 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. As we reported last week, we believe that in the next decade, there will be changes in public policy that are going to restrict the way in which big internet companies are able to appropriate user data. Big Tech came under fire again this week with the CEOs of Facebook, Twitter and Google going toe to toe with several US senators. Microsoft CEO Satya Nadella however, was not one of those CEOs in the firing line. Microsoft doesn't heavily rely on ad revenues, rather the company's momentum is steadily building around Azure, which by my estimates is now roughly 19% of Microsoft's overall revenues. It's surpassed maybe nearly got to $7 billion for the first time on a quarterly basis. I'll come back to you on that. Hello everyone and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we'll respond to the many requests we've had to dig into the business of Microsoft a little bit deeper and provide a snapshot of how the company is faring in the ETR dataset. Let's take a quick look at Microsoft's financials. In the scope of Microsoft's business is actually mind boggling. The company has roughly $150 billion in revenue and it grew its top line 12% last quarter. It has more than $136 billion in cash on the balance sheet. Microsoft generates over $60 billion annually in operating cash flow in last quarter alone throughout more than 19 billion in operating cash. Its gross margins are expanding across virtually all of its major business lines. So let's look at those business sectors. Microsoft, it doesn't suffer from the nagging problems that we've talked about with a lot of older tech companies. Companies like IBM and Dell and Cisco and Oracle and SAP they struggle with growth sometimes because their growth businesses are not yet large enough to offset the declines in their traditional on-premises business segments. Now at the highest level, Microsoft breaks its business into three broad categories and they're all growing quite nicely. Let me add some color here. Let's start with the productivity and business process line of business. LinkedIn, which is growing at 16% is in this category as is Office. This business is shifting from one of on-prem licenses which are really headwinds right now for Microsoft to the cloud in the form of SaaS with Office 365 which is growing at a 20% clip within its commercial market base. Even the consumer side of O365 is growing in the double digits. Dynamics is Microsoft's ERP and CRM business. That falls into this slice of the pie and that's growing at 18%. And then the newer Dynamics 365, that's growing at 37%. So you can see Microsoft is easily able to show growth despite the transitions from its legacy business. Intelligent cloud is the next segment. It's kind of the kitchen sink category meaning there's stuff in there that includes a bit of cloud washing in my opinion but Microsoft is not nearly as egregious as IBM with the liberties that it takes around its cloud categorization. For Microsoft this is a $13 billion quarterly business and it's growing at 19% as we show in the pie chart. Azure is an increasingly large portion of this segment. Azure is the most direct comparison with AWS and I have said in the past quarter I'd say it's around 50% of the intelligent cloud. And it's approaching by my estimates around $7 billion a quarter. Azure grew at 47% annually this past quarter the same growth rate as last quarter. Ironically both AWS and Google cloud grew at the same year over year rate this quarter as they did last quarter. AWS is 29% in GCP in the high 50s by my estimates. AWS revenue was 11.6 billion this past quarter and I have GCP still well under 2 billion. We'll be updating our cloud numbers and digging deeper next week into this topic. So consider these estimates preliminary Azure and GCP which the respective companies don't break out for as Amazon as you know breaks out AWS explicitly. Now back to Microsoft's intelligent cloud business. It includes on-prem server software which is a managed decline business for Microsoft. They also include enterprise services in this category. So as you can see it's not a clean cloud number for comparison purposes. Now finally the third big slice of the pie is more personal computing. I know it's kind of a dorky name but nonetheless it's nearly a $12 billion business that's growing at 6% annually. The Windows OEM business is in here as is Windows 10 and some security offerings. Surface is also in here as well and it's growing in the mid 30s. Search revenue is in this category as well. It's declining per my earlier statements that it's not a main piece of Microsoft's business. And one of the most interesting areas of this sector is gaming. Microsoft's gaming business is growing at 21% and they just acquired Xenomax, Xenomax Media for seven and a half billion dollars. I'm leaving