Whenever I read about an article pertaining to Microsoft (NASDAQ:MSFT), it's usually about the consumer side of the business. And while talking about the Xbox One, Windows 8 and 9, Office, Skype, M&A activity and Nokia sure is a lot more relatable, the fact is, Microsoft generates the bulk of its revenue and earnings from enterprise related services and software.
Therefore, I decided to do much deeper research on the topic, and I have to admit, Microsoft has a durable advantage on this side of the business, and there are many high-growth categories that Microsoft is participating and flourishing in. That's good news for shareholders, but it's also reassuring for prospective investors.
The commercial segment of Microsoft is flourishing
Source: Microsoft
In the most recent quarter, Microsoft reported that the commercial segment grew sales by 7%, and while that revenue growth rate doesn't sound that impressive, more than half of the revenue generated by Microsoft is generated by the commercial segment. The growth in the commercial segment is driven by software licensing, cloud, infrastructure services, software deployment in the cloud, analytics, etc.
According to Eron Kelly (General Manager, SQL Server Marketing of Microsoft):
So, SQL Server is now a $6 billion business, and from a growth perspective, it's been growing in double digits for the last several years. And our Q4 numbers were 19% year-over-year growth. I think we're in a market that's growing at a pretty good clip. Most analysts will put it at 9%, 10%. But as you said, they're more flat. So the market's growing and we're growing faster than market, so we're taking share there. And then this -- we're just starting to see the shift over. Our price point is lower than Oracle. We're about a third of their price in many configurations. It's a simple math around that.
SQL Server is growing into becoming a much larger percentage of the licensing sales mix on the commercial end. However, it's still relatively small when compared to the commercial Windows 7 and 8, Windows Server licensing business. However, Microsoft does package many of its products together in a way in which other companies offering infrastructure may not be able to. Furthermore Microsoft mentions that it's 66% cheaper than Oracle (ORCL) in many configurations, putting Microsoft in a position to gain share at the expense of other players in the industry, i.e. Hewlett Packard (HPQ), and IBM (IBM).
However beyond being price competitive, Microsoft has a fairly compelling solution in hybrid cloud, cloud and dedicated infrastructure.
Source: Microsoft
Microsoft SQL Server was the least vulnerable database for five years straight. The superior security, paired with the ability to ramp-up Microsoft SQL makes it one of the more desirable platforms. A company can deploy hybrid, put everything onto the cloud, or install Microsoft SQL onto their own servers on the premises.
According to Gartner:
Microsoft's brand, existing customer relationships, history of running global-class consumer Internet properties, deep investments in engineering, and aggressive road map have enabled it rapidly to attain the status of strategic cloud IaaS provider. It is second in terms of cloud IaaS market share - albeit a distant second - but far ahead of its smaller competitors. Microsoft has pledged to maintain AWS-comparable pricing for the general public, and Microsoft customers who sign a contract can receive their enterprise discount on the service, making it highly cost-competitive. Microsoft is also extending special pricing to Microsoft Developer Network (MSDN) subscribers.
Furthermore, Microsoft thinks that it can get a much larger percentage of the organization to use analytics software. The way it works is to get people to use excel to do analytics, and use database software or tools to cull the data. I.e. use Excel programs to do math, and pull data from a NOSQL database, or whatever database of your choice.
According to Eron Kelly (General Manager, SQL Server Marketing of Microsoft):
The way we think about it is there's about a billion Excel clients in the world, not all of them do BI of course. And right now most people would estimate that within an organization you have 7% to 8% of employees will do BI functions. And so a lot of that's in Excel, some of it with some of these other products. Our vision is to go beyond that. Our vision is to get 20%, 30%, 40% of an organization using data to make decisions. And the way we think about it is doing that in a familiar tool is going to be a big part of it, but then also bringing together the right information on the back-end and delivering it to that user in a familiar way will further that growth.
The office suite has been a cash cow for quite a while, but further usage of Microsoft Excel in organizations may drive topline performance in the commercial segment. However, the broader trend in big data and ways to put practical data to use seems to apply at higher levels of an organization. I'm not exactly sure if ground level employees will ever do that much math using Microsoft Excel. Admittedly, Microsoft Excel has powerful tools like the simplex solver add-on for complex linear programming (linear programming is used to calculate optimization when you have certain constraints). So Microsoft Excel is great for crunching numbers, but I don't know how much of an organization will actually do any analysis.
However, Microsoft is well positioned in big data because it does have one of the most intuitive software programs that can be multi purposed for business intelligence and analytics.
Conclusion
Microsoft is the second most dominant player in IaaS (infrastructure as a service), however what's nice about Microsoft is that it has a broad spectrum of services and licenses that it can bundle. Because Microsoft has product synergies that it can offer to many organizations, plus it can sell services in narrow and broad verticals, I have high conviction that Microsoft's commercial business will grow at a reasonable rate in the foreseeable future. The market for cloud-based solutions will continue to grow, and with an impending explosion of data, I think the commercial segment will surprise to the upside.
Microsoft has been a steady growth investment for quite a while now and it also trades at a reasonable earnings multiple. I think Microsoft is a great buy, even at these levels.
