Microsoft and IBM Earnings: The Battle of New vs. Legacy Businesses

IBM and Microsoft reported earnings last week and the reports clearly highlighted the current stage in the transformation of each companies. Arguably the two most important software companies of the last 40 years, Microsoft and IBM used to exhibit similar patterns in the earnings reports a few years ago. However, those days are long gone.

Microsoft and IBM are companies in the middle of aggressive transformations to adapt their business models to a world dominated by technology revolutions in areas such as mobile, cloud, data science, augmented reality etc. The earnings reports clearly illustrates the effectiveness of the transformation process in each company contrasting the grow in new strategic areas with the decline of traditional business.

Microsoft: Growth in the Right Areas

Microsoft’s earnings reports can be summarized in a single sentence: “Growth in the right areas”. The Redmond giant reported remarkable growth in areas such as cloud, devices that compensate the decline in traditional areas such as Windows and Office.

Cloud revenues were the positive highlight of Microsoft’s earnings dominated by the company posting a $2.1B loss from the Nokia acquisition.  Commercial cloud ARR grew 88% (or 96% in constant currency) to $8 billion. This continues strong sequential performance from two quarters ago ($5.5 billion) from last quarter ($6.3 billion) to this quarter. These numbers prove that the investments in the unique combination of Office365, Azure and CRM Online is producing strong results.

Devices and search were other areas of improvement. Surface revenues grew 117% which contrasts with the poor IPad sales numbers disclosed by Apple. Bing also exhibited strong growth with a market share that now reaches 22%.

In summary, Microsoft earnings shows strong performance in strategic areas such as cloud, devices with a strong presence in the enterprise. These news have to be encouraging in anticipation to the Windows 10 launch next quarter.

IBM: Too Much Legacy

IBM earnings report resulted in the 13 consecutive quarter of revenue declines. Even though the company repeated the message about its current cloud transformation process, it couldn’t avoid missing revenue estimates. Revenue was down 13% affected by the strong dollar and net income was down 15%.

Similar to Microsoft, IBM reported strong growth in strategic areas such as cloud and analytics. Growth in those two areas came in at more than 20% while software revenues overall were down 10% for the quarter at $5.8 billion and down 3% adjusted for foreign currencies, while middleware was down 7% and essentially flat when adjusted for currency.

In summary, IBM is also exhibiting strong growth in strategic initiatives but the not enough to offset the decline of traditional businesses such as hardware or professional services. From that perspective, it seems that IBM has a long road ahead in its transformation processes.

 

The List of Companies that can Acquire Salesforce.com is Smaller than you Think

Yesterday, Bloomberg broke the news that Salesforce.com have hired advisers to evaluate a potential takeover offer. The news spread incredibly rapidly and the CRM stock had to be halted due to volatility. When trading resumed, the stock was up 10% trading at an all time high.

As media outlets started speculating about the potential Salesforce.com acquirers, there was a consensus that only IBM, Google, Oracle, Microsoft and SAP have the sufficient market cap and cash to afford what could be considered the second highest technology acquisition of all times. However, as we start analyzing each potential acquirer, we quickly realize that the list of smaller than we think.

Let’s take a look:

Microsoft

• Pros: Microsoft seems to have over $95B in cash that could be deployed into M&A activity. The Redmon company has established a strong relationship with Salesforce.com on the CRM side and an acquisition can help immediately help their Office365 and business suites. Other components of the Salesforce.com platform like the social analytics and marketing platform can also be a great fit for Microsoft’s portfolio.
• Cons: While the Salesforce.com CRM suite seems to be a great fit for Microsoft, we can’t say the same about the the rest of the platform. Specifically, there is a strong competition between the Salesforce1/Heroku and Azure platforms which will be hard to reconcile. Additionally, keep in mind that Azure and Salesforce1 have been built in different technology stacks. Finally, a takeover offer doesn’t seem to be the style of the Satya Nadella and the current Microsoft board.

IBM

• Pros: Acquiring Salesforce.com will represent a string accelerator toi IBM’s SaaS business. Also the Salesforce1 platform fits nicely with IBM’s aggressive investments in the mobile and IOT spaces.
• Cons: With only about $9B in cash, IBM doesn’t seem to have enough liquidity to embark in such an aggressive acquisition. Also, similar to Microsoft, IBM is heavily invested in their cloud platform which presents some serious overlap with the Salesforce1/Heroku stacks.

Google

• Pros:com can be a very strong and necessary addition to Google’s enterprise business. Additionally, Salesforce1/Heroku can help to expand Google Cloud’s capability set which is still trailing competitors like AWS or Azure.
• Cons: Acquiring Salesforce.com will be a strong shift from Google’s current trajectory making it’s enterprise business one of the most relevant business units of the entire company. Also, a hostile takeover doesn’t seem align with Google’s culture.

