Where Is Microsoft's Phenomenal Growth Momentum Coming From?

The company's growth strategy is manifold, starting with self-disruption

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Feb 16, 2017
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Microsoft Corp. (MSFT, Financial) turned things around nicely during the second quarter of the current fiscal, posting 1.2% revenue growth compared to the prior period. The move from a period of declining revenue to flat growth to slight growth was due to the momentum the company enjoys in its Productivity and Intelligent Cloud segments. Now that the growth offshoots are visible, let us take a closer look at how long the current runway in the software-as-a-service (Saas) and infrastructure-as-a-service (IaaS) markets can keep pushing Microsoft forward.

The SaaS play

Microsoft counted $7.4 billion in revenue from the Productivity and Business Processes segment during the second quarter, which houses revenue streams from Office-based products, Microsoft’s business management software, Dynamics and the newly added LinkedIn.

Microsoft has kept its SaaS-focused products within this segment, and there are two areas within the segment that the company has kept its eye on - office collaboration software, led by Office 365, and enterprise management software products, led by Dynamics 365.

According to a recent survey done by North Bridge and Wikibon, seven out of 10 companies already use some form of SaaS application. The on-demand, pay-as-you-go model had a direct impact on the expense column for companies, apart from several other tangible benefits.

The age of licensed software that has to be installed on every system is slowly disappearing, which is irreversible. Case in point is the growth of Salesforce (CRM, Financial) at the expense of Oracle’s (ORCL, Financial) and SAP’s (SAP, Financial) market shares. SaaS is the present as well as future of the software industry, especially enterprise-related software.

On the collaboration software side, Microsoft has already established a dominant position in the market. Microsoft’s Office 365 commercial revenue has been growing in excess of 50% for the past several quarters, with second-quarter growth coming in at 47%. This kind of growth does indicate a good dose of cannibalization from Office annual license users who have started shifting to the the newer, cloud-delivered Office 365 products.

This is certainly not bad news for the company because Office products have simply found a new leg to run on for the next few decades without having to fight for space.

Thankfully, Microsoft did not allow a Salesforce-type company to come from behind and take away a good chunk of its market by focusing on SaaS delivery while its rivals were content with the age-old licensing model.

According to IDC, the SaaS industry is expected to grow at a steady rate over the next several years, and Microsoft is poised to enjoy that growth. Apart from collaboration software, the company has upped its intensity on its enterprise management software segments like CRM and ERP through its Dynamics 365. Although it is far too early to comment on this segment’s growth, it is clear that Microsoft is keen on reserving its spot in this multibillion-dollar market.

From a vendor perspective, Microsoft possibly has the broadest product portfolio, running from IaaS to SaaS. Companies prefer a single vendor option simply because it reduces unnecessary integration and compliance headaches. It is a long-term advantage that Microsoft has been building into, which will help move its revenue needle over the next several years.

According to  Allied Market Research, the Global ERP Software Market is expected to gain $41.69 billion by 2020, registering a compound annual growth rate of 7.2% between 2014 and 2020.

In addition, Strategyr says the global market for Customer Relationship Management Software is projected to reach $48.4 billion by 2020. While the U.S. represents the largest regional market, the Asia-Pacific market is expected to grow the fastest at a CAGR of 13.6%.Â

Any way you look at it, Microsoft has positioned itself for growth - whether that is disrupting its own model or moving fast to take the lead in a new segment. As such, Microsoft has plenty of opportunities to keep its growth momentum intact.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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