Microsoft Q3 2017 – Missed Revenue and Cloud Focus Presents Negotiating Opportunities

Even though Microsoft missed on revenue, all was not lost for the industry giant as they were able to show impressive signs of growth in their cloud businesses.  Microsoft’s revenue reached $23.56B in Q3 of 2017, which was just short of the expected $23.62.  But what’s a mere $60M delta when you’ve achieved your primary goal of posting strong growth in your key Office and Azure cloud computing segments?

In addition, Microsoft grew its revenues in two of its three business segments.  Productivity and Business Processes was up 22% reaching $8B — significant since this includes the key cloud solutions of Office 365, Dynamics and Dynamics 365.  Microsoft’s Intelligent Cloud accounted for about $6.8B in revenue, growing 11% — also outstanding given Azure revenues fall under this business sector.   Azure is a highly strategic offering that Microsoft is relying heavily on advancing as it continues to compete with Amazon Web Services (AWS) for valuable market share.

As in recent past quarters, the only area coming up short was Microsoft’s struggling Personal Computing business segment, which experienced a slight decline.

Highlights (by business):

Productivity and Business Processes

• Revenue grew 22% to $8B
• Office commercial products and cloud services revenue increased 7%
• Office commercial products revenue declined 13%
• Office 365 commercial revenue grew 45%
• Office 365 commercial seats increased 35%
• Office 365 commercial monthly active users over 100 million
• Dynamics products and cloud services revenue increased 10%
• Dynamics 365 revenue grew 81%
• LinkedIn contributed revenue of $975M

Intelligent Cloud

• Revenue grew 11% to $6.8B
• Server products and cloud services revenue increased 15%
• Server products revenue grew 6%
• Azure revenue grew 93%
• Azure compute usage more than doubling year-over-year
• Azure premium services revenue grew triple-digits for the 11^th consecutive quarter
• Enterprise Mobility installed base grew 2x for the 12^th consecutive quarter
• Enterprise Services revenue decreased 1%

More Personal Computing

• Revenue declined 7% to $8.8B
• Windows commercial products and cloud services revenue increased 6%

Four Leverage Considerations for Microsoft Customers

• Q4 is the most important quarter for Microsoft’s commercial business. Microsoft expects continued annuity growth and healthy renewals and is relying on more customers adopting and using Microsoft’s growing portfolio of Commercial Cloud services. Organizations considering a move to the cloud or expanding its portfolio of Microsoft cloud solutions through a renewal in Q4 will have a significant amount of leverage. 
• The company expects Productivity and Business Processes to continue to grow with Q4 revenue projected at $8.2B to $8.4B. This outlook will be heavily dependent on the ongoing annuity shift to the cloud and Commercial Office 365.  Those considering a move to the cloud (especially Office 365) as part of their upcoming Q4 renewal, will have a significant amount of clout.  We fully expect Microsoft to position “one-time” special discounting to push Office 365 into the renewal.
• Microsoft is continuing to focus on grabbing market share from large vendors like SAP, Oracle and Salesforce.com, with their cloud solution, Dynamics 365. Enterprises that have been evaluating ERP and/or CRM applications will gain a significant amount of leverage by introducing Microsoft’s Dynamics 365 offering into the mix of solutions under consideration.  Those that are in a position to close the deal in Q4 will have an even greater chance of obtaining best-in-class upfront pricing.
• Microsoft is positioning Azure as a very strategic product. Microsoft understands the value in getting businesses to adopt Azure does not just come from the revenue directly associated with the sale, but also from the addition of high-level services in what is defined as Azure, and of the accompanying digital transformation opportunity.   Microsoft knows what Azure can lead to and has shown a willingness to do what it takes to get Azure into an organization’s eco-system.  Should an organization be willing to add Azure to their Q4 renewal, we fully expect Microsoft to offer aggressive discounting on the larger deal.

Opportunity Knocks – Will You Answer?

Given Microsoft’s recent revenue expectation miss and their further need to demonstrate revenue growth during their highly important Q4, they will need to continue to push one or many cloud offerings into their enterprise customer base.  This is especially the case where an organization has yet to adopt any of Microsoft’s cloud solutions.   Microsoft understands that to start an organization down the journey to full cloud adoption and ultimate “stickiness,” they just need the first domino to drop.   We typically see this through the push to get the organization to adopt Office 365, if not across the whole enterprise, at least in part — without even having to adopt the most robust plan (i.e., Office 365 E5).

Microsoft understands that once you are on Office 365, they can not only push user adoption wider within the organization but push you up to the most robust offering.  More importantly, they clearly understand that once you are using Office 365, you become a much easier candidate to adopt other cloud solutions like EMS, Azure, Dynamics or one of the strategic cloud bundles like Secure Productive Enterprise (Office 365, EMS and Windows 10 Enterprise) or Dynamics 365.

The golden opportunity for customers willing to migrate to the cloud is to leverage Microsoft’s thirst for cloud adoption to achieve non-standard concessions not only on the cloud purchase, but also on the renewals across all remaining on-premise products.  To achieve the expected revenue growth and increased cloud adoption, we expect and have already seen an extremely motivated and aggressive Microsoft sales organization that will offer meaningful “one-time” discounting to current customers willing to transition to a Microsoft cloud offering (i.e., Office 365).  This time of transcendent negotiation opportunity happens once in a generation and provides customers with an ability to re-set their entire Microsoft relationship.  The organizations that will benefit are those who answer the knock, understand and define the holistic deal construct that is possible, and then adopt and execute to a proven strategy to achieve it.

Is the Past Indicative of the Future?

Past experiences may have led you to believe there is very little, if any, leverage for your organization to negotiate with Microsoft, but Q4 presents a remarkable opportunity.