Software

Microsoft's earnings confirm the Intelligent Cloud strategy--but the fight is not over

Microsoft's earnings beat expectations, validating the mobile-first, cloud-first strategy. But now, fierce competition is coming from all angles.

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Image: iStock/g-stockstudio

When Satya Nadella took over the reins at Microsoft in 2014, he changed the company's business strategy to focus on what he dubbed a mobile-first, cloud-first world. Moving away from reactionary competition with other companies over the best operating system or the best productivity suite, he saw a profitable opportunity in cloud-based services. It was a bold pivot for such a large and established industry titan, but it has paid off handsomely.

In July 2017, Microsoft announced its fourth-quarter earnings for the fiscal year ending in June. In a nutshell, the company beat Wall Street expectations for both revenue and net profits by a mile, making the stock price rise and shareholders extremely happy. But in this hyper-competitive market, a shareholder "thank you" can quickly become "So what's next?" Competition is fierce and Microsoft can't afford to rest on its laurels.

SEE: Microsoft beats Q4 estimates with strong cloud growth (ZDNet)

Earnings

Microsoft reported revenue of $24.7 billion versus the $24.3 billion that was expected by Wall Street analysts. Those numbers translated into earnings per share of $0.98 versus the $0.71 that was expected. More important, the results reflect increased earnings from both cloud services and business productivity products.

Revenue from Microsoft's cloud computing businesses were reported to be $7.43 billion, which is an 11% increase over the same period in 2016. These results reflect the continued growth and overall success of the company's Intelligent Cloud services, which comprise Microsoft Azure and Windows Server.

The other area of revenue growth came from the Productivity and Business Processes category, which is essentially the standalone Microsoft Office products and their comparable Office 365 online services. This category was up 21% compared to the same period in 2016, reaching $8.4 billion in revenue. According to the report, there are now 27 million Office 365 subscribers.

It is important to note that Microsoft also reported a significant windfall in earnings from the write-off of its smartphone business. This is just more evidence that the company has all but abandoned efforts to make Windows smartphones a viable competitor to Google Android and Apple iOS—which is a bit of a shame, since more competition is exactly what consumers need in the smartphone market right now.

SEE: Microsoft Azure Cosmos DB: The smart person's guide (TechRepublic)

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Image: Microsoft News

Bottom line

The revenue and earnings numbers reported by Microsoft for the fourth quarter of fiscal year 2017 speak for themselves. The company's emphasis on cloud-based services is paying off and the merits of CEO Nadella's mobile-first, cloud-first strategy has been confirmed.

However, Microsoft is not the only company basing its business strategy on cloud computing. Amazon and Google in particular have services and products competing directly with those offered by Microsoft. Other companies, like Oracle, SAP, and Salesforce, also provide competition with specialized services designed to address a specific niche. And all of that doesn't even touch on the competition Microsoft will see for services and computational power when IoT reaches its full potential.

Therefore, while Microsoft deserves a nod for its current financial accomplishments, it can't afford to stop now. The market for cloud-based services is just starting. Competition is going to be intense and there are bound to be a few corporate casualties along the way. Microsoft has laid a strong foundation in cloud computing services, but the market won't reach maturity for years yet, so there is still much to be done.

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About Mark Kaelin

Mark W. Kaelin has been writing and editing stories about the IT industry, gadgets, finance, accounting, and tech-life for more than 25 years. Most recently, he has been a regular contributor to BreakingModern.com, aNewDomain.net, and TechRepublic.

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