One More Sign Microsoft Cloud Services Are On The Right Track

  • Microsoft's Office 365 has tripled its market share in 2015 and overtaken Google as the leading enterprise application.
  • Strong adoption of the cloud application by large enterprises  is what has mainly been driving this growth.
  • What does this mean for Microsoft's cloud growth and overall top line growth of the company?
one_more_sign_microsofts_cloud_services_are_on_right_track

Microsoft (NASDAQ:MSFT) shares have been paring back their losses on a spate of good news about the company from various quarters. The shares have been making good gains since MSFT corporate VP’s tweet that more than 75 million devices had already downloaded the new OS. Microsoft's stock closed at $43.48 on Friday, 11th September.

In an earlier article, I discussed how Microsoft’s cloud would get a considerable boost from strong Windows 10 adoption.

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Source: CNN Money

Office 365 : Most Popular App In The Enterprise

But Windows 10 is not the only Microsoft growth segment enjoying blistering growth. Access Security company, Bitglass, has now revealed that Microsoft’s Office 365 has grown its enterprise market share by more than 300% Y/Y this year, and in the process has overtaken Google Apps as the most popular app in the enterprise. Though investors are already aware of the fact that Microsoft’s cloud remains the company’s fastest-growing revenue segment, it has been difficult to discern where this growth has been coming from since Microsoft lumps together Office 365, Azure, and Dynamic CRM under its cloud sales, then reports cloud sales together with premium and consulting services under the ‘‘Commercial Other’’ segment. Moreover, it has not been clear how Office 365 stacks against other leading enterprise apps. But using the information provided by Bitglass, we can gain some useful insights into Microsoft’s cloud growth.

Some key highlights from the Bitglass report are:

  • Office 365 grew its enterprise app market share from 7.7% in 2014 to 25.2% this year, thus overtaking Google Apps as the most popular enterprise app. Google Apps grew their market share from 16.3% in 2014 to 22.8% currently.
  • Large organizations with more than 1,000 employees are mainly to thank for the strong growth in Office 365 and Google Apps. 30% of large organizations currently use Office 365, up from 5% in 2014, representing an incredible 500% Y/Y growth. Meanwhile, 15% of large organizations now use Google Apps up from 5% a year ago, which is good for 200% Y/Y growth.
  • EMEA and APAC regions still outpace North America in cloud adoption with 59% and 61% for EMEA and APAC vs. 48% for North America. There’s still plenty of room to run for Office 365.

Good times for Microsoft’s cloud

The latest Bitglass report provides perhaps the strongest evidence that Microsoft’s cloud transition is actually bearing fruit. Though Microsoft does not break out revenue for its various cloud segments, we can use available data from disparate sources to arrive at some estimates.

Synergy Research provided the following infographic that showed the respective growth rates and market shares for cloud leaders. According to the infographic, Amazon’s (NASDAQ: AMZN) cloud, AWS, had roughly 29% market share by end of Q4 2014 while Microsoft’s Azure (IaaS and PaaS) commanded about 11% cloud market share.

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Amazon broke out AWS sales for the first time during Q1 2015. According to the company, AWS realized revenue of $1.57 billion during the first quarter.

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Source: ZDNet

The infographic above was provided by ZD Net and suggests that AWS maintained a somewhat uniform 49% growth from Q2 2014-Q4 2014. This would work out to AWS revenue of $1.45 billion during Q4 2014. This in turn means that Azure had revenue of ~$660 million during Q4 2014.

The second revenue component of Microsoft’s cloud that we can readily work out is Dynamic CRM. According to Gartner, Microsoft had 6.8% CRM market share by the end of 2014. We can deduce revenue for Dynamic CRM during the quarter by using revenue of market leader Salesforce (NYSE:CRM). Salesforce recorded revenue of $1.38 billion during end-of-year quarter, which implies Dynamic CRM realized revenue of $580 million.

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Computer World estimates that Office 365 realized revenue of ~$175 million during Q4 2014

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Source: Computer World

Combining revenue from the elements of Microsoft’s cloud yields cloud revenue of $1,015 million during Q4 2014. Microsoft has managed to maintain cloud growth rate of approximately 100% during the current year. This means that the company’s cloud revenue is on course to reach $2.03 billion during the December quarter, or about $8.12 billion annual run rate. This excludes premium and consulting services which I estimate at ~20% of commercial cloud revenue.

Cloud Will Boost Microsoft To Double Digit Revenue Growth

This might, however, turn out to be quite a conservative estimate. Computer World has based its Office 365 estimates on the number of Office 365 subscribers added during each quarter, the only Office 365 growth metric that Microsoft reports each quarter. Given the strong Office 365 enterprise adoption, the segment could easily exceed an annual run rate of $1 billion by the end of the year, which would put Microsoft’s overall cloud revenue in the ballpark of $10 billion (excluding premium and consulting services). At this rate, Microsoft’s cloud growth could accelerate the company’s overall growth rate by 3%-4% by the end of 2016, which suggests Microsoft could return to double digit revenue growth somewhere in 2017.

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