Microsoft's enterprise offerings continue to carry the day

Microsoft's enterprise offerings continue to carry the day

Summary: Microsoft still is an enterprise-driven company, even if management wants to do its best to deny that fact. Just look at its fourth quarter fiscal 2014 earnings for proof.

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Microsoft execs continue to talk up dual consumer/enterprise usage patterns and bring your own device trends, but it's still unmistakably enterprise software and services that are fueling the company.

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Because of the way Microsoft reports its revenues, it's not a simple to divide the company down "Devices & Consumer" and "Commercial" lines as a way of comparing the company's consumer vs. enterprise products and services.

Microsoft reported on July 22 its Q4 FY14 earnings of $4.61 billion, or .55 a share.

One of the drivers in the quarter was Microsoft's Windows OEM revenues -- specifically Windows OEM Pro revenues attributable to business PCs. Those Windows OEM Pro revenues are reported under Devices & Consumer (D&C). The money-losing Phone Hardware (Nokia) business also is reported under D&C yet no doubt includes some phones purchased as "work" phones. It really is impossible to determine exactly how much of the $10.0 billion in revenues that Microsoft garnered from D&C came from "consumer" product and service sales.

That said, the entire Microsoft Commercial segment, which brought in $13.48 billion in revenues, is comprised of enterprise products and services. "Commercial cloud" -- a k a Office 365, Azure, Dynamics CRM, Exchange Online, SharePoint Online, Lync Online and Intune -- is now at an annualized run rate of more than $4.4 billion, according to the company. Commercial Cloud plus other enterprise services, like consulting, totalled $2.26 billion in revenues for the quarter. Server products, including Windows Server, SQL Server and System Center, brought in another $11.2 billion.

There were a few bright spots among the company's consumer-focused products in its latest quarterly report. Office 365 Home and Personal subscribers hit 5.6 million, up from 4.4 million in April. On the Surface front, Microsoft is transitioning to Surface Pro 3, which has better gross margins than its the preceeding Surface lines. But Microsoft did take a gross margin hit by deciding "to not ship a new form factor," meaning the Surface Mini, officials acknowledged during today's earnings call. 

Microsoft CEO Satya Nadella also told those on earnings call that Bing will be a profitable, standalone business by fiscal 2016. Based on previous executive comments, I'd assume that means Microsoft expects to cross the 20 to 25 percent search market share line by that time.

Again, Nadella reiterated Microsoft isn't giving up on trying to target consumers.

"Dual (consumer/enterprise) use is how we reinvent productivity," said Nadella. He pointed out that Microsoft has combined a number of its consumer and enterprise teams, such as its Skype and Lync; its OneDrive and OneDrive for Business; and its Outlook.com and Exchange teams.

"Our experiences are available on all devices," Nadella emphasized. "Mobility means more than just phones and tablets."

"We made progress with a number of our consumer businesses in the quarter," Chief Financial Officer Amy Hood told analysts and press on the earning call.

Nadella acknowledged that MSN, retail stores and hardware are not among Microsoft's core area of focus and likely places where Microsoft will be looking to insure "discplined execution" going forward. (Does that mean more layoffs or cutbacks? We didn't get further word.) And with Xbox, the focus clearly is back on gaming, rather than attempting to pitch that platform as a broader entertainment hub, he made clear, given gaming is one of the primary "digital life experiences" in which users are interested and Microsoft plans to address.

Microsoft may have switched CEOs in recent months, but there's one place the company's messaging hasn't changed -- in insisting Microsoft doesn't want to be an IBM and focus on the enterprise... even if that's what some on Wall Street and a number of its enterprise customers would prefer it to do.

Topics: Mobility, Cloud, Microsoft, Windows

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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35 comments
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  • Yay! MJ

    Thanks for actually saying what Microsoft has been pretty clear about for some time even if Wall Street and some tech journalists couldn't, or chose not to, hear the message. Microsoft is NOT going to focus only on the enterprise; is not going to become irrelevant like IBM (Apple's new partner) and will continue to produce consumer products. In the earnings call Nadella was clear, again, about the role of hardware and called out, again, Xbox and its role. And while some of your ZD Net colleagues are clearly in the "chose not to hear" category, I think you've been one who heard the company's message but you've never stated it quite as clearly as you did here.
    cantbeme
    • What?

