How Are Microsoft Corporation (NASDAQ:MSFT)’s Cloud Ambitions Progressing?


  1. Microsoft’s cloud revenues are on track to reach $20 billion a year up from $8 billion currently.
  2. Azure battling to coexist with AWS in the cloud, even if there is no harmony between them.
  3. Spying fears could cost Microsoft and other cloud vendors $35 billion in cloud revenues in Europe by 2016.

Microsoft Corporation (NASDAQ:MSFT) is reorienting itself and it is easy to take notice. The company is shifting focus away from the decaying personal computer market and it is getting deeper in the “cloud” and “mobile.” Because it already has a powerful software business, Microsoft can be seen trying to graft its legacy software and services on to the cloud to gain a head start.

With Satya Nadella in the driver’s seat as the CEO, Microsoft has, in recent times, appeared aggressive in breaking away from the status quo. Microsoft’s campaign in the cloud is primarily though Azure. However, the company also has offerings such as Office 365, which is a version of the legacy Office software rendered in through the cloud.

In the last quarter (1Q2016), Microsoft continued to win more Office 365 customers among large enterprises and SMBs. Torrid growth in Office 365 subscription helped the company to offset softness in the desktop Office business in the quarter.

Does Azure have legs?

Microsoft Corporation (NASDAQ:MSFT) reported that Azure revenue more than doubled and Office 365 revenue rose 70% in 1Q. The progress in the two businesses is indicative of Microsoft’s strengthening cloud operations.

One of the key things driving Microsoft to cloud is that it understands that cloud revenues are recurring, thus eliminating the problem of revenue volatility in the business of legacy software license sales, especially with the declining PC sales. From cloud, Microsoft estimates its annual revenue run rate is currently in the vicinity of $8.2 billion and is one track to reaching $20 billion.

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Azure fighting for its space against AWS

It is almost settled that Microsoft is the only other public cloud company best suited to compete with Amazon.com, Inc. (NASDAQ:AMZN) in the cloud. However, questions are lingering as to whether Microsoft and Amazon can coexist in the cloud, even if it means acrimonious coexistence. There are particularly worries that Amazon’s AWS could eventually grow larger to the point that it cannibalizes Microsoft’s Azure.

The concerns are legitimate bearing in mind that AWS is currently larger than all its four closest competitors (Azure included) combined. As if that is not enough, AWS continues on a multipronged rapid growth in areas that include scale, subscribers and revenues.

As much as Microsoft Corporation (NASDAQ:MSFT) is currently an underdog in the cloud relative to Amazon, it is not difficult to see that Azure has what it takes to fight to coexist with AWS in the cloud. Microsoft already enjoys a strong base of enterprise customers that it can ascend or cross-sell to the cloud. It will likely take Amazon’s AWS years to match the kind of enterprise customer connection at Microsoft.

The other advantage that Microsoft has in its cloud competition with Amazon is that it has a broad portfolio of products and services that are already popular with enterprises. Shifting Office to cloud, which it is already doing, will enable Microsoft to fight for its fair share in the public cloud against Amazon and possibly narrow the gap that currently divides them.

Microsoft currently operates cloud centers in 26 regions, which is double the cloud geographical footprints of Amazon and Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) combined. The fact that less than 10% of the public cloud opportunity has already penetrated also signals that Microsoft has a long runway to travel and could possibly catch up with AWS even if not in scale.

Microsoft’s cloud strategy in Europe

Technology buyers in Europe have increasingly become uncomfortable with trusting their data to U.S. companies. The problem stems from damaging revelations by a former NSA contractor, Edward Snowden, about the U.S. spying activities targeting foreign governments, their people and businesses.

It has been argued that the issue of mistrust of U.S. technology companies in Europe could cost cloud vendors such as Microsoft $35 billion in lost revenues by 2016.

To deal with the problem of mistrust of U.S. technology/cloud vendors by foreign customers, Microsoft Corporation (NASDAQ:MSFT) has figured out a strategy to put to rest their data residency concerns. The company is building data centers in Europe to store data locally. The move has been well-received in Europe with the British government’s Ministry of Defense pledging to use Microsoft’s cloud services once its data centers in the country are operational.

Microsoft plans to build two U.K.-based data centers before the end of next year to allow it store U.K. data locally. The company previously served the U.K. cloud market from data centers in Netherlands and Ireland. Having data centers in the U.K. will not only help eliminate the controversial data residency issues, but also boost Microsoft’s cloud performance in the market by addressing latency problems.

It is not in the U.K. only that Microsoft is making efforts to make the government, businesses and citizens comfortable with its cloud solutions. In Germany, the company has come up with a trustee model whereby its cloud data centers in the country will be operated by a more trusted local firm. Microsoft said that the new data centers that it plans to build in Germany will be operated by a unit of Deutsche Telekom, which is a local telephone carrier.

Germans are among the most concerned Europeans about the issue of data incumbency and letting a local firm operate cloud data centers there is a great way to get them more deeply involved with Microsoft’s cloud offerings.

Microsoft trustee model could be a gold-standard strategy for companies like Amazon, Alphabet and others vying for a slice of the European cloud economy.

Microsoft Corporation (NASDAQ:MSFT)’s investment in cloud infrastructure in Europe has reached more than $2 billion and the company has invested $15 billion in cloud overall.

Displacing Windows as the bread and butter

Beyond Windows, Microsoft Corporation (NASDAQ:MSFT) is aggressively promoting software and services such as Cortana, Bing and Office 365 to dry and wean itself from Windows dependency.

There is so much that Microsoft is doing behind the curtains to diversify revenue streams away from Windows.Break away from Windows-centric business model can also be seen from Microsoft’s efforts to serve once Windows-only software on foreign platforms. The company is currently offering its key productivity tools and services such as Skype for Business, Office and more on Apple Inc. (NASDAQ:AAPL)’s iOS and Alphabet’s Android mobile platforms.

1Q2016 earnings highlights

Microsoft posted 1Q2016 adjusted EPS of $0.67 on revenue of $21.7 billion. Both the topline and bottom-line figures in the quarter smashed the consensus estimates of $0.59 and $21.03 billion for EPS and revenue respectively.

Microsoft introduced a new reporting structure in 1Q that brings more clarity to its business, especially the performance of its various divisions.

Takeaway

Microsoft Corporation (NASDAQ:MSFT) is not only making a valid claim of its fair share of the cloud economy, but the company also has key competitive advantages to help it close in on Amazon.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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