land on gaming for a minute. The gaming experts at theCUBE are really excited about Microsoft's Xbox content services which grew at about 30% this past quarter. Game pass is essentially Microsoft's Netflix or you can think of it as maybe like a Spotify model. You can get in for as low as $5 a month that I think you can pay as much as $15 a month and get access to a huge catalog of games that you can download. In November of last year Microsoft launched its XCloud beta service which allows you to download to a PC or a game box. Now eventually with 5G the box goes away. All you need is a screen and a controller with the joysticks, no download. In fact, this is how it works today for Android. Now interestingly, Apple is blocking Microsoft and some others like Google's Stadia saying that they don't allow streaming game apps like Microsoft's XCloud service because they don't follow the company's guidelines. What Apple's not telling you is that it's adjacent offering Apple Arcade is considered subpar by hardcore gamers. And while Apple allows the streaming of movies and music from any service on the iPhone it's decided not to allow streaming games. Now the last thing I want to stress about Microsoft is its leverage point around developers. Developers is a big one here. We all remember the sweaty Steve Ballmer running around the stage like a madman screaming developers, developers, developers. Well, despite his obsession with Windows he sure got that one right. The GitHub acquisition was Microsoft's way of buying more developer love. It does concentrate power with a tech giant but you know what, if it wasn't Microsoft that bought GitHub, it would have been Facebook or Amazon or Google, one of the other tech giants. Now, despite some angst in the developer community over this GitHub, it really is a linchpin from Microsoft to more tightly integrate GitHub with its pretty vast developer tool set. All right, let's look deeper into the Microsoft data and focus on the enterprise and bring in the ETR as we always do. We said last week that Google needed to look to the cloud and edge and get its head out of its ads. Well, Microsoft recovered from its Windows myopia after Satya Nadella took over in 2014 and by all accounts from the ETR survey data Microsoft is killing it across the board. Let me start by putting Microsoft in context with some of the most prominent companies that both compete with and sometimes partner with Microsoft. This is XY graph, it's one of our favorites. I show it all the time and it shows net score on the vertical axis, which is a measure of spending momentum from ETR and the horizontal axis shows what we call market share which is a measure of pervasiveness in the survey. Now in the upper right hand table, you can see the data for each of the companies. This is an ETR survey taken in October and it had more than 1400 completes. Several points stand out here. Microsoft is by far the most pervasive in the data set and yet its net score or spending velocity is right there with AWS, ServiceNow, Salesforce and Workday. Only snowflake, which I put in there for context because of its consistently strong net scores shows a meaningfully higher net score of course from a much smaller base. Now what makes this so impressive is it represents a pan Microsoft view across its entire portfolio. And you can see where companies like IBM and Oracle struggle from a momentum standpoint compared to Microsoft which is a much, much larger company. It's that problem that I referred to earlier regarding the smaller size of their respective growth businesses. You know also called Cisco and SAP which despite some earnings challenges lately are able to maintain net scores that well not in the green, they're not in the red either. Green essentially means your overall install base is expanding, red indicates contraction. Now let's look at the spending patterns for Microsoft customers. This chart shows the granularity of ETR's net score for Microsoft. The green represents increased spend and the red decreased spend. What's impressive is that Microsoft's red zone, I mean it's essentially negligible at 6% when you add two reds up, the pink and the bright red. Their customers, they're all spending more or the same and very few are leaving the platform. Now I made the case last week that Google should double or triple its efforts and focus on cloud and the edge. Microsoft has already made that transition in its business and that's the premise really of my discussion today. Specifically, Microsoft Azure is powering the company across all of its products and services. It's giving Microsoft tremendous operating leverage and steadily improving marginal economics. You can see that in the gross margin lines in this quarter across all of its businesses. And here's a graphic showing its position within cloud computing in terms of net