Microsoft's cloud business and the subscriptions tied to it are poised to accelerate in the quarters ahead, according to Cowen analyst Gregg Moskowitz.
In a research note, Moskowitz upgraded Microsoft shares to an outperform from a market perform. The primary rationale was Office revenue and subscriptions to Office 365. He said:
Largely overlooked in the F3Q report, we believe, is a critical turning point in Microsoft's transition of Office to a subscription. Further, this turning point simultaneously occurred in both the consumer and commercial Office businesses. Specifically, as shown on the following page, total consumer and commercial Office revenue - perpetual and subscription combined - each grew on a y/y reported basis (and more, of course, in constant currency terms), reversing a series of declines that occurred once the transition was well underway.
Moskowitz added that Microsoft appears to have made the transition to subscriptions well. As for the bottom line, Moskowitz said that Microsoft's capital spending for its cloud infrastructure is likely to moderate and that reality means that subscription revenue will fall to the bottom line.
The other moving part behind Microsoft's upgrade was Moskowitz's take on Azure. In a cloud survey 314 public cloud customers, Azure was the clear No. 2 behind Amazon Web Services. He said:
Among those respondents who are looking to add a new Public Cloud service, 59% are considering Azure, which was higher than any other offering. Further, when restricting the data to enterprise customers, Azure held a commanding 10 point advantage over the next closest vendor (53% vs. 43% for IBM SoftLayer), making it the clear preference within this category of customer.
According to Moskowitz, Azure is being used for tier 1 and 2 workloads for business applications.