Microsoft reported FY20 Q2 earnings after the market close on January 29th. I won’t dig into Microsoft’s performance overall, as it is covered thoroughly by other analysts. However, within the earnings release and subsequent analyst call, there were some implications for smaller, niche software companies that may be useful for investors to consider.

Listed below are highlights where I see a connection between commentary from the earnings call and services offered by a particular software company. These connections generally reflect secular growth opportunities in a sector. My focus is on the smaller software stack companies that we cover in this blog. Links on their tickers will take interested readers to our detailed analysis of each company.

  • Azure year/year revenue growth of 64% (in constant currency). This compares to 63% from the prior quarter. Obviously, cloud investment and migrations are not slowing down.
  • Satya provided some high level perspective on the industry. Momentum of digital transformation efforts is strong and will continue over the next decade. Software will drive productivity improvements across all industries. Spending on technology solutions will double over the next decade, as a percentage of GDP. All of these secular trends favor software-oriented companies, not just Microsoft.
  • Leadership claims that all companies will need a distributed computing stack, which works from the central cloud to the edge. They also highlighted the Azure Stack Edge offering and its machine learning inferencing capabilities. This allows data processing workloads to be performed at local collection points for clusters of IoT devices. Processing at the edge prevents the need to transmit large, raw data sets across the network. Microsoft’s continued investment in edge computing indicates a large opportunity for other edge compute providers, like Fastly (FSLY).
  • Data footprints are expanding rapidly. Satya claims that “there will be 175 zettabytes of data by 2025, up from 40 zettabytes today. Processing this data in real-time will be an operational imperative for every organization.” This represents growth of over 4x in 5 years. This enormous data growth, likely in unstructured data, favors software companies that provide flexible and scalable data storage and processing solutions, like MongoDB (MDB) and Elastic (ESTC).
  • Leadership highlighted their new data warehouse and analytics service, Azure Synapse. Synapse combines data warehousing capabilities with analytics to allow data scientists to process both structured and unstructured data to generate insights and build custom ML models. Notes that Walgreens is using Synapse to “analyze more than 200 million item-store combinations so millions of customers can rely on items always being in stock.” This is the type of data analytics use case that Alteryx (AYX) would also enable. Hearing about more large enterprise level examples in this area is favorable.
  • Stated that 3,500 new conversational agent bots are being created each week by Microsoft customers using the Azure Bot Service. This is an amazing statistic. One example was Nationwide insurance company using the Azure Bot Service to facilitate claim submission. Bot and intelligent chat services are both products that Twilio (TWLO) and Zendesk (ZEN) provide. Hearing such a large magnitude of applications for Bot technology from Microsoft implies growth in this area for other providers.
  • Regarding their Power Platform, leadership emphasized how Microsoft is empowering citizen developers and business decision makers with no code or low code tooling. This tooling allows them to create unique apps and intelligent workflows to address common business needs, without having to engage the internal development team. Currently, 2.6 million of these citizen developers are using Power Platform to streamline activities like “build a mobile app, automate a business process, or even create a virtual agent – all with no coding experience.” This level of user engagement with their low/no code platform is very impressive. It bodes well for other providers of low code and workflow automation tools, like Smartsheet (SMAR) and Appian (APPN).
  • In answering an analyst question, Satya provided an interesting statistic around the growth of software developers at non-tech companies: “the number of developers in the non-tech sector is now more than in the tech sector. This is software engineers, and that’s going to only increase in the world, going forward.” This growth of software engineers in mainstream enterprises further underscores the trend that every company is investing in custom software development as a means of differentiating itself from competitors. These developers will increasingly turn to products from software stack companies in order to build the next generation of digital experiences.

While this commentary is Microsoft specific, I think investors can use it to gather subtle signals about growth opportunities for smaller, niche software stack companies. If a behemoth like Microsoft is focusing incremental effort in a particular area, we can assume that is based on substantial market research and validation of a need. Granted, Microsoft’s focus also implies competition for smaller players, but the total addressable markets behind these secular trends are huge and allow for a variety of approaches.