Lync, Azure, Office 365 And The Shifting Center Of Microsoft's Gravity

You might have missed it, but Lync, Microsoft's enterprise-focused communications suite brought its parent company $1 billion in revenue during its 2013 fiscal year. That a milestone of that sort could all but slip through the news coverage of Microsoft's earnings report is almost interesting.

The reason for the mild coverage of Lync and its performance is in fact a non-puzzle: One billion dollars in revenue stacked next to Microsoft total fiscal 2013 top line of $77.8 billion isn't much, and enterprise-facing products from incumbent firms aren't sexy, thus often getting lost in the press mix.

However, the Lync number, when placed next to two other figures helps to draw a picture of Microsoft that details a company in transition. As Windows slips in the face of a sliding personal computing market, hurting OEM revenues for the company, new business products at Microsoft will command increasing internal primacy as its business adapts to current and future market conditions.

Or, more simply, the core fiber of Microsoft is changing.

Microsoft estimated that the larger PC market contracted by 9% during its fiscal year, stating that declines in its revenue relating to sales to OEM partners was due to "the impact on revenue of the decline in the x86 PC market." That's correct, Microsoft.

A few numbers: Azure, Microsoft's cloud computing product, recorded $1 billion in revenue over the past 12 months, it was reported in April; Office 365 is currently generating revenue at a run rate of $1.5 billion per year at the end of Microsoft's fiscal fourth quarter, up 50% from the number quoted at the end of the company's fiscal third quarter; Lync grew 30% in the fiscal fourth quarter, and brought in $1 billion in revenue for the fiscal year.

These are numbers that Microsoft is proud of, not because in terms of relative scale they are tectonically impressive – the Windows division's fiscal fourth quarter revenue alone totaled $4.4 billion – but more that the represent the fact that it has business units in the pipe that can replace other incomes that are aging; Microsoft can, therefore, at least in theory, continue revenue growth even as its core Windows operations atrophies during the opening chapters of the post-PC era.

Office 365's $500 million yearly run rate change in a single quarter is impressive, but Lync's most recent quarters detail that it too can put points on the board: It has grown by 30% or more for the past three quarters – before that I don't have data, so the spree could in fact be longer. Here's Microsoft at the end of the fiscal third quarter: "Specifically, Lync revenue grew over 30% again this quarter." The 'again' in that sentence indicates that the preceding quarter met the same 30% benchmark. And, here's Microsoft detailing its performance in the fiscal fourth quarter: "Lync revenue grew over 30%."

So, Lync grew at least 30% for three quarters, ending at full year revenue of more than $1 billion. Mathematically that puts Lync revenue over $250 million for the last quarter, and likely nine figures more. A simple progression assuming 30% quarterly growth and a starting estimate for fiscal first quarter Lync revenue of $150 million tracks out to $195 million in the second quarter, $253 million in the third, and $329 million in the fourth. However, those estimates are conservative as they sum to a mere $927 million for the full year. Therefore, Microsoft's Lync revenues were higher. However they do demonstrate the pace of Lync's expansion.

The standard quip is that once an internal business unit tracks in $1 billion in revenue in a year, it garners status inside of Microsoft of having 'made it,' in a way. This is why Microsoft product groups are keen to announce the milestone, even if they can only do so in the form of projection as is the case with the Office 365 team.

This is about more than just dollars, however. Lync, Azure, and Office 365 have their hands in subscription and continuing income – those are distinct – that is key to Microsoft's transition to becoming a company that sells services, and not merely software. Lync itself is weakest in this regard, finding home in certain Office 365 SKUs, but it does generate revenue on a recurring basis per account.

Therefore, Microsoft's perhaps most interesting new businesses are aligned with its new business model. That's important. Yammer is another business group that falls into this narrative, though we know less about its incomes than I'd like. Given that, we cannot safely say that it is tracking growth on similar lines as Lync, and so forth.

Microsoft as a company has most of its work still ahead of it as it works to change the software market to a service economy, but it is cultivating new products providing it with revenue growth that provide more than a mere shot in the arm.

I titled this post "Lync, Azure, Office 365 And The Shifting Center Of Microsoft's Gravity" because we are in fact seeing a change in Microsoft's soul. You can't change your entire business philosophy and not have it impact what matters internally. And Microsoft isn't selling Windows as a Service. Put simply, if the three business units that we have discussed can continue their current growth rates, Microsoft will quickly have new heavyweights internally that are in a way removed from the sales of software to new personal computers. Office 365 the least removed, of course.

So, say hello to three teams at Microsoft that are working to stem the impact of the revenue and mindshare obsolescence of the personal computing market for the company. They can't reform Microsoft alone, but I'd say that the company could not pull off the feat without their help. And let's be frank, Microsoft needs the boost.

Top Image Credit: Jason Costanza