s three business segments.  The only segment coming up short was Microsoft’s struggling Personal Computing business segment, which experienced a decline.

Highlights (by Business Segment):

Productivity and Business Processes

• Revenue grew 6% to $6.7B
• Office commercial products and cloud services revenue grew 5%
• Office commercial products revenue declined 14%
• Office 365 commercial revenue grew 51%
• Office 365 commercial monthly active users now over 85 million, growing over 40%
• Dynamics products and cloud services revenue grew 11%
• Dynamics CRM online paid seats grew more than 2.5x
• More than 70% of Dynamics CRM and ERP enterprise customers chose Dynamics online

Intelligent Cloud

• Revenue grew 8% to $6.4B
• Server products and cloud services revenue grew 11%
• Server products revenue grew 2%
• Azure revenue grew 116%
• Azure compute usage more than doubling year-over-year
• Enterprise Mobility customers increased 85% to over 37,000, and the install base grew nearly 2.5x

More Personal Computing

• Revenue declined 2% to $9.3B
• Windows commercial products and cloud services was flat

Key Takeaways:

• Microsoft expects the Productivity and Business Process business segment to continue to grow with Q2 revenue of $6.9B to $7.1B. This outlook is heavily dependent on Microsoft’s expected ongoing transition to the cloud to drive install base growth.  Organizations considering a move to the cloud, especially Office 365, will have a significant amount of leverage come renewal time.

• Microsoft wants to grab market share from large enterprise applications vendors like SAP, Oracle, and Salesforce.com. Microsoft’s soon to be released Dynamics 365 is intended to compete directly with such vendors.  Organizations evaluating ERP and/or CRM applications will gain leverage with these vendors and Microsoft by introducing Microsoft’s Dynamics 365 offering into the mix of solutions under consideration.

• Microsoft expects Azure revenue and compute usage to continue to grow and beat out AWS when head-to-head. For those enterprise customers with high security and compliance demands, Microsoft is quick to mention that Azure is the most trusted and compliant cloud with more certifications than any other cloud provider (49 to be exact).  Look for Microsoft to offer aggressive discounting on the larger deal should there be a willingness to add Azure to the renewal.

Given Microsoft’s need to demonstrate continued overall revenue growth and not fall short of their guidance for Q2, Microsoft will need to continue to push one or many cloud offerings into their enterprise customer base and win more head-to-head battles against large traditional enterprise application vendors such as SAP, Oracle and Salesforce.com.  To achieve such revenue growth, we fully expect and have already seen an extremely motivated and aggressive Microsoft sales organization that is willing to offer meaningful promotions to the current customer base that are willing to transition to a Microsoft cloud offering (i.e. Office 365).  Regarding Microsoft’s soon to be released cloud offering, Dynamics 365, we have learned that Microsoft will be willing to offer a one-time incentive for new customers willing to switch from Salesforce.com, SAP or Oracle to Dynamics 365.  Of course, knowing there are promotions available is one thing, knowing the upper bounds in which Microsoft is willing to go is another.  Also, it is critical to not let the allure of the up-front, one-time promotion blind you (especially if transitioning away from a competing solution as it is always difficult to go back).  Like all other cloud subscriptions, upfront pricing is important but it is equally important to put in place proper price protections to ensure Microsoft is not in the position to make up for lost time (lost revenue in this case).  They will most likely attempt to do this at your next renewal, where your leverage will be significantly diminished.

Past experiences may have led you and your organization to believe there is very little if any; leverage to negotiate with Microsoft.  Things are changing at Microsoft.  Not only is the time right to negotiate with Microsoft, there is a proven playbook and methodology to level the playing field with Microsoft ensuring you leave nothing on the table.