Microsoft (NASDAQ:MSFT) and Hewlett-Packard Enterprise (NYSE:HPE) recently unveiled Cloud Productivity and Mobility Solution Offerings (CPM), which will integrate HPE's consulting services with Microsoft services within Windows 10. HPE will integrate its consulting services into Microsoft's SaaS (software as a service) platforms, including Office 365, Skype for Business, Dynamics CRM, and Enterprise Mobility Suite. Microsoft believes these integrations will "help organizations share information faster, increase engagement and collaboration, and optimize work."
Microsoft previously partnered with HPE across the healthcare, financial, and automotive industries. For example, HPE's Automotive Aftersales CX Management Solution, built on Dynamics CRM, extracts information from connected cars so automakers can deliver personalized offers (like infotainment, concierge services, app downloads, and fuel services) to customers. Microsoft plans to expand its partnership with HPE into the retail, energy, and transportation industries as well.
What this partnership means for Microsoft
Strengthening the bonds between Windows 10 and the cloud is the crux of Microsoft CEO Satya Nadella's "mobile first, cloud first" strategy. Instead of relying heavily on Windows license revenues, Nadella wants Microsoft to generate more sustainable revenues from services tethered to its Windows 10 ecosystem. Nadella believes this strategy will help Microsoft generate $20 billion in cloud revenues by fiscal 2018, more than double its annual run rate of $8.2 billion last quarter.
The majority of Microsoft's cloud revenues come from SaaS platforms like Office 365 and Dynamics CRM. Last quarter, Microsoft's Office 365 revenue rose 70% annually on a constant currency basis. 3 million new subscribers signed up for the productivity suite, boosting its total subscriber base to 18.2 million. Dynamics revenue rose 12%, and its online enterprise base more than tripled.
Deeper integration with HPE's consulting services will ensure that both companies stay on the same page as the Windows 10 enterprise ecosystem expands. The partnership can also help Microsoft's Enterprise Mobility Suite (EMS) fend off rivals like BlackBerry's (NYSE:BB) BlackBerry Enterprise Service (BES). Both services help businesses monitor employees' mobile devices, which is becoming increasingly important due to the relaxation of BYOD (bring your own device) restrictions.
What this partnership means for HPE
After splitting with HP Inc., HPE mainly sells enterprise computer systems, software, and business support services. Prior to the split, HP shuttered its public cloud platform, Helion, which competes against Microsoft's Azure, to focus HPE's future on "hybrid cloud" installations instead.
Hybrid cloud installations merge private and public clouds for large companies that aren't ready to move all their data to the public cloud. Gartner estimates that about half of all large enterprises will use hybrid cloud installations by 2017. HPE is also dramatically reducing the size of its ES (Enterprise Services) division to cut costs. The company plans to lay off 25,000 to 30,000 employees to achieve $2 billion in gross annualized cost reductions and a sustainable operating margin between 7% to 9%.
Despite these strategic shifts, HPE estimates that its total cloud revenue (from its enterprise group, and software/enterprise service segments) will still rise 20% annually to $3 billion in fiscal 2015. Looking ahead, HPE's slimmed down ES division will benefit from partnering with Microsoft, since it can piggyback off Windows 10 Enterprise and Microsoft's other SaaS platforms. This means that it can spend less on marketing to achieve its cost reduction targets.
While deepening its partnership with Microsoft is a positive development, investors should note that HPE still faces plenty of headwinds. During its final quarter under HP, HP's enterprise services revenue fell 11% annually as demand for IT services, apps, and business services all fell.
A new growth market for mature tech giants
Microsoft, HPE, and many other "mature" tech giants are expanding their cloud and mobility offerings to diversify away from aging core businesses. For Microsoft, the cloud and mobility markets represent new ways to keep enterprise users locked into its ecosystem. For HPE, CPM represents a way to stay closely tied to Microsoft's dominance of the enterprise PC market.