Microsoft heads into its fiscal Q3 earnings release April 27 with a new acquisition under its belt. Focus could be on the Nuance Communications buy, along with the usual suspects like cloud computing.
In Microsoft’s (MSFT) last earnings conference call with analysts, CEO Satya Nadella opened with an upbeat and sweeping salvo on cloud platform Azure’s role in the emerging “second wave” of global digital transformation.
Despite all the fireworks, it turns out that Azure wouldn’t be MSFT’s biggest story in the quarter to follow.
The big story is arguably more complex. It’s not just MSFT’s huge $20 billion acquisition of artificial intelligence (AI) software company Nuance Communications (NUAN), but the larger subplot of mergers and acquisitions (M&A) that potentially hints at an outline of MSFT’s longer-term strategy.
M&A will likely be on peoples’ minds when the company reports fiscal Q3 earnings Tuesday, but so will the usual suspects like cloud, Office, and LinkedIn. Last time MSFT reported, fiscal Q2 Azure revenue grew 50% and total commercial cloud revenue rose 34%, setting high bars for MSFT as it prepares to report its latest financial results.
MSFT’s acquisition of NUAN adds another point to the buying-spree narrative that appears to be unfolding.
Last month, MSFT bought video game holding company ZeniMax Media for $7.6 billion. Last year, the software giant was on track toward buying TikTok for $30 billion before the deal got derailed. 2016 marked the company’s largest acquisition—LinkedIn—for $26 billion. And chat app Discord just turned down MSFT’s $10 billion acquisition offer.
Each company MSFT targets represents entry into a potentially new market—or a larger footprint into an area in which the company had previously been in a more “exploratory” stage. The NUAN acquisition is kind of unique because it may give MSFT a subtle but solid foothold in the healthcare sector while boosting its capacity in AI and speech recognition software. Kind of a two-for-one.
Nadella didn’t mention NUAN once in last quarter’s call with analysts. So, you can imagine the surprise. What this acquisition means is that MSFT might have the enhanced capability of upgrading its existing cloud-based tools geared specifically toward healthcare, which in the long run, can be augmented further to match private enterprise and government agency needs.
If you haven’t heard of NUAN, it’s a software company specializing in speech recognition technology and AI. A dominant player in the healthcare industry, its solutions are used in 77% of hospitals across the US, according to MSFT. And there’s more. NUAN has also been active across different industries, from financial services and retail to education and government.
Back to healthcare, MSFT’s acquisition may allow it to double its addressable market—possibly up to $500 billion—according to some analyst estimates. On top of that, it also gives MSFT the opportunity to jockey further into the voice recognition and AI technology space. As Satella said in a statement, “AI is technology’s most important priority, and healthcare is its most urgent application.” In the quarters to come, these financial results will be included in MSFT’s cloud reporting segment.
Year-to-date market performance shows the S&P 500 Index (SPX) up nearly 12%, with the Information Technology sector trailing behind at 10% but MSFT springing forward nearly 19%.
Revenue growth for cloud-based software is expected to reaccelerate post-pandemic as IT budgets loosen up and organizations seek greater agility through digital transformation and cloud migration, according to IT experts.
A note on MSFT’s cloud position: As of last year, Azure commanded 20% market share of global cloud-spend, making it the second most adopted public cloud in the world. It’s sandwiched between Amazon Web Services (AMZN), holding 32% of global share, and Alphabet’s (GOOGL) Google Cloud, trailing behind at 7%,
In its fiscal Q2, MSFT saw 17% growth on an annualized basis. It reported earnings of $2.03 per share versus consensus expectations of $1.64 per share. Its revenue stood at $43.08 billion, topping analysts’ $40.18 billion consensus.
In terms of guidance, Amy Hood, MSFT’s executive vice president and chief financial officer, said last time out she expects to see fiscal Q3 revenue between $40.35 billion to $41.25 billion. That covers the productivity and business processes, office consumer segment, and Intelligent Cloud segments.
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