As Microsoft (MSFT, Financial) finishes the introduction of Windows 10, it appears the development of the operating system will transform Microsoft into a more three-dimensional company. In the past, the firm was primarily thought of as a licensing business focused on personal computing and productivity. With the firm's growing cloud business and Windows 10's capabilities within the cloud platform, the firm is now going to be more broadly expanding on cloud. With this expansion, the firm is shifting from a two-dimensional company focused on personal computing and productivity, to a three-dimensional company focused on personal computing, productivity and the cloud. In a recent discussion at the Citi Global Technology Conference, Microsoft's Chief Marketing Officer Chris Capossela discussed the firm's shift to a more three-dimensional focus.
Personal Computing
Focusing on the user experience within personal computing has always been a key focus for Microsoft. While this is often measured by licensing business revenue from a financial perspective, from a marketing perspective personal computing focuses on the experience users have and expect from using a Microsoft program or device. Recently, the personal computing experience has become more human-based, incorporating more convenient ways to operate individual electronic devices such as touchscreens, voice recognition and facial recognition. Intel is even working with Microsoft to eliminate the need for login passwords by using just facial recognition.
"When we say personal computing, we're not talking about the personal computer. We're actually talking about the human being," says Microsoft's Chief Marketing Officer.
The capabilities Windows 10 can provide are going to continue to evolve for Microsoft, and personal computing is going to become even more focused on human-based computing. This will enhance the user experience and drive revenue in licensing for Microsoft. Additionally, Microsoft's gaming and phone sales are also going to benefit from the enhanced user experience that Windows 10 brings to these devices.
Microsoft's first quarter 2016 earnings results are going to show just how much Windows 10 is contributing to the company in licensing. In 2015, Microsoft's licensing business was slightly stalled as consumers and businesses awaited the new Windows 10 product. Licensing revenue is going to continue to be a key focus for the firm as Windows 10 sales continue; however, it will probably be less of a focus as the firm shifts to deploying Windows 10 within its other business segments. Many speculators see Windows 10 as Microsoft's last operating system upgrade for a while as the firm plans to focus more on how the innovative operating system can be used to develop its other business segments.
Productivity
Productivity has always been a second key focus for Microsoft. Consumers and businesses choose Word, Excel, PowerPoint, Skype, OneDrive, OneNote, Outlook, Bing and Dynamics because of the productivity levels that they can provide. Microsoft will continue to focus on productivity and this aspect of the business will also be enhanced by overlaps from innovation in personal computing.
"Everything that we do in the realm of Office and Skype and OneNote and Word and Excel and Outlook and all of those things fits squarely in the notion of productivity," says Microsoft's Chief Marketing Officer.
Windows 10 will significantly help sales of these productivity products as well, adding value through the human-based user experience enhancements. However, in monetary terms the business is not likely to take big strides. Rather it will become even more core to the user experience that both retail and commercial customers expect from Microsoft, thus leading and helping Microsoft to capture greater market share in cloud.
Cloud
Prior to the Windows 10 launch, Microsoft was primarily focused on marketing its efficiency and productivity software products for the cloud. However, Windows 10 now provides a perfect segway for Microsoft's enhanced focus on cloud infrastructure because of the enhanced capabilities it can bring to Microsoft's Azure infrastructure platform. Microsoft has been steadily growing its business in Azure while also continuing to maintain its Windows Server business. The new Windows 10 operating system enhances its offering within both its Windows Server and Azure infrastructure platforms. With Windows 10, Microsoft is much more competitive in the enterprise business. The new operating system brings enhanced capabilities to Microsoft's enterprise business allowing it to offer public, private and hybrid cloud solutions with its familiar Windows 10 operating system and suite of software products.
Windows 10 makes Microsoft's cloud capabilities much more diverse and versatile greatly adding to the marketability of its cloud offering overall.
"I am spending far more heavily on the cloud this year than I spent last year," says Capossela.
Additionally, this is also where real revenue growth can be realized since enterprise cloud infrastructure is a higher revenue generator than individual licensing products. Conveniently for Microsoft it is now well positioned for growth in the cloud with its new Windows 10 operating system. Meanwhile, it still has room to grow its personal computing and productivity product offerings.
Investors can already see the strides Microsoft has made in cloud, evidenced by its Commercial Other growth in 2015. In Commercial Other, the business segment includes Enterprise Services, Office 365 Commercial, Azure, Dynamics and CRM. In 2015, Commercial Other grew 44% to $10.8 billion for the year and industry analysts expect this rate of growth to continue through 2018. As Windows 10 becomes more integrated within the cloud solution over the next few quarters, investors are going to see Microsoft's cloud offerings become even more of a focus with Microsoft rivaling competitors such as IBM (IBM, Financial) for cloud infrastructure business.
Conclusion
At a current price of $43.48, Microsoft has marginal upside potential in the current market. Investors watching Microsoft are going to see incremental increases in revenue in the first quarter of 2016 from the launch of Windows 10. However, investors should follow closely how the integration of Windows 10 goes within its cloud infrastructure and software offerings. The effects from the Windows 10 enhancements overall will likely be seen more towards the second half of 2016.
Currently analysts are predicting flat revenue growth for the first quarter at $21.1 billion with earnings per share growth of 9% from the comparable quarter. In a best case scenario the stock has an approximate discounted cash flow value of $51.65. Analysts also currently have a high target price of $60. Given a successful cloud integration of Windows 10 it appears Microsoft's cloud offerings are poised to grow significantly over the next two years. This growth would add substantial earnings value for Microsoft and would also result in movement towards these stock price targets.
