These Trends Indicate That Microsoft Is Moving in the Right Direction

Microsoft's third-quarter report shows that the company is doing it right.

Jun 26, 2014 at 3:00PM

When Microsoft (NASDAQ:MSFT) reported its third-quarter results in April, some key trends crucial to its long-term growth were revealed. The software giant is now making rapid strides in the cloud, expecting a bump in PC sales, and giving tough competition to Sony with its Xbox One. Moreover, Microsoft's progress in enterprise solutions is an important development, as the company is facing competition from the likes of Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

Mobile and cloud focus
Microsoft's mobile-first and cloud-first world is an excellent growth opportunity across all of its customer segments. In the last quarter, the company saw strong momentum in cloud services. The commercial cloud business more than doubled, with Office 365 and Azure performing robustly. Since the Windows platform is quite popular among business customers, substantial growth was seen in Windows volume licensing revenue.

The company will continue investing in its cloud capabilities, including Office 365 and Azure, and in the fast-growing SaaS and cloud platform. It is focused on delivering cloud services across all device platforms, and as a result, it is investing and innovating in several areas ranging from form-factor to software experiences to price.

Office on a roll
Microsoft's efforts have already yielded some results, as the company added approximately 1 million new users for its Office 365 Home service in the last quarter, and now it has over 4.4 million subscribers. It has enhanced its value proposition with new features, premium services, and cross-platform functionality.

It is important for Microsoft to continue bolstering its Office platform because Google is trying to grab a share of this market with Google Apps, which cost much less than Office 365. The basic Google Apps for Business package costs $50 per user per year, while the Premium package costs $120 per user, per year. Comparatively, Office 365 Enterprise E3, which is the most comprehensive version of Office 365, costs $240 per user per year.

Microsoft is trying to deliver a more comprehensive package, which is necessary for the company to stay ahead of the curve because Google has the potential to be a big threat in this segment. To solidify its position, Microsoft recently introduced the Office software for Apple's iPad. It also decided to give away Windows to manufacturers of small-screen mobile devices. Moves such as these indicate the company's focus on mobile and Internet-centric computing, and stealing a march over rivals. 

Search gains and more
Microsoft is also providing stiffer competition to Google in search. The company saw an improvement in its search business, with Microsoft's U.S. search share growing to 18.6% and search revenue increasing by 38%. So, Microsoft made solid progress with Bing and grew its revenue per share significantly, while Google's share increased at a much slower rate.

The software giant is innovating and expanding its cloud business through enhanced scale and engineering efforts to drive efficiency. Additionally, Microsoft is seeing a strong preference by businesses for Windows. As a result, revenue from Windows Pro increased 19% in the previous quarter, driven by growth in business PCs, higher attach rates in developed markets, continued strength in the enterprise market, and an increased mix of Pro in small and medium-sized businesses.

Also, more customers are now purchasing subscriptions, and multi-year agreements were better than Microsoft's expectations last quarter. The company witnessed double-digit growth in solutions such as SQL, System Center, Windows Server Premium, and Lync, which shows that Microsoft's value proposition is resonating with customers.

Microsoft is also concentrating on hardware, software, data center optimization, and supply chain efficiencies to maximize the benefits of its cloud efforts. As a result, the company expects improvements in its gross margin.

The bottom line
Microsoft is making solid progress in different sectors. The company is pulling the strings in the right areas, such as the cloud and consumer applications, to mitigate declining PC sales. If Microsoft continues to execute well under its new CEO, there's no reason why it cannot continue to get better.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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