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Microsoft Q2 Results Just Miss on Revenues, Cloud Growth Still Strong

Microsoft reported second quarter revenues on Wednesday that slightly missed financial analysts' targets, but that reflected double-digit growth in strategic business units.

Revenue for the quarter ended Dec. 31 was $32.47 billion, a gain of 12% over the year-ago period, and below analyst expectations of $32.51 billion. Diluted earnings per share were slightly higher than what Wall Street expected, coming in at $1.10 non-GAAP against predictions of $1.09.

By the company's three overarching business segments, growth was strongest in Intelligent Cloud, followed by Productivity and Business Processes, with More Personal Computing bringing up the rear. Intelligent Cloud revenues rose 20% in the quarter to $9.4 billion. Productivity and Business Processes was up 13% to $10.1 billion, and More Personal Computing delivered single-digit growth of 7% to $13 billion.

In a statement, Chief Financial Officer Amy Hood drew attention to revenue growth in Microsoft's commercial cloud category, which crosses boundaries between the business segments. "Our solid execution delivered another strong quarter, with commercial cloud revenue growing 48% year-over-year to $9.0 billion," Hood said.

In a quarter when some infrastructure players like Intel have struggled, Microsoft's best data point of the quarter came in its Azure line of cloud infrastructure products. The Azure business, which competes against market leader Amazon Web Services (AWS) and other players including Google Cloud Platform (GCP), increased in the quarter by 76%. The growth percentage is sequentially flat for Microsoft, but the high-double-digit result still demonstrates strong momentum.

The numbers also suggest that the massive acquisition of LinkedIn is going well. Revenues for LinkedIn are up 29%, and sessions growth for the work-based social media platform is up by 30%.

A new batch of Surface hardware devices unveiled last October provided a bounce in Surface revenues for the quarter of 39%. Those devices that were all shipping for the holidays included the Surface Pro 6, Surface Laptop 2, Surface Studio 2 and Surface Headphones.

Other highlights included 24% growth in server products, a category that includes and was mostly driven by the Azure performance; and 13% growth in Windows commercial products and cloud services.

The biggest headwind by far in the quarterly results related to desktop Windows, once the crown jewel of the company and now something of a drag as the company transitions to cloud. Windows OEM revenues dropped 5% in Microsoft's second quarter compared to the same October-to-December period in 2017. Also weak was Office Consumer products and cloud services, which grew but only by 1%.

Shares of Microsoft fell by 3% in after-hours trading once it released its results Wednesday.

Mark Sami, vice president of Microsoft and Cloud Solutions at SPR, a Chicago-based Microsoft managed partner specializing in digital transformation projects, contends the stock may have already dropped too far.

"An initial look at the numbers indicates the drop in earnings was a miss on the personal computing side, though growth still looks to be strong in the productivity cloud and infrastructure cloud offerings," Sami said in an e-mail. "This seems to be an overreaction, as the miss on the desktop side is minimal and many Microsoft users will have to upgrade their Windows 7 environments that will be out of support after this year. This is going to drive a lot of revenue to this sector of the business, as well as potentially boost the productivity cloud numbers because of the new way licenses are packaged."

Sharing the view that Microsoft's quarterly results look especially strong on the cloud side is Ryan Duguid, chief evangelist at Nintex, a process management and automation specialist and close Microsoft partner.

"Microsoft has certainly enjoyed an impressive run over the last 5+ years, but to be honest, I think they're only just getting warmed up," Duguid said by e-mail. "Having successfully transitioned away from a dependency on Windows and a perpetual license model across all core franchises, Microsoft has now positioned itself as the dominant player in the cloud, both in terms of core compute power with Azure, as well as application delivery through Office 365."

Posted by Scott Bekker on 01/30/2019 at 3:30 PM


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