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Where Is Microsoft’s Phenomenal Growth Momentum Coming From?

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Microsoft Corp. (NASDAQ:MSFT) turned things around nicely during the second quarter of the current fiscal, posting 1.2% revenue growth compared to the prior period. The move from a period of declining revenue to flat growth to slight growth was due to the momentum the company enjoys in its Productivity and Intelligent Cloud segments. Now that the growth offshoots are visible, let us take a closer look at how long the current runway in the software-as-a-service (Saas) and infrastructure-as-a-service (IaaS) markets can keep pushing Microsoft forward.

The SaaS play

Microsoft counted $7.4 billion in revenue from the Productivity and Business Processes segment during the second quarter, which houses revenue streams from Office-based products, Microsoft’s business management software, Dynamics and the newly added LinkedIn

Microsoft has kept its SaaS-focused products within this segment, and there are two areas within the segment that the company has kept its eye on – office collaboration software, led by Office 365, and enterprise management software products, led by Dynamics 365.

According to a recent survey done by North Bridge and Wikibon, seven out of 10 companies already use some form of SaaS application. The on-demand, pay-as-you-go model had a direct impact on the expense column for companies, apart from several other tangible benefits.

The age of licensed software that has to be installed on every system is slowly disappearing, which is irreversible. Case in point is the growth of Salesforce (NYSE:CRM) at the expense of Oracle’s (NYSE:ORCL) and SAP’s (NYSE:SAP) market shares. SaaS is the present as well as future of the software industry, especially enterprise-related software.

On the collaboration software side, Microsoft has already established a dominant position in the market. Microsoft’s Office 365 commercial revenue has been growing in excess of 50% for the past several quarters, with second-quarter growth coming in at 47%. This kind of growth does indicate a good dose of cannibalization from Office annual license users who have started shifting to the the newer, cloud-delivered Office 365 products.

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