SAP

• Pros: SAP has embarked in an ambitious effort to modernize its existing business suite. Acquiring Salesforce.com could be the accelerator needed to effectively execute on those plans. The marketing and analytics suite seemed to be a perfect fit for SAP. Also, the Salesforce1/Heroku platforms can really help SAP’s struggling cloud business.
• Cons: SAP seems to only have about $5B on hard which will require the German giant to take on some debt to pursue the acquisition.

Oracle

• Pros: Oracle seems to be a great candidate to acquire Salesforce.com. The CRM and business platform can really simplify and help Oracle’s chaotic SaaS business. Salesforce1/Heroku can be a great fit for Oracle’s Cloud stack which is lagging competitors like IBM, AWS and Azure. Also, don’t forget that Salesforce.com leverages a lot of Oracle technology which will make the technical integration slightly less challenging. Finally the existing relationship between Benioff and Larry Ellison should not be ignored.
• Cons: Oracle has reported to have around $14B in cash and another $30B in securities. In that sense, Oracle will have to assume some heavy debt to pursue the acquisition.

I hope the previous analysis makes sense. In addition to the previous list, Amazon, Alibaba and EMC could also be considered as potential acquirer although not at the same level of the ones included previous list. Is that enough for speculation? What do you think?

 

Microsoft and Amazon Earning Reports: Two Perspectives of the Cloud

Yesterday, both Amazon and Microsoft beat Wall Street expectations during their quarterly earnings reports. While reading many of the analysts’ reports during the evening, I couldn’t avoid noticing some key differences in the way their cloud services businesses is evolving. If is true that both companies reported very strong numbers in their cloud services business, it’s pretty clear that their current challenges and go to market strategies are quite different.

AWS: It’s Growing but not as Fast as It Was

As expected, Amazon’s AWS business continues to grow strong. For the fourth quarter, the North America Sales “Other” category — which includes AWS — hit $1.17 billion, up 52 percent from $769 million for the year-ago quarter. For the full year, AWS (or other) hit $3.72 billion, up 58 percent from $2.35 billion.

An interesting thing to notice is that, while AWS remains the clear market leader in the cloud infrastructure category, the AWS business is not growing as fast as it was a few years ago. The following chart might help to illustrate that point:

Some factors that might influence that could be the constant cost reductions in some of the services and the increasing competition from Google, Microsoft, Rackspace and others.

Microsoft: Diversity of Cloud Services Offerings

Microsoft also delivered killer numbers as part of it’s earning reports yesterday beating Wall Street expectations.

 

One thing to notice in MSFT report is that it’s long term investment in diverse cloud services offerings is starting to pay off. Office365 delivered a 100% growth and is now on a $2.5B. Similarly, Windows Azure revenue increased by 150%. Finally, Bing US market share is up to 18.6%

While these numbers are just based on one quarterly report, it might be an indication of two different strategies moving forward. While AWS needs to figure out new engines of growth to continue its market dominance, Microsoft will continue diversifying its cloud offering to accelerate growth.

Interesting times…

 

Oracle Partners with Microsoft, Salesforce.com and NetSuite but Still Looks Ugly.

After reporting disappointing numbers last week, Oracle’s Larry Ellison pre-announced a series of important and exciting partnerships with different cloud providers and hinted the names of Microsoft, Salesforce.com and NetSuite. As promised, this week Oracle announced three different partnerships with the aforementioned cloud providers. While this is, undoubtedly, a very interesting move on the Oracle side, I find hard to believe is will make a difference in their current position in the cloud market. Despite these partnerships, Oracle still looks very boring in the cloud!

The Microsoft Deal

The essence of these partnership, Oracle will certify and support Oracle software — including Java, Oracle Database and Oracle WebLogic Server — on Windows Server Hyper-V and in Windows Azure. Microsoft will also offer Java, Oracle Database and Oracle WebLogic Server to Windows Azure customers, and Oracle will make Oracle Linux available to Windows Azure customers.

My thoughts?

From a Windows Azure perspective I find hard to believe this deal will make any difference on WebLogic or Windows Azure situation. While Windows Azure has supported Java for a long time, the uptake hasn’t been great within the enterprise customer community. Windows Azure has been more appealing to traditional Microsoft shops while developers building Weblogic applications are not necessarily crazy about the cloud.

More importantly, this deal doesn’t help Weblogic to stop the migration of developers to competitive platforms

The Salesforce.com Deal

As part of this partnership, Salesforce.com plans to standardize on the Oracle Linux operating system, Exadata engineered systems, the Oracle Database, and Java Middleware Platform. Oracle plans to integrate salesforce.com with Oracle’s Fusion HCM and Financial Cloud, and provide the core technology to power Salesforce.com’s applications and platform. Salesforce.com will also implement Oracle’s Fusion HCM and Financial cloud applications throughout the company.

