- Enterprise user IT conference, Ignite, confirmed Microsoft's solid fundamentals.
- Separately, Microsoft and Bank of America Merrill Lynch announced a collaboration on innovative blockchain tech.
- I reiterate a Buy rating with a $80 bull case price target.
Microsoft (NASDAQ:MSFT) recently hosted the enterprise user IT conference, Ignite, for two days. Overall, the event was not a thesis changer, but it did confirm that fundamentals are solid. For about 18 months now the Office365 migration has been mainstream within the Microsoft customer base. Contract migrations (move from perpetual to subscription licensing) is happening first. I also heard of good success with implementation of email on E1 and some E3 contracts.
Sessions at Ignite around migration to Office365, new Office365 features, and other topics were well attended. I expect to continue to hear about the success of Office365. Although I don’t expect to see significant uplift to revenue from Office365 migrations, as most customers are being brought over at economics which are in-line with current pricing on traditional Office. The E5 SKU represents a potential driver of pricing uplift.
Interest in the on-premise Windows Server product was high, but mostly in tactical feature and function enhancements. I don’t expect a surge in licensing for Windows Server 2016 as it is usually end of life, not new releases which drive purchasing. I note that of the Azure-related sessions, the best attendance I saw was around sessions on Azure Stack, which is Microsoft’s private cloud offering slated for 2017 release. I note Azure Public Cloud session attendance was not that robust, with most customers trying to understand where they can use this offering without a significant shift to could.
Testing and development remains the most common use case. Where production application adoption is happening on Azure, I hear of much more traction for IaaS versus PaaS. As an example, I heard of SQL running on IaaS as a more popular deployment versus Azure SQL (the fully managed DBaaS). I continue to believe that adoption of platform-level services are important for public cloud players seeing adoption as a standard.
I also note that at Ignite, Adobe and Microsoft announced plans for a strategic partnership to help enterprise companies embrace digital transformation and deliver compelling, personalized experiences through every phase of their customer relationships. Together, the two companies will enable businesses to dramatically strengthen their brands through solutions from Microsoft Azure, Adobe Marketing Cloud and Microsoft Dynamics 365. Business leaders in every industry are focused on how to better engage their digital customers, wherever they are.
Together, Adobe and Microsoft are bringing the most advanced marketing capabilities on the most powerful and intelligent cloud to help companies digitally transform and engage customers in new ways. The two companies are collaborating to create standardized data models for their marketing and business applications —leveraging artificial intelligence, machine learning and advanced analytics — that customers can use to create new data-driven sales and marketing capabilities. Adobe and Microsoft intend to make the data models extensible to enterprise customers, as well as third-party developers and partners, in order to foster innovation and development.
Blockchain Partnership With Bank Of America
Separately, at the annual conference organized by SWIFT for the financial industry, Microsoft and Bank of America Merrill Lynch announced a collaboration on blockchain technology to fuel a transformation of trade finance transacting. As part of this collaboration, the two companies will build and test technology, create frameworks, and establish best practices for blockchain-powered exchanges between businesses and their customers and banks. Microsoft Treasury experts will serve as advisors and initial test clients, establishing the first Microsoft Azure-powered blockchain transaction between a major corporate treasury and a financial institution.
By working with Bank of America Merrill Lynch on cloud-based blockchain technology, Microsoft aims to increase efficiency and reduce risk in its own treasury operations. Businesses across the globe — including Microsoft — are undergoing digital transformation to grow, compete and be agile, and I see significant potential for blockchain to drive this transformation. Microsoft Azure Blockchain as a Service was first introduced in November 2015. The global scale, hybrid cloud capabilities, extensive compliance certification portfolio, and enterprise-proven security of Azure provide businesses with confidence and choice, especially in highly regulated industries such as financial services, healthcare and government. More than 80% of the world’s largest banks are Azure customers. Furthermore, more than 75% of the global systemically important financial institutions are using Azure, representing the highest bar for legal, compliance, security and acquisitions teams.
I continue to see a meaningful upside for Microsoft stock considering strong FCF. The bull case outlook calls for a price target of $80 per share. The recently announced large buyback layered onto the already attractive dividend yield support valuation. I reiterate a Buy rating on Microsoft Stock.