Microsoft Office 365 Tools To Aid DOD's Digital Overhaul

Microsoft (NASDAQ:MSFT) recently secured a significant deal win from the U.S. General Services Administration (GSA) and U.S. Department of Defense (DOD).

Notably, three of Microsoft’s vendors — Minburn Technology Group LLC, Dell Marketing L.P. and General Dynamics’ (NYSE:GD) CSRA LLC, have been recently awarded the Defense Enterprise Office Solutions (or DEOS) Blanket Purchase Agreement (BPA).

Per the terms of the deal, the contract partners will provide DOD with Microsoft’s cloud-based enterprise software capabilities. It primarily includes Office 365 collaborative tools, file sharing, productivity tools including cloud email, and storage.

Microsoft’s Office 365 will aid DOD to modernize IT infrastructure, and strengthen cybersecurity functionalities in cost-efficient manner. This marks a shift from DOD’s prior use of “legacy” solutions from Oracle (NYSE:ORCL) and IBM (NYSE:IBM), per reports.

Markedly, per DOD, the DEOS BPA contract is valued at $7.6 billion spread over 10 year time period. This highlights Microsoft’s increasing association with DOD, which is a major positive.

Reportedly, Amazon (NASDAQ:AMZN) , which is contesting with Microsoft for Pentagon’s Joint Enterprise Defense Infrastructure or JEDI contract, opted out from bidding.

Key Takeaways

Deal Wins Favor Business Prospects

Utilization of Office 365 by DOD reinforces Microsoft’s strength in cloud-based services aimed at accelerating enterprise and IT processes.

The tech giant is infusing AI capabilities across its portfolio of services, which includes Azure, Windows, Cortana, Gaming, Office 365, Dynamics 365, HoloLens. This is enabling it to secure deal wins, which bodes well for its top line and enhances growth prospects.

In fact, in January, 2019, the company clinched a five-year contract worth $1.76-billion from DoD, under which the company’s enterprise services will be utilized by the Pentagon Defense Department, cloud Coast Guard and intelligence services.

Markedly, in the last reported quarter, Microsoft’s Office 365 commercial revenues improved 31% (34% at constant currency), driven by strong installed base growth and average revenues per user (ARPU) expansion.

Overall, revenues from Productivity & Business Processes, which includes the Office and Dynamics CRM businesses, increased 14% (up 17% at cc) on a year-over-year basis to $11 billion (representing 32.6% of total revenues). Microsoft anticipates double-digit growth in Dynamics, Office commercial and LinkedIn (NYSE:LNKD) to drive the segment revenues for first quarter of fiscal 2020.

Microsoft to Gain from DOD’s Multiple Cloud Approach

Per Chief Information Officer at DOD, Dana Deasy, “DOD’s cloud strategy includes both general purpose and fit-for-purpose clouds. DEOS is a great example of a fit-for-purpose cloud that supports our multi-cloud strategy.”

Moreover, the Office of Management and Budget or OMB agency’s Cloud Smart Strategy is aimed at enabling federal agencies to leverage cloud solutions.

Microsoft is well poised to capitalize on emerging business opportunities from federal agencies on its undeterred efforts to enhance Azure Government services portfolio with intelligent capabilities. In fact, the company announced the availability of Azure Government Secret regions, which are enabled to support Level 6 workloads, from the first quarter of 2019. Notably, DoD’s Impact Level 6 workloads are touted to be Pentagon’s and U.S. military’s highest level of classified information.

Microsoft has also crafted Azure Government for the US Department of Defense, specifically to handle DoD related workflows. Moreover, Microsoft’s HoloLens is being utilized by DoD and the company has secured several deals with DoD.

These initiatives are also expected to aid Microsoft in securing JEDI contract; however Amazon’s dominance in the cloud market remains a deterrent.

Notably, Oracle has recently taken the JEDI fight to the Federal Court of Appeals, and consequently, delaying the closure of the contract with a single winner. Moreover, Pentagon is reportedly receiving complaints regarding procurement, which require addressing and investigation and are likely to delay the process.

Wrapping Up

Microsoft’s expanding Office 365 clientele now including latest DOD contract win is expected to strengthen its position in the enterprise software market against Oracle, SAP, IBM and others.

Per ResearchAndMarkets data, worldwide enterprise software market is envisioned to hit $575 billion by 2024. We believe Microsoft’s efforts to enhance Office 365 capabilities augur well.

Zacks Rank

Microsoft currently carries a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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