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Microsoft capitalises on collaborative tools

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Top technology companies have pioneered the transformational trends observed in the last three to four decades. The leap in technological advancement has been at the forefront in recent months as the pandemic forced businesses to shift from brick and mortar stores to the online space.

This came to the benefit of market leaders in the digital world as businesses became dependent upon the collaborative tools offered by these same companies. Microsoft has lived up to its promise to provide a digital framework which assists and transforms the operational structure for businesses.

Microsoft CEO Satya Nadella explained that the double-digit growth in its latest quarterly earnings results came from strong demand to the company’s commercial cloud. He said that the company has seen two years’ worth of digital transformation in two months. COVID-19 provided the much needed impetus for companies that lagged behind to adopt greater digital integration of their business operations. The changes experienced over the last two months will be a defining moment for the way people live and work. Microsoft benefitted from the in-home measures as countries sought to contain the threat posed by COVID-19.

Microsoft Teams saw a surge in demand as online collaboration became ever more important following the in-home restrictions introduced by governments. Innovation for Microsoft Teams remains crucial for it to remain relevant in this competitive space. A key attribute for Microsoft’s position in the market relates to security as competitors like Zoom saw security flaws that undermined their business proposition especially for commercially-sensitive meetings. During April, Microsoft saw more than 200 million meeting participants in a single day with 75 million daily active users. In our view, following COVID-19, Teams will be a growth catalyst for the company.

Windows Virtual Desktop usage saw a threefold increase as organisations used virtual desktops and apps on Azure (Cloud service) to ensure secure remote working. Significant gains were also registered for Windows 10 with a 30 per cent year on year growth in monthly active devices. Office commercial revenue grew by 13 per cent, whilst Office 365 commercial revenue grew 25 per cent driven by installed base growth and higher average revenue per users. For office consumers; revenue grew 15 per cent driven via growth in Office 2019 and Office 365 subscription revenue.

The commercial space is especially sensitive to the overall security architecture provided by software and cloud providers. Microsoft leads the way on Security features as the shift to remote working increases the need for integrated, end-to-end Zero trust security space. Data centre infrastructure is key to maintain market dominance. Microsoft has more data centre regions than other cloud providers. This makes Microsoft as the top hybrid cloud company as legacy businesses digitalise their operations.

Commercial cloud revenue grew 39 per cent year on year with a gross margin improvement up to 67 per cent. Azure has been also tailored for the 5G carrier network through the acquisition of Affirmed Networks. The sales mix shift to Azure also meant that the commercial cloud gross margin improved by four points to 67pp. This contributed to the overall improvement in the company gross margin to 69pp. Microsoft positions itself as a hybrid-cloud company with on-premise and public-cloud infrastructure.

In conclusion, the company’s push for cloud dominance remains a key pivot to enhance user experience despite the slew of competition that has tried over the years to dethrone Microsoft from its position. The company continues to reap the benefits from past strategic decisions that have been sculpted in a way that provide a dynamic response the way that only technology can.

Disclaimer: This article was issued by Jesmar Halliday, CFA, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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