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Channel Takeaway from Microsoft Earnings: Cloud, Cloud, Cloud

Microsoft reported earnings this week, the comparison with Apple earnings was unflattering, and Wall Street hammered MSFT.

As usual, the news release, 10Q filing with the U.S. Securities and Exchange Commission and earnings call transcript contained lots of tidbits that didn't make headlines but have implications for the Microsoft channel.

The combined messaging was notable in its near-exclusive focus on cloud and devices, and CEO Satya Nadella provided one of the clearest and most concise explanations of his strategy and attitude toward Windows that we've seen so far.

Cloud is still a relatively small part of the overall revenue picture, but getting larger fast, and Microsoft obviously intends to do everything in its power to keep that momentum going.

Overall Microsoft revenues for the quarter were $26.47 billion. Commercial cloud revenue grew by 114 percent year-over-year, representing the sixth consecutive quarter of triple-digit growth. Microsoft said commercial cloud revenue is at an annualized revenue run rate of $5.5 billion. It's an impressive amount of revenue, but if you divide that by four quarters, or maybe three to roughly account for accelerating growth, it's got a long way to go.

In a statement, COO Kevin Turner indicated that Microsoft will keep pushing partners toward the cloud (emphasis mine): "Our sales engagement worldwide continues to focus on helping customers and partners transition to the cloud and navigate the shifting product mix related to our services and solutions."

The earnings release called out Office 365, Azure and Dynamics CRM as the core of the cloud mix. The earnings transcript, however, revealed how seriously Microsoft takes the Enterprise Mobility Suite (EMS) as a major component of its cloud effort. Almost every mention of cloud by Nadella and other executives on the call included EMS.

One analyst asked Nadella what kinds of cloud and hybrid products SMBs are buying. "One of the products that's doing very, very well for us is the StoreSimple product, which is essentially a storage product that cloud tiers virtualization storage from on-premise to the cloud," Nadella said.

He added that the real movement in the SMB segment is toward Office 365. "One of the things in Office 365 is we are getting people to effectively use servers, which now happens to be in cloud, who never bought servers from us ever before because they didn't have Exchange, they didn't have Lync, they didn't have any of the core capabilities of Office 365."

The traditional Microsoft business was a mixed bag this quarter. A tough comparison to the Windows XP refresh cycle brought a 13 percent drop in Windows OEM Pro revenue, and commercial Office fell 1 percent both from the Windows XP issue and as businesses shifted to Office 365 subscriptions. Server products and services revenue, on the other hand, bounded up by 9 percent and SQL Server and System Center enjoyed double-digit growth.

Microsoft steered the focus to its other favorite new topic, devices.

Microsoft phone hardware did all right, or at least it seemed to until Apple's iPhone 6 results blew analysts' estimates out of the water a day later. Microsoft brought in phone hardware revenue of $2.3 billion and sold 10.5 million Lumia units.

Surface broke the $1 billion revenue mark for the first time in a quarter, with Surface Pro 3 and accessories driving 24 percent growth to $1.1 billion.

Fielding an analyst question, Nadella navigated the minefield of OEM mistrust on Surface. Asked to what extent Surface Pro cannibalizes full-featured Windows PC sales, Nadella replied, "I think it's definitely expanding the market opportunity. One of the things that I feel very good about is the risk we took to introduce the two-in-one category. And I feel now that we inspire even a lot of activity in our own OEM ecosystem, and we see many good designs coming because it's viewed as a category that drives growth."

With Microsoft reaching out to support Android, iOS and Mac across various product lines, it's sometimes unclear how Microsoft is going to make money. Although Nadella has answered the question many times over the last few months, his answer at the end of the Q&A Monday was one of his clearest yet.

"At the highest level our strategy here is to make sure that the Microsoft Services -- i.e., cloud services, be it Azure, Office 365, CRM Online or Enterprise Mobility Suite -- are covering all the devices out there in the marketplace, so that way we maximize the opportunity we have for each of these subscription and capacity-based services. So that's sort of the core rationale for why we are doing cross-platform," Nadella said. "So the best way to measure our progress is Office 365 subscription growth, Azure growth and EMS growth."

If that's how Nadella wants investors to measure Microsoft's progress, that's how the Microsoft field will be assessing partners' value, as well.

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Posted by Scott Bekker on January 29, 2015 at 9:10 AM


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