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Can Microsoft Compete With Amazon In The Cloud?

Posted on Wednesday, Apr 27th 2016

According to a recent Gartner report, global PC shipments in the first quarter of the year fell 9.6% to 64.8 million units. IDC estimates that number to have fallen 11.5% to 60.6 million units. This is the lowest that the PC shipments have ever been at over the last decade. Recently reported results for Microsoft (Nasdaq: MSFT) are blemished by declining PC sales. But Microsoft is undeterred and continues to improve its offerings to support the mobile-first, cloud-first world.

Microsoft’s Financials

Microsoft’s Q3 revenues fell 6% over the year to $22.08 billion, falling short of the market’s forecast of $22.09 billion. EPS of $0.62 was also short of the Street’s expectations of $0.64 for the quarter.

By segment, revenues from the Productivity and Business Processes grew 1% over the year and 6% on a constant currency basis to $6.5 billion. The growth was driven by 7% constant currency growth in sales of Office commercial products and cloud services. Office 365 revenues were a big driver as they reported a 63% growth on constant currency basis. Office consumer products and cloud services revenue grew 6% in constant currency as Office 365 consumer subscribers grew to 22.2 million from 12.4 million a year ago. Dynamics products and cloud services revenue grew 9% in constant currency with Dynamics CRM Online seat adds more than doubling over the year.

Revenues in the Intelligent Cloud segment grew 3% over the year and 8% in constant currency to $6.1 billion. The segment has benefitted by a 5% growth on constant currency basis in the server products and cloud services. Azure revenues grew 120% in constant currency as usage of Azure compute and Azure SQL database more than doubled over the year.

Microsoft’s cloud moves are expected to deliver strong results. According to recent reports, Amazon Web Service accounted for 36.9% of the cloud computing market share. Microsoft was a distant second with 8.7% share followed by Salesforce’s 4.7% share in the third quarter of previous year. Researcher Goldman Sachs expects that Microsoft will grow at a faster pace in the market and together, Amazon and Microsoft will account for 76% of the total market by the year 2017. Recent advances do suggest that Microsoft is headed in the right direction, but Amazon is clearly miles ahead of them. Microsoft will probably always end up being the runner up to AWS.

Revenues from the Personal Computing segment grew 1% over the year and 3% in constant currency to $9.5 billion. Declining PC sales continued to hurt Microsoft as Windows OEM revenues fell 2% in constant currency. Surface revenues grew to $1.1 billion reporting a 55% increase over the year and a 61% increase in constant currency driven by additional sales on Surface Pro 4 and Surface Book. Xbox Live monthly active users grew 26% year-over-year to 46 million.

Microsoft’s phone business continues to struggle and the segment reported a 46% decline over the year in constant currency. Microsoft clearly does not appear to be making any waves in the mobile hardware market. During the quarter, Microsoft reported sales of 2.3 million Lumia phones in a market that estimates global smartphone sales to reach 1.5 billion units this year. But given the fact that mobile phones are becoming the biggest form of connecting to the end consumer, Microsoft may not be able to give up on its mobile phone strategy. It continues to build on Windows 10 Mobile and is pushing the upgrade of Windows 8.1 phones to Windows 10 and is focused on delivering apps that can operate on both iOS and Android platforms to remind the world of Microsoft’s mobile presence.

Microsoft and Windows

To counter the weakening PC shipments, Microsoft is focusing on alternate strategies. The company is focused on upgrading its enterprise customers to Windows 10 and Office 365. It aims to have 1 billion devices operating on Windows 10 by 2018. According to Microsoft’s reports, within eight months of the launch of Windows 10, it has been installed on more than 270 million devices already. The adoption is estimated to have outpaced Windows 7 in the same timeframe by 145%. Microsoft is making it easier for organizations to take the decision to shift to Windows 10 by offering bundled products and by adapting products such as Office to operate equally well on both iOS and Android devices.

Microsoft’s Cloud Focus

Microsoft continued to improve its cloud offerings for the quarter. During the quarter, they added more differentiation to high-value services in Azure in three key areas – artificial intelligence, Internet of Things (IoT), and business analytics. Within artificial intelligence they expanded Cortana Intelligence Suite by including more than 20 cognitive services ranging from object-in-motion recognition to text and linguistic analysis. The Cortana Intelligence Suite is Microsoft’s Big Data and Analytics service that transforms data into predictions and intelligent action.

Within the IoT and the Analytics segment, Azure’s new IoT suite has streamlined the ability to building IoT applications while continuING to allow the management and monitoring of assets. They have also integrated the IoT offering with analytics so that organizations are able to connect and analyze data from multiple devices globally and use Power BI tools to understand this data and act on the information so gathered.

Microsoft’s Acquisitions

In February this year, Microsoft announced two acquisitions to strengthen their mobility businesses.  Earlier in the month, they acquired Swiftkey, a London-based developer of mobile-focused keyboard software for an estimated $250 million. SwiftKey is known for its software keyboard for mobile devices that adapts to ensure more accurate typing. It currently supports over 300 million Android and iOS devices. The acquisition will help Microsoft improve its own machine learning and AI capabilities.

They also announced the acquisition of mobile software development specialist Xamarin at a price estimated to be between $400 million-$500 million. San Francisco-based Xamarin provides developers who use Microsoft products with access to tools to build apps for iOS and Android platforms. The move will help Microsoft continue to expand its reach across devices irrespective of the platforms that they operate upon.

Its stock is currently trading at $51.44 with a market capitalization of $404.34 billion. It touched a 52-week high of $56.85 in December last year. The stock has recovered significantly from the 52-week low of $39.72 it had crashed to in August last year.

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