How Much Will Productivity & Business Processes Contribute To Microsoft’s Top Line Growth?

by Trefis Team
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Microsoft (NASDAQ:MSFT) reported strong growth in revenues in fiscal 2017 after a slowdown in revenue growth through FY 2016. The current fiscal year has been even more fruitful for the tech giant, with revenue gains across key segments. Microsoft has sustained revenue growth in its Productivity & Business Processes (+15%) as well as Intelligent Cloud (+10%) segments in the current fiscal year thus far. Additionally, the company’s More Personal Computing segment also reported a mid-single digit increase in revenues compared to low-single digit declines in previous years. Going forward, Microsoft seems to be on course to sustain revenue growth through the end of FY’19.

For FY’18 ended June, we expect Microsoft’s net revenues (excluding corporate expenses) to increase nearly 10% to $106 billion, which is further expected to increase 8% to over $114 billion through FY’19. We forecast the Productivity & Business Processes segment to add around $10.1 billion to net revenues in this period, which is roughly 58% of the total revenue growth. We have created an interactive dashboard for Microsoft’s Productivity & Business Processes Segment, where we have summarized our revenue growth expectations. If you disagree with our forecasts, you can change the key drivers including individual segment revenue for Microsoft to gauge how changes will impact the segment contribution.

Factors Driving Segment Growth

Microsoft’s Productivity & Business Processes segment includes revenues from products such as Microsoft Office, LinkedIn and enterprise resource planning and customer relationship management suite Microsoft Dynamics. This segment has been the fastest growing revenue stream for Microsoft for two main reasons. First is the LinkedIn acquisition, which Microsoft completed in the middle of FY’17, and second is the product refresh for both Microsoft Office and Microsoft Dynamics. Both Office 365 and Dynamics 365 have gained traction in the market and have reported solid revenue increases in recent quarters.

We expect LinkedIn revenues to be around $5.7 billion for FY’19, up from just under $5 billion in FY’18. The surge in LinkedIn’s revenues from $2.3 billion in FY’17 is because the company realized LinkedIn revenues mainly in the second half of the fiscal year after completing the acquisition. We forecast strong adoption of Office 365 and growth in the total number of subscribers to drive growth in the Office Commercial and Office Consumer segments. We forecast the growth spree to continue with a 10-11% increase in revenues through FY’19 to $26 billion and $4.3 billion, respectively. Similarly, the strong adoption of Dynamics 365 should help the company sustain 10-12% revenue growth through FY’19 to $4.3 billion for the segment. If you disagree with our forecasts, you can modify these figures on our  interactive revenue contributor dashboard for Microsoft and come up with your own estimates. You can further use these figures in our valuation dashboard for Microsoft to calculate your fair price estimate for the company’s stock based on new estimates.

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