Microsoft Q2 FY 2018 Earnings: Advancing the Cloud

Microsoft posted its Q2 FY 2018 earnings on January 31st, reporting revenue of $28.9B along with exceptional growth tied to two key Cloud products, Office 365 and Azure.  Overall, company revenue was up 12% year-over-year while Office 365 revenue was up an impressive 41% and Azure grew an astounding 98%.

Such growth would be noteworthy for any IT vendor but having it come from the Cloud offerings of a juggernaut like Microsoft makes them that much more impressive.  It is also a key indicator of the magnitude of strength and momentum Microsoft has built for itself as it transitions into a Cloud vendor.

Ever since CEO Satya Nadella took the helm, it was very clear that Microsoft was going to become a Cloud-first company and that its go-forward success in many ways was going to be directly tied to the ability of Microsoft’s sales organization to transition its base from on-premise to Cloud.

Microsoft very strategically knew that the best way to start this process was through enticing customers to adopt some flavor of Office 365 (E1, E3, E5 or even F1), while also convincing them to begin using the Azure Cloud computing platform before AWS or even Google entrenched themselves.

Beyond the immediate win of showing the market the over-arching Cloud strategy is paying off, adoption of Office 365 is extremely important to Microsoft’s downstream success because it can lead to two significant upsell opportunities.

No Turning Back

The first upsell opportunity is the most straight forward.  Microsoft knows that once an organization starts the transition to the Cloud, it will be very hard (if not impossible) to turn back, and there is a high likelihood that by the time the next renewal discussions take place, there will be interest in moving to the next more robust Office 365 plan.  For example, when a company starts out with Office 365 E1 for a portion of their organization, Microsoft is already planning to motivate them to become an enterprise-wide Office 365 E3 customer within the next 3 years (i.e., by the time renewal comes).

Go All-In

The second upsell opportunity is the one where Microsoft is most focused, even if it may take multiple renewal cycles to execute.  They ultimately want to convert Office 365 customers to Microsoft 365 customers.   Ideally, they want you to adopt the Microsoft 365 E5 Cloud bundle — the most robust plan.  Microsoft 365, formerly known as Secure Productive Enterprise (SPE), which was previously the Enterprise Cloud Suite (ECS), allows Microsoft to increase adoption of Office 365, Windows 10 Enterprise, and EM+S (Enterprise Mobility + Security).  In doing this, Microsoft essentially has converted the customer to an “all-in” Cloud user.

Given Microsoft’s focus on moving its customers deeper into the Cloud, we fully expect (and have already seen) an aggressive sales organization looking for every opportunity to pitch the need to either adopt Office 365, move to a more robust Office 365 plan, or go all-in with Microsoft 365.  But buyer beware — don’t let any “special” one-time discounting be the reason you jump in or purchase up.  There are many considerations and discussions that need to take place in order to ensure you are not only making the right selection from a form-fit perspective (e.g., the new solution aligns with actual needs and requirements), but you are, in fact, getting a competitive price upfront with the proper downstream protections and flexibility in place.  Based on experience, that “special” one-time discount often turns out to be not all that special after all.

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