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More Proof Microsoft Corporation's Cloud Strategy Is Spot On

By Tim Brugger - Sep 1, 2015 at 1:20PM

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The software king’s cloud-first strategy that goes well beyond hosting is where the real opportunity lies.

Much was made of Amazon.com's (AMZN -0.03%) latest quarterly earnings release, particularly as it relates to its Amazon Web Services (AWS), its cloud services division. And why not? The unit's sales jumped over 81% compared to 2014's Q2 to $1.82 billion, reigniting talk of Amazon.com being the runaway leader in all things cloud-related. The thing is, the numbers don't add up, in large part because AWS is big on cloud hosting. Amazon.com does offer other cloud-related services, but hosting is where its bread is buttered, and the ongoing price wars with other mainstays of the market has quickly made that piece of the cloud a commodity.

So, where do the real revenue opportunities lie regarding the cloud? Software-as-a-Service, or SaaS. The estimates vary depending on the company conducting the research, but the common theme is that the market for SaaS delivered via the cloud is already big, and it's projected to continue growing at a phenomenal rate, which is right up Microsoft's (MSFT 3.20%) alley.

Show me the money
According to research company Gartner, the market for enterprise-based software, led by SaaS, will increase by 7.5% this year to about $150 billion, and jump to over $200 billion in just four years. As a research director at Gartner put it, "The majority of spending is going toward modernizing, functionally expanding or substituting long-standing business and office applications with cloud-based software-as-a-service."

By the end of this year, Gartner predicts that 15% of businesses will conduct their day-to-day operations utilizing cloud-based office applications. In just five years, the number of companies utilizing cloud applications is expected to jump to about 60%. Clearly, there's a world of opportunity for SaaS cloud providers, which is exactly why Microsoft is ideally suited to reap the long-term rewards of delivering software via the cloud.

On a roll
The big news when Microsoft announced its fiscal 2015 Q4 earnings on July 21 was the nearly $8.3 billion write-off of its Nokia devices and services acquisition. Though not quite on par with the charge-off news, Microsoft also broke its string of seven straight quarters of triple-digit cloud revenue growth. Apparently, growing CEO Satya Nadella's "cloud-first" strategic pillar a "mere" 88% compared to last year -- 96% after removing the impact of currency exchange rates -- disappointed some Microsoft investors.

But a closer look at Microsoft's cloud results tells an intriguing story, particularly for investors with a bit of patience to give the market time to recognize it's no longer reliant on PC sales. The driving forces behind yet another strong cloud revenue quarter -- though not quite triple-digit growth -- as per Microsoft, were "Office 365, Azure and Dynamics CRM Online."

Azure is Microsoft's cloud platform, and it certainly does generate some revenue, a la Amazon.com's AWS division. But Azure goes well beyond hosting; it's the gateway to driving sales of Microsoft's SaaS solutions, including the aforementioned Office 365 and its customer relationship management (CRM) solution, Dynamics.

Though challenges remain in terms of adopting cloud-based CRM solutions globally -- primarily security-related concerns in emerging markets -- Gartner suggests that with the continued build-out of data centers across the globe, a full 20% of businesses in emerging regions will run their CRM systems via the cloud. Cloud-delivered CRM solutions in North America are already the norm.

This is good timing for Microsoft, in that its Dynamics CRM user base more than doubled last quarter, driving a 6% jump in revenue. Sales of cloud-based Dynamics are quickly becoming a legitimate source of revenue, and if Gartner's predictions come to pass, Microsoft could be sitting on a CRM gold mine.

Microsoft has its SaaS solutions to thank for its more than $8 billion annual run rate in cloud revenue, which is already an impressive result and dwarfs virtually every other player in the field. The even better news is that its emphasis on SaaS means that as the adoption of cloud-based solutions intensifies, Microsoft's stellar cloud results will continue to blow away its competitors.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$260.65 (3.20%) $8.09
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,151.14 (-0.03%) $0.68
Nokia Corporation Stock Quote
Nokia Corporation
NOK
$4.93 (2.07%) $0.10
Gartner, Inc. Stock Quote
Gartner, Inc.
IT
$250.20 (0.06%) $0.16

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