Strategic takeaways from Microsoft′s Fiscal Q1 2017 earnings call

I always take a couple of hours to read and analyze the quarterly Microsoft earnings transcripts. I do that for a number of reasons. First Kabel′s business is still largely dependent on Microsoft technologies although we are on a long term plan to become less dependent on Microsoft. Therefore, I need to really deeply understand Microsoft′s long term strategy and short term execution focus. Second, as a key Microsoft partner my customers expect me to have a balanced point of view on what Microsoft is doing and how successful they are at doing that. Third, I need to understand Microsoft′s place in the overall technology world to be able to steer the organization and my people in the right direction in order not to become obsolete. Fourth, I need to be on the edge of innovation with Microsoft as Microsoft is a key partner for me getting into new customers with the latest technologies.

I try to look at the following things: How Satya articulates certain things and what he emphasizes. Numbers, to go deeper on the numbers and look at longer term trends and analysts, I look at what the analysts are asking in the Q&A sessions and how Satya and Amy respond to them. If you are really interested you can find my excerpted and highlighted transcript here (5600 words, don′t say I did not warn you..)

Overall takeaways

Artificial Intelligence is everywhere. It is THE latest thing at Microsoft. Microsoft′s view of AI is a broad approach to bring intelligence to all of Microsoft products and platforms.

Increased focused on Security as a capability. MS has one of the major platforms out there which they are already using to make Microsoft itself and Windows secure. They will now use this enormous cloud and AI capability for their customers and aim to have more intelligence then other vendors in this space because of the sheer size of Microsoft′s platform and reach.

Dynamics365. Microsoft is trying to take apart the ERP and CRM world and is basically trying to build a new category based on transforming how people work across finance, sales, marketing and customer service. So end to end business processes across the org, infused with AI, integrated with productivity tools and being able to not only analyze but take action as well.

Microsoft is aiming for cross selling customers to use more than one Microsoft cloud services as that leads to exponential increases in adoption and usage on Azure. Azure revenue grew 121% YoY.

Continued support of open source with open sourcing Power Shell, SQl server on Linux, Azure service fabric on Linux, support of Caffe, TensorFlow and Torch

All of this should lead to increase usage of Azure which in turn will lead to MS reaching a tipping point of scale when the overall margin % of Microsoft′s cloud business should increase and not decrease similar to what is happening at AWS (who would have thought that Amazon providing IaaS services mainly would be able to generate so much profit?)

Windows is being more and more focused on enterprise customers and gaming and specific value added uses cases like Holographic platforms and is moving to being a platform to generate revenue for other Microsoft services, moving from a transactional approach focused on revenue to an approach focused on share and usage (link)

Microsoft′s plan in my opinion is to become the Enterprise Cloud Services company, vs Google and Facebook which are basically consumer cloud services companies (although both are moving more in to the enterprise space) vs Apple which is mainly a devices company. (For more on the changes in Microsoft′s strategy see this link)

Why do I say this? Because the most repeated statement from Satya is always Commercial cloud annualized revenue run rate now exceeds X (X in this case $13 billion), and we remain on track to achieve our goal of $20 billion in fiscal year 18. That is also why Microsoft bought LinkedIn and you can see it in how they present their income statement. As you can see in the table below services have grown from 25% to 36% of revenue

So you can stop reading here. If you are still not tired please see the next section on financial analysis or if you really have time to spare read through the excerpted highlights of the earnings transcript. If you want to read other stuff that I publsh or find interesting please follow me on Twitter at @michielvvliet

Financial analysis

The market seems to be impressed with the results as the stock has gone up like 5% and as of closing Oct 24 the stock is at 61$. However, from my analysis the increase in profit comes mostly from stopping the bleeding in the phone business and from stock buy backs. GM% and operating income in the Productivity & Business Processes (P&BP) and Intelligent Cloud (IC) have gone down.

Overall good revenue growth results (5% in constant currency which I will be using for the rest of this article) for a total of $22,3B with Productivity and Business Processes (PBP) growing 8%, Intelligent Cloud (IC) growing 10% and More Personal Computing (MPC) declining 1%

As you can see in the next table the PBP growth of 5% in absolute terms means an absolute growth of $496M, the IC growth means adding $581M and the 1% decline in PC means -/- $93M.

When you look at overall grow margins you one can see that gross margin % declines in Productivity and Business Processes and Intelligent Cloud. There is also an Operating Income decline in Productivity and Business Processes (-2% in constant currency) and Intelligent Cloud (-11%). The spike in profit comes almost completely from the more personal computing segment because of stopping the bleeding in phones.