My thoughts?

Very important deal for Oracle! However, this feels like Salesforce.com helping out Oracle more than anything else. In terms of the impact, it’s very hard to tell. Salesforce.com already runs on Oracle software and it’s difficult to imagine impactful the integration between the two SaaS platforms will be. Most enterprises require high level of customizations in order to implement these integrations.

The NetSuite Deal

Under the partnership, announced Wednesday, NetSuite will integrate its enterprise resource planning (ERP) software, which companies uses to manage various parts of their day-to-day business, with Oracle’s human resources (HCM) apps.

My thoughts?

NetSuite customer base is mostly composed for premium-medium size business. I am not really certain how popular HCM would be within that community that are not the typical Oracle buyer.

 

While all three deals represent a major change from Oracle’s traditional “take no prisoners” approach, it’s really hard to see any of these strategic alliances moving the needle for Oracle’s position in the cloud space. Regardless, it’s very good to see these level of collaboration between traditional rivals. Time will tell….

 

Microsoft-Yammer Deal is the Florence of Enterprise Software

Florence and Siena are the two Italian cities that had the most impact in the Italian renaissance. Even though the movement itself was originated in Tuscany, Florence is often associated with the expansion of the  renaissance movement throughout that Italian peninsula. Is we can, for a minute, trace a parallel between the rebirth of  enterprise software and the Italian renaissance then Microsoft’s Yammer acquisition can become the Florence of enterprise software.

During the last few days we’ve heard strong rumors that Microsoft will be acquiring enterprise social media pioneer Yammer for a price between $1B-1.6B. As a matter of fact, if the rumor holds true, the deal is likely to be announced in the next few hours. Yammer provide enterprise social networks capabilities to thousands of organizations across the globe and has a very strong presence within Fortune 500 companies. After a few financing rounds, Yammer’s valuation is reported around $500M but the value is far from directly correlating to revenue numbers which is reported to be around $20M.

Regardless of your opinion related to the terms of the transaction, there is no doubt that, to the day, Yammer’s acquisition represents the most important moment in the history of this new generation of enterprise software. While this new movement has already experienced outstanding successes such as Jive’s IPO or the acquisitions of Rightnow, Success Factors and Taleo for multi-billion dollar valuations, Yammer’s acquisition is set to have a more profound impact in the enterprise software industry.

Why is that?

Yammer’s influence in the new enterprise software movement goes way beyond its technology contributions and expands onto the commercialization, economics and adoption models of enterprise software technology. If you think about it,  Jive’s IPO had very little influence in the new enterprise software models and SAP’s and Oracle’s acquisitions of Taleo, Rightnow and Success Factors were strongly validated by revenue models and traditional customer acquisition processes.

Yammer, on the other hand, has established a strong enterprise customer base by challenging a large number of the traditional enterprise software concepts. Microsoft’s Yammer acquisition strongly validates that the economics and dynamics of enterprise software are changing. With this deal, Microsoft is telling the world that the old school of enterprise software might benefit from a few lessons from the new boys:

• Market share matters as much as revenue: As in the consumer market, enterprise software valuations can be correlated to market share rather than actual revenue. While Yammer’s revenue numbers might not be impressive, their number of customers and the dependency those customers have on Yammer’s technology is a great asset for Microsoft.
• Fremium works: Yammer was one of the pioneers of the fermium pricing model for enterprise software. Microsoft’s acquisition validates that these new type of pricing models can be very effective within enterprise customers.
• Sexy and simple interfaces win: Yammer is not a super feature rich product and its main value proposition is a very simple one: improving the communication within the enterprise. However, Yammer accomplishes this goal by providing a super sexy, incredibly intuitive and astonishing simple interface. Compared to most enterprise software products, Yammer’s interface might look ridiculous but, as always, we should remember that in this industry simple and open tends to win.
• Partnership matters: If you have been following the market, Microsoft acquisition of Yammer should not come exactly as a surprise. Since last year, Yammer and Microsoft have partnered to expand SharePoint’s social networking capabilities with Yammer. This acquisition is a testimony that long term partnerships can evolve into successful outcomes for both parties.
• Mobile-First Matters: Mobile devices are one of the main channels by which people use Yammer. By acquiring Yammer, Microsoft is acknowledging that mobile-first consumers are also relevant in the enterprise.

You can probably tell I am super excited about Microsoft’s Yammer acquisition. I believe Microsoft will get an all-star team head by David Sacks and a rock solid product and Yammer directly benefits from Microsoft’s dominant presence in the enterprise software world.

What do you think? Is Microsoft-Yammer deal as important as I think it is? Is $1.2B too much? 😉