Originally published by Sramana Mitra on LinkedIn: Microsoft - The Dark Horse

The recent quarter results show how Microsoft is getting stronger in the cloud computing space. And it definitely has the potential to come out as a winner, and this has sent its stock to a record high.

Microsoft's Financials

Microsoft's first quarter revenues grew 0.5% over the year to $20.5 billion. Non GAAP revenue grew 3% to $22.3 billion, ahead of the market's forecast of $21.7 billion. Net income narrowed to $4.7 billion or $0.60 per share. Non GAAP EPS increased to $0.76, beating analyst estimates by $0.08.

By segment, revenues from the Productivity and Business Processes grew 6% to $6.7 billion, Intelligent Cloud segment grew 8% to $6.4 billion, and More Personal Computing segment fell 2% to $9.3.

Within the Intelligent Cloud segment, Azure showed a remarkable 116% growth driven by doubling of Azure compute usage.

Within the More Personal Computing segment, Gaming revenues fell 5% while Phone revenue plunged 72%. Search advertising revenue excluding traffic acquisition costs grew 9% over the year.

For the third quarter, the company expects revenue to be within the range of $21.05 billion to $21.25 billion. Analysts expect earnings of $0.68 per share on revenue of $21.71 billion.

Security Focus for Office 365 Paying Off

Microsoft is focusing on strengthening security for Office 365. During the quarter, it announced Office 365 threat intelligence which analyzes billions of signals across office Azure Windows and external data sources to give customers broad visibility into attack trends and proactively recommend security policy adjustments. Monthly active users of Office 365 commercial are now over 85 million, up more than 40%. Office 365 commercial seats were also up 40% and revenue was up 54%. Its customer list includes names like eBay and Fortune 100 companies like the energy leader Exelon.

Microsoft expects its $26.2 billion acquisition of LinkedIn to close in the second quarter. Microsoft plans to leverage the acquisition to transform productivity and business processes especially within the Office 365 segment. Microsoft believes that the integration of LinkedIn and Office 365 will help create new revenue opportunities for it in the form of subscriptions and advertising revenues. But, I think there is a bigger potential if Microsoft were to leverage LinkedIn's incredible network by making them a cloud services vendor, especially with an anchor position in CRM and related products.

Microsoft's Cloud Strategy Focuses on Hybrid Cloud

Microsoft's commercial cloud annualized revenue run rate now exceeds $13 billion, and it expects to achieve its goal of $20 million in fiscal year 2018. Its commercial cloud margin has increased to 49% from 42% in the previous quarter. More than 60% of the Fortune 500 companies now have at least three of its cloud offerings, up from 40% a year ago.

CEO Satya Nadella observed during the earnings call that once enterprise customers choose one of its cloud services, they continue to adopt more services because they want hybrid support, a trusted global hyper scale cloud provider, and higher level services to help them build their own digital capability inclusive of DevOps, productivity, new IOT and enterprise app development, advanced analytics and machine learning in AI capability. Microsoft is therefore more committed to a hybrid cloud approach in which companies use a mix of both cloud computing services and their own data centers.

In a recent post on the 5-Horses Race in Tech, I said that Microsoft is the dark horse among the tech giants. It currently dominates nothing while Google dominates Search and Mobile; Apple dominates mobile; Amazon dominates Commerce and Cloud; and Facebook dominates Social. But Microsoft's recent acquisitions and its potential to make some more acquisitions make it a potential winner.

Some prospects for making its Cloud game stronger are IT service management company ServiceNow (NYSE: NOW) trading at $13 billion, business intelligence and analytics company Tableau (NYSE: DATA) trading at a market cap of $3.6 billion, data analytics software solutions provider Splunk (NASDAQ: SPLK) trading at market cap of $7.9 billion, andSaaS-based enterprise application services provider Workday (NYSE: WDAY), which is trading at a market cap of $17.6 billion. All these are very much within the reach of Microsoft, which ended the recent quarter with $136.9 in cash and short-term investments.

Its stock is currently trading around its 52-week high of $60.05 with a market capitalization of $445.6 billion. It had crashed to a 52-week low of $48.04 in November last year.

Published on: Oct 26, 2016