      IBM is irrelevant? On what planet?
      Buster Friendly
      • IBM is a niche player

        True, their niche is the Fortune 500, but outside their niche, they are really not a factor any more.
        diane wilson
    • Is Microsoft becoming IBM?

      If Microsoft doesn't get its mobile aspirations off the ground eventually, it's going to look more and more like IBM--an iconic brand that everyone recognizes... but with little consumer presence or relevance (in the consumer space).

      If, however, they CAN get their mobile aspirations to take-off, then they'll be a consumer powerhouse again.
      cybersaurusrex
    • They are IBM bound

      Let's face it, Windows is not a "cool" brand. Never have been. Maybe back in 1995 it was. But tying their entire consumer mobile strategy around Windows (out of the fair Windows would become irrelevant in the fastest growing mobile sector) actually sped up their prospect of becoming an IBM. Consumers were not looking for Windows on their phones and tablets, never were. If their new strategy is more focusing on software and services across all platforms, then hello IBM.

      What they should have done was branch off their device strategy much the same way they did their XBox. Meaning it had nothing to do with "Windows", it stood on its own merits against iOS and Android. Imaging XBox being tied to Windows.
      dave95.
    • IBM Irrelevant?

      Where do you live? You may not like them but they're out there alright.
      Eleutherios
  • What?

    "even if management wants to do its best to deny that fact"

    What? Of course everyone wants more revenue but I've never heard anyone in management trying to deny Microsoft is mostly a B2B.
    Buster Friendly
  • Well, they would say that, wouldn't they?

    You wouldn't really expect Microsoft to admit that their consumer campaign was failing everywhere except XBox, or that their enterprise dominance was under attack from all directions.

    Sure, after 20 years of control, things won't change overnight. But they'll change.
    Heenan73
    • Of course not

      Of course not...because that wouldn't be true.
      Buster Friendly
      • failing in consumer markets? no

        Growing in consumer markets? Also no.

        MSFT has topped out with consumers except for Xbox and perhaps Office 365. For the latter I wonder how anyone outside MSFT could measure perpetual license Office sales to consumers. IOW, hard to tell whether increasing Office 365 Home & Personal subscriptions outpace possible decreases in consumer perpetual license sales.

        The % of its revenues and profits MSFT receives from enterprise customers is growing. At best Q2Q revenues and profits from consumers are growing at low single-digit rates.
        hrlngrv 
        • That is growing

          Due to the total dominance of their products in all markets, single digits per quarter is about what you'd expect. Mature, well established companies all do that.
          Buster Friendly
          • In all markets?

            Except they can't get solid traction in the fastest growing consumer mobile markets (smart phones and tablets). Even in the enterprise where you would think Microsoft would dominate due to their Windows fortification, iOS leads in smart phones and tablet adoption.
            dave95.
    • Translation -

      "NO, NO, NO, NO, NO, NO, NO!!! Microsoft was supposed to LOSE billions this quarter! I predicted that!

      What'll I do, what'll I do? I know - I spin it so it soundsquite dire!

      Yeah! That's the ticket!
      William.Farrel
      • Lose half a billion here, half a billion there...

        it eventually adds up.
        jessepollard
        • Losses reported?

          Hmm...didn't see that in this article.

          Facts
          - Overall revenues on the rise: Check
          - Share price on the rise: Check
          - Good diversification: Check
          - Good R&D funding/results: Check
          - Profits funding acquisitions / product development / new markets: Typical
          - Multi-year ramp up to profitability in newer ventures: Typical

          More wishful thinking from the ABM crowd.
          Nierteroth9
        • Losses?

          Why do you keep bringing Google's issues into an MS article?
          William.Farrel
  • What's wrong with entertainment?

