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Why enterprise cloud services are driving Microsoft’s growth

Smita Nair

Investing in Microsoft: A comprehensive primer and key analysis (Part 4 of 7)

(Continued from Part 3)

Microsoft customers

Microsoft’s full customer profile is currently made up of 55% enterprise customers, 20% consumers, 19% original equipment manufacturers, and 6% small- to medium-sized businesses. Enterprise has accounted for a major chunk of Microsoft’s revenue, as businesses are increasingly buying products such as web-based cloud services.

Microsoft COO Kevin Turner said in a statement that strong customer adoption of Office 365, Azure, and Dynamics CRM Online is accelerating Microsoft’s business transition to the cloud. The company’s investments in SQL database platform, Hyper-V, System Center, and Lync are driving market share gains, as these comprehensive solutions enable customers to increase their insight and efficiency.

Microsoft posted $18.53 billion in revenue in its first financial quarter, ending September 30, 2013. The majority of the revenue came from the commercial segment, which grew 10%. This segment includes enterprise cloud and server revenue.

The Commercial group develops and markets software and services designed for enterprise customers. It includes the following segments.

Commercial Licensing

The Commercial Licensing segment accounted for 51% of Microsoft’s revenue in fiscal 2013. It comprises server products such as: Windows Server, Microsoft SQL Server, Visual Studio, and System Center; Windows Embedded; volume licensing of the Windows operating system, excluding academic (“Commercial Windows”); Microsoft Office for business, including Office, Exchange, SharePoint, and Lync (“Commercial Office”); Client Access Licenses, which provide access rights to certain server products (or CAL); Microsoft Dynamics business solutions, excluding Dynamics CRM Online; and Skype.

Commercial Licensing revenue increased $649 million, or 7%, due primarily to increased revenue from server, CAL, and Office licenses offset in part by the transition of customers to Commercial Office 365.

In Commercial Licensing, Microsoft expects revenue to reach between $10.7 billion and $10.9 billion for 2Q 2014, with similar dynamics as in the first quarter. This includes healthy renewals and strong annuity revenue growth from volume licensing with Software Assurance.

Commercial Other

This segment comprises: Enterprise Services, including Premier product support services and Microsoft Consulting Services; Cloud Services, comprising Office 365 (“Commercial O365”), other Microsoft Office online offerings, Dynamics CRM Online, and Windows Azure; and certain other commercial products and online services not included above.

In 1Q 2014, Commercial Other revenue increased $355 million, or 28%, due to higher Cloud Services revenue and Enterprise Services revenue. Cloud Services revenue grew $261 million, or 103%, due mainly to higher revenue from Commercial Office 365. Enterprise Services revenue grew $93 million, or 9%, due to growth in both Premier product support and consulting services. Office 365 commercial seats and Azure customers both grew triple digits. Two-thirds of the new Dynamics CRM customers opted for cloud deployment.

In Commercial Other, the company expects revenue to reach between $1.7 billion and $1.9 billion for 2Q 2014, reflecting ongoing momentum in the commercial cloud business and enterprise services. Amazon (AMZN) still owns a major share of the cloud computing market. The other players include IBM, Google, and Salesforce.com.

Continue to Part 5

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