Microsoft’s Q4 FY19 Earnings Reveal a Subtle Shift in Focus


Microsoft Q4 FY19 earnings

The results of Microsoft’s Q4 FY19 earnings were to be expected.  Microsoft performed extremely well and continues to grow; they achieved over $125B in revenue over the full FY19.  While the numbers themselves may not hold any major surprises, what may be surprising are some subtle (and not-so-subtle) changes in focus and behavior.

When we dig deeper than face value, there is always an underlying motivation for any shift.  If you are a Microsoft customer, it is critical that you pay attention to these important changes so that you are more informed of Microsoft’s goals and motivations that could have drastic impacts to your business and budget.

Microsoft Shifts its Focus to People and Teams

It may seem odd that an organization that is largely known for its tools that empower people (e.g.  productivity tools such as Office 365), had to shift its focus to motivating people to use their software.  This shift is largely due to competition, which is a pressure that Microsoft is not used to facing.  Google, with its Google Cloud Platform and G Suite, is becoming a more viable option for enterprises and posing a real threat to Microsoft’s productivity solution dominance. Microsoft has figured out that if they increase usage of their solutions, they will become more ingrained and stickier within your organization. This is their way of keeping the competition out.

If you are an enterprise using Office 365, chances are you are familiar with Microsoft Teams.  Microsoft has been aggressively pushing organizations to adopt and utilize Teams. In fact, Microsoft reported that this was a “breakout year” for Teams and is now showcasing over 13 million daily users with 19 million users being active on Teams weekly.

Microsoft even stated that they will be targeting new and unpenetrated markets such as healthcare, hospitality, and retail to increase the opportunity of landing more Teams users. This increased utilization is so important because of the breadth of functionality that Teams includes, such as chat, meetings, voice, and other robust collaboration capabilities all bundled into one solution.  If your organization starts going down this path it will be nearly impossible to break away. To highlight just how important this is, Satya Nadella discussed how, from a product innovation and at-scale deployment perspective, Teams represents a full “platform effect” that has not been seen since Windows.

Firstline Workers Represent a Huge Opportunity

Firstline workers are another large focus of Microsoft’s.  Microsoft reported that there are over 2 billion firstline workers worldwide that can be using Microsoft 365 (their most robust bundle offering that includes Windows, Enterprise Mobility + Security and Office 365). By expanding the communication, productivity, and collaboration features of the Microsoft 365 solution (such as Teams), firstline workers also become stickier and more ingrained into Microsoft.

Microsoft is a technology company and will always maintain its focus on innovation to some degree. In fact, Artificial Intelligence and machine learning were highlighted during the earnings call as differentiators for Microsoft. Whether or not Microsoft develops the technology or buys it (such as their acquisition of GitHub in Q2), it is evident that getting use of technology is paramount. For example, Microsoft noted that the developer community is largely utilizing GitHub, with over 36 million active developers.

The Same Old Microsoft

Microsoft’s Azure platform was another large focus of the earnings call.  Microsoft managed to increase their gross margin percentage by 6 points year-over-year, now reaching 65%, which was driven largely by significant improvement in Azure gross margin.  Coupled with the fact that Microsoft’s revenue mix will continue to shift to Azure-based consumption services, Microsoft will only make more money on an even better profit margin. If your organization is not already contributing to this statistic (i.e., not already moving workloads to Azure), expect Microsoft to push you there.

Microsoft reported that they are having more conversations around Azure and digital transformation plans with customers and that these interactions are leading to extended commitments with Microsoft and that they will more likely than not, contain Azure contracts. Strong renewal execution led to material growth in the Azure space, particularly when we look at $10M+ in Azure deals.

It is important to realize that even with all of the shifts in focus and Microsoft’s evolving go to market strategies, underneath it all you are dealing with the same old Microsoft. Microsoft reported that they have maintained strong renewal executing with “healthy behavior”, which really means the selling of new value propositions and high customer value transactions (i.e., expanded adoption and use of Azure and firstline worker solutions).

Make sure that you approach Microsoft from a position of being informed ahead of your next renewal or incremental purchase. Being able to effectively use Microsoft’s focus against them will be critical to your negotiation.

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Erik Bullard

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