    Xbox Entertainment Studios seemed so promising. MS kept the Xbox 360 revitalized over the last few years by expanding into entertainment better than anyone else. I don't understand the sudden reversal. The problem with Xbox sales had to do primarily with $100 price differential between the Xbox One and the PS4, and also the need for more games. Also the marketing wasn't targeted enough. It should have been marketed like a PC. I.e. it should have been sold as a budget game system to budget gamers; a deluxe game / entertainment system to gamers who can afford the Kinect configuration of the device; and also to families as an entertainment system. I don't understand how MS can just turn its back on the one area of the consumer market, it is way ahead of its competitors, and was a source of pride for its community. If XES isn't making money fast enough, simply put pressure on them to do so as quickly as possible. It would be better that the Xbox division saw itself like a cable company, and started charging comparable, maybe slightly lower subscription rates, than just flush such a crucial effort down the toilet.

    I really believe MS is doing the wrong thing. I think it would have been better for Nadella to yell at these guys to start making money or else ..., instead of just shuttering a key area of entertainment at Xbox, which distinguishes MS uniquely in the consumer market.
    P. Douglas
    • Here's The Problem

      Note, when I say problem, it's just that, a difficulty in the way of a goal. Not doom. Not bane. Not insurmountable.

      But not easy.

      By aiming a console at the gamer crowd, Microsoft has to put in quality hardware that over serves the watch-tv functionality. People who primarily want a living room tv-gizmo do a price comparison and leave the Xbox unbought. You can see Microsoft became aware of this because they unbundled the Kinect and dropped the price. Meanwhile, I'm told, Sony is winning this generation of console sales. In addition, there's a buzz of a possible low-end disruption if Apple puts A7/Metal/iOS games on the AppleTV. Apple won't win among the current gamers, but Apple could win the next five to fifty million new gamers. Xbox 360 won its generation and Xbox One so far has not lived up to its predecessor and leaves Microsoft in a vulnerable position as the expensive alternative for what it does.

      Xbox Studio had two missions. License game titles to Hollywood for features or television programs and generate exclusive content for the Xbox. But Krackel, Yahoo, Netflix, HBO, Showtime, other cable channels and websites, have exclusive content and nobody expects that a consumer is going to pay to subscribe to all of them. At some point exclusive content doesn't move the needle.

      So Microsoft saw the lay of the land and chose roll it up rather than be a late attendee to a dissipated party.

      The first round of licensing took place and the deals were not killed off by Nadella. (Why should they be, it's income without work.) There aren't that many buyers in Hollywood, and there aren't that many brave buyers. So it's wait and see if the licensees put out features that make money. Since it will take at least three years to know the answer, if it's positive, there's no point in paying people to wait by a quiet phone. Battleship sank. Lego built something. (Puns intended.) Lara Croft had a run. Mario Brothers was a disaster. There's a history. We may not even see the Halo movie. The Stretch Armstrong project (I kid you not) got killed before it left development.

      Now you may still argue that Xbox Studio was going to be wildly successful and that's okay, it's not an unreasonable opinion. However, shutting it down is an understandable decision. It's also not a decision that will come back to haunt any one.
      DannyO_0x98
      • Indicators point to original entertainment getting big on consumer platform

        The problem is that many people realize that a consumer computer platform, is at least partly uniquely defined by its own content platform? Apple has iTunes, and is moving in the direction towards unique subscription content with its acquisition of Beats. Amazon is moving in this direction with its Kindle and Fire TV platforms. Google is pushing Android TV, and will likely push it until it gets off the ground. What happens when MS flushes XES down the toilet, only to realize in 2 years or so, it just got rid of the very thing that could have put Windows platforms over the top in the consumer space, in many scenarios?

        If Nadella doesn't want to deal with the complexities of XES operations, maybe he should just spin it off while maintaining significant control, or at least influence in the company, and tell these guys to become profitable ASAP.

        XES is supposed to be doing interactive stuff way beyond everyone else. It is not just doing original content. In my opinion, this is another area (similar to the smartphone, and tablet) MS stands to lose, because of short sightedness. It can either embrace entertainment's inevitable rise in importance on consumer platforms, and take steps to make it profitable; or it can throw it through the windows, tossing away its current competitive advantage.
        P. Douglas
        • Part of the Team...

          They could still accomplish a lot of what they were going to do with Original studios by ensuring they have quality partnerships. Maybe its quite possible the Showtime deal for the Halo series was going to work out better than their own work? We will just have to keep waiting and enjoying the Xbox One for what it has... an escape for when we're not working! =p
          MediaCastleX