Analysis of Microsoft’s EduBrite Acquisition

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The macroeconomic uncertainty is hurting big tech. Microsoft (Nasdaq: MSFT) recently announced its quarterly results that delivered the slowest revenue growth in the last five years. It failed to meet market expectations for the quarter driven by lower consumer and business spending.

Microsoft’s Financials

Revenues for the first quarter grew 12% to $51.87 billion, falling short of the market’s forecast of $52.44 billion. On a constant currency basis, revenue would have grown 16% over the year. Non GAAP net income was $2.23 per share, which was also short of the Street’s forecast of $2.29 per share. This was the first time since 2016 that Microsoft missed the earnings expectations for the quarter.

By segment, revenues from the Intelligent Cloud segment, which includes the Azure public cloud for application hosting, SQL Server, Windows Server, and enterprise services grew 20% to $20.91 billion versus analyst estimates of $21.1 billion. Revenue from Azure and other cloud services grew by 40%, compared with 46% a quarter ago, falling short of the market’s forecast of 43.1%.

Revenue from the Productivity and Business Processes segment that includes Office productivity software, Dynamics and LinkedIn grew 13% to $16.60 billion, falling marginally short of the Street’s forecast of $16.66 billion. The More Personal Computing segment that features the Windows operating system, Xbox video-game consoles, the Bing search engine, and Surface devices delivered a modest revenue growth of 2% to $14.36 billion, again falling short of the Street’s forecast of $14.65 billion. Sales of Windows licenses to device makers fell by 2% in the quarter.

For the second quarter, Microsoft forecast revenues of $49.25-$50.25 billion, compared with the market’s forecast of revenues of $51.49 billion. It forecast a gross margin of 69.85% for the quarter compared with the market’s forecast of 69.3%.

Microsoft’s Growth Areas

Despite the mild performance, Microsoft continues to drive growth across its offerings. GitHub was operating at an annual revenue run rate of over $1 billion during Q1. GitHub has over 90 million users using the service to build software for any cloud on any platform. Its advanced security is helping organizations improve their security posture by bringing features directly into the developer’s workflow.

Within the Power Platform, it is helping customers save time and money with its end-to-end suite spanning Low-Code/No-Code tools, robotic process automation, virtual agents, and business intelligence. Power BI has seen adoption in customers like Walmart who are using the tool to standardize reporting and analytics. Power Apps is the market leader in Low-Code/No-Code tools and has grown over 50% to nearly 15 million monthly active users. Power Automate has more than 7 million monthly active users and is being used to digitize manual business processes and save employee time.

It also had impressive statistics to share about other tools. Dynamics 365 now has more than 400,000 organizations using its applications. Microsoft 365 has become a cloud-first platform that continues to support the hybrid way of work and is reducing cost and complexity for IT. The new Microsoft 365 app integrates productivity apps with third-party content, as well as personalized recommendations.

With some businesses going back to brick and mortar operations, Microsoft Teams has not lost growth or users. Users interact with Teams 1,500 times per month on average. Monthly active enterprise users running third party and custom applications within Teams increased nearly 60%. Microsoft is also increasing the use of other ancillary services through Teams. For instance, usage of Teams Phone has grown by double digits for five quarters in a row. As organizations define their hybrid work environment, Microsoft is supporting them by providing the remote working tools, along with access to well integrated hardware ecosystems such as Cisco’s devices that will run Teams natively.

Microsoft’s EduBrite Acquisition

Earlier last quarter, Microsoft announced the acquisition of EduBrite, a platform that specializes in creating, hosting, and deploying professional certificates. Founded in 2009 by Ajay Upadhyay, and Manish Gupta, Edubrite is a learning management platform for professional certification that allows organizations and educational institutions to create courses, tests, and surveys; assign them to trainees or sell online; and track their results.

Microsoft plans to integrate EduBrite’s services into LinkedIn to allow users to earn professional certificates from trusted partners directly on the platform. By building EduBrite into the LinkedIn Learning platform, Microsoft will be able to better test and validate the skills people have to help them grow in their careers and showcase their skills. It will help it deliver on its vision for LinkedIn to create a skills-first approach to hiring and learning. LinkedIn ended the quarter with over 875 million members and over 150 million subscriptions to newsletters on LinkedIn, up 4X. Members added 365 million skills to their profiles over the last 12 months, up 43%. 

Terms of the acquisition were not disclosed. Prior to the acquisition, EduBrite was privately held and did not disclose either its funding or financial details.

Microsoft’s ISV Focus

Microsoft also continues to build on its ISV program. It recently announced an ISV Success Program that is available to select partners through a private preview. The program is helping ISV partners access benefits to build and publish apps faster, accelerate innovation, and reach a wider audience by providing them access to tools such as Cloud sandbox, developer focused tools to help build and publish applications to Microsoft’s commercial marketplaces, and access to content such as webinars, workshops, and expert opinion. Microsoft currently has Solutions Partner designations for service providers, but it is now working on developing specialized ISV designations that will help developers differentiate their solutions to customers by industry-specific scenarios and broader technology and line-of-business capabilities.

Like most of the stock market, Microsoft’s stock has also fallen this year. Its stock has fallen 25% since the start of the year. The results did not help it either, and the stock fell 6% in the after-hours trading session. It is currently trading at $227.10 with a market capitalization of $1.69 trillion. It had climbed to a 52-week high of $349.67 in November last year, and fallen to a 52-week low of $219.13 last month.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article.

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