Reviewing Microsoft’s Performance In 2017

by Trefis Team
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Microsoft’s (NASDAQ:MSFT) stock price has increased by close to 40% year to date, while the return for the NASDAQ composite index was close to 30%. During the year, Microsoft’s Cloud business continued to boost its revenues as its Commercial Cloud annualized revenue run rate (ARR) exceeded $20 billion. Additionally, the company continued to supplement its Surface line of devices with new launches during the year. For the first three quarters of 2017, Microsoft’s revenues have grown by 13.5% to $70 billion. In this note, we explore Microsoft’s business performance in 2017.

See our complete analysis of Microsoft here

Office 365 Continues To Bolster Productivity Revenues

Over the course of the last nine months, the productivity and business process revenues for the company have grown by 22% to $24.6 billion, primarily due to growth in commercial Office cloud services and Dynamics cloud software. During the year, the company rolled out a comprehensive integrated productivity solution, which bundles Windows 10, Office 365, Enterprise security and mobility for organizations. As a result, its Office 365 revenues from both the consumer and commercial segments have improved significantly. While Office 365 commercial seats grew by 40% from 85 million last year to 120 million active users this year, the Office 365 consumer subscriber base grew by 17% to 28 million in the last nine months. Commercial and consumer Office revenues grew by around 8% and 11%, respectively.

According to the company’s management, Office 365 is catering to a $500 billion market. Considering the adoption of Office among enterprise and consumer clients alike, we expect the revenue run rate from Office 365 will increase further. We also believe that Office 365 can further leverage Microsoft’s ecosystem to sell other products by bundling more value-added services. As a result, we currently project segment revenue to increase to $34.5 billion by the end of our forecast period.

Dynamics Software Revenues Improving

The Microsoft Dynamics family includes products across enterprise resource planning (ERP) and customer relationship management (CRM). Microsoft’s Dynamics cloud services continue to see healthy adoption as its clients continue to transition to the cloud. While Microsoft does not to disclose its Dynamics revenue allocation between CRM and ERP, the Dynamics software revenue grew by 8.3% in first three quarters of 2017. We believe that as the adoption of Dynamics 365 grows, it should boost overall Dynamics revenue.

Azure Platform Powers Intelligent Cloud Revenues

During the last nine months, the Intelligent Cloud segment (Azure, Server products, and enterprise services) delivered 10% y-o-y growth in revenues to $21 billion. While Server products and Cloud services revenue grew in mid-single digits, driven by growth in Microsoft SQL Server, adoption of the cloud-based Azure platform resulted in triple-digit growth in revenues. As a result of these products, the company’s Cloud revenue run rate exceeded $20 billion by the end of fiscal Q1.

The company is ramping its Azure platform to boost its cloud revenues through IaaS and PaaS solutions. While Azure was launched later than Amazon’s AWS, it is gradually catching up and its market share has inched up to 10% recently. The company continues to add capabilities such as adding AI to its Azure hybrid cloud offering. As a result, Azure is fast emerging as an attractive platform for Microsoft’s clients for Infrastructure as a Service (IaaS) and Platform as a Service (PaaS). Based on these trends, we expect this division to become an important driver for Microsoft’s value in the coming years.

Windows OS, Hardware Launches Bolster Personal Computing Division

Over the course of this year, Microsoft has ramped down the production of smartphones as the division was not able to make much headway in the smartphone market. As a result, revenues from the phone business have declined by over 90% in the last nine months. However, Microsoft’s Personal Computing division has done well in the last nine months, largely due to the adoption of Windows OS and the launch of its Surface line of devices. The revenues have declined marginally by 2% to $27.05 billion.

Despite a slowdown in PC sales, Windows OS revenues have reported growth in previous quarters due to the widespread adoption of Windows 10, the installed base for which has swelled 600 million. We expect that Windows OS sales for both Windows OEM non-Pro and Pro will continue to outperform PC sales in the coming years.

We currently have a $67 price estimate for Microsoft, which is 20% below the current market price.

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