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Inside Microsoft: Earnings report proves its playbook for transitioning customers to cloud

Microsoft Corporation

Apr, 28 2017, 6:38 AM

Editor's note: Focusing on lifetime customer value helps Microsoft successfully traverse business model shifts, says Technology Business Research Analyst Kelsey Mason. 

HAMPTON, N.H. - Microsoft [in its earnings report issued Thursday; see wire report later in this post] continues to be the exemplar of navigating the business model shift associated with cloud migrations, growing organic revenue 3% year-to-year while improving organic operating margin.

LinkedIn’s first full quarter of revenue and expense contribution hampered corporate operating margin slightly, but will ultimately add value to core businesses such as Office and Dynamics following more robust integration.

The crux of Microsoft’s success has been its ability to first transition customers to cloud-based offerings, then upsell additional or premium services to increase lifetime customer value.

Office 365 and Azure are the first examples of this strategy. Office 365 commercial revenue surpassed Office commercial on-premises revenue in CY1Q17, according to TBR estimates, as customers adopted premium versions and as Microsoft expanded its addressable market to deskless workers.

Further, customers continue to “lift, shift and modernize” server software workloads, with revenue from Azure premium services growing triple digits for the 11th consecutive quarter, driven by use cases around hybrid, IoT and artificial intelligence.

Microsoft has similar plans for its Dynamics business, where it is in the initial phases of encouraging customer migrations to Dynamics 365.

New integrations with LinkedIn and continued horizontal expansion create opportunities to grow share of wallet and increase lifetime customer value.

These three businesses, combined with ongoing commercial adoption of Windows 10 and premium versions of on-premises server software, position Microsoft favorably to enable customers’ digital transformations, both for lines of business and IT departments.


Earnings report details

Microsoft's fiscal 3Q revenue falls short of expectations

Microsoft's cloud business propelled its fiscal third-quarter earnings above Wall Street's expectations, but revenue fell short, sending the software maker's stock lower in after-hours trading.

Microsoft Corp. said Thursday that it earned $4.8 billion, or 61 cents per share, in the January-March period. That's up 28 percent from $3.76 billion, or 47 cents per share, in the same period a year earlier.

Excluding one-time items, Microsoft earned $5.71 billion, or 73 cents per share. That's up 13 percent from $5.04 billion, or 63 cents per share, a year earlier.

The company posted revenue of $22.09 billion, up 8 percent from $20.53 billion.

Adjusted revenue, which is more closely followed by analysts, was $23.56 billion, up 6 percent from last year's $22.16 billion.

Microsoft's earnings were above expectations, but revenue fell slightly short.

Analysts, on average, were expecting Microsoft to report adjusted earnings of 70 cents per share on revenue of $23.65 billion, according to a poll by FactSet.

As sales of Windows PCs decline, CEO Satya Nadella has been pouring money and resources into remote data centers that deliver the company's services online to smartphones, tablets and other devices. Businesses and government agencies are increasingly turning to such "cloud computing" services, which is helping Microsoft move on from its old software business.

Shares in Microsoft Corp., which is based in Redmond, Washington, slid about 1 percent to $67.65 in after-hours trading.

Source: The Associated Press