score. Microsoft Azure Functions, which is the first bar on this chart and Azure Overall, which is the third set of bars shows momentum that's as strong as any cloud category, including AWS Lambda, which as we've talked about many times is killing it. Now five over from the left, count them over, one, two, three, four, five, you can see AWS overall. So that's a really important reference point. And while its levels are still elevated, Azure Overall, which again is number three from the left has a meaningfully more momentum with 65% net score versus 52% for AWS overall. Now, reasonable people can debate the quality of these respective clouds and you can argue over feature sets, who's got the most features, who's got the most regions, which regions are most reliable, who's got the most data centers and all that stuff, but it's really hard to argue against Microsoft's good enough strategy. It's working in the cloud and it has been working for the company for decades. Now another Microsoft strategy has been to be a latecomer to a category and then bundle multiple capabilities into one suite. We saw this at first really in the late 1980s with Office and it's continued in a number of areas. The latest example, Microsoft Teams. Teams combines features like meetings, phone, chat, collaboration, as well as business process workflows that leverage tools like SharePoint and PowerPoint. And it's a killer strategy and you can see the results in this chart. I mean, it's essentially competing with Zoom, it's competing with Slack and all the sort of productivity plays there in that space. This graphic compares net scores from the year ago October survey for reference, the July survey from this year and the most recent October survey, as I said, 1400 respondents. Look at the lead that Teams has relative to the competition. This is a story across Microsoft's portfolio. Look at Microsoft's products in the ETR taxonomy. Video conferencing with Teams, productivity apps, RPA, cloud, cloud functions, machine learning, artificial intelligence, containers, security, endpoint, analytics, mobile, even database. The only signs of softness are really seen in the company's legacy businesses like Skype or on-prem licenses business, which I said were a headwind for them. And while PCs and tablets are weaker, that's what you'd expect from this mature industry relative to some of these other categories. Now again, the premise here today is that by pivoting to the cloud and going all in, competing with infrastructure as a service, Microsoft has created a platform for innovation for its business. And its developer chops are really credible. So it's evolving its install base very successfully to Azure. It's got a very solid hybrid and multi-cloud strategy and story with Microsoft Arc, which eventually it can take to the edge. We think its edge strategy needs some work. But nonetheless, the company is really, really well positioned. Microsoft has a huge partner ecosystem. Heck, it even partners with Oracle in database. As well, it's using Azure to enter new markets, including vertical clouds like healthcare, which it talked about on its earnings call. I mean, there's really not much on which you can criticize Microsoft. You know, sure, they've had some high profile failures in the past, the Nokia acquisition, the Windows phone. You remember, Zoom, Mixer, Bing, is Bing a fail? I don't know, maybe not really. I guess the fail is, you know, what I was talking about last week with Antitrust, Microsoft was distracted by the DOJ. Maybe that caused it to mis-search, give it to Google. And in that sense, maybe it was a failure, but overall, pretty good track record for Microsoft. You know, maybe you can say Microsoft is somewhat of a copycat, you know, the graphical user interface that they copied from the Mac, but hey, even Steve Jobs stole that. Surface, okay, the cloud, but so what? Ideas, they're plentiful. Execution is the key, really. No matter how you slice it, the data doesn't lie. Microsoft's financial performance, it's pivot to the cloud and the success of its adjacent businesses make it one of the most remarkable rebirths in the history of technology industry. Now I didn't use the word turnaround because the company was never really in trouble. It just became irrelevant and kind of boring. Today, Microsoft is far from immaterial. Okay, that's it for this week. Remember, all these episodes are available as podcasts wherever you listen, so please subscribe. I publish weekly on wikibon.com and siliconangle.com and don't forget to check out etr.plus for all the survey data and analytics. I appreciate always the comments on my LinkedIn post or you can DM me at dvolante or email me at david.volante at siliconangle.com. This is Dave Vellante for the Cube Insights powered by ETR. Thanks for watching, everybody. Be well and we'll see you next time.