Shares of Microsoft MSFT slid 4% in after-hours trading yesterday as the tech giant released its latest earnings report, in which it missed analyst expectations on both revenue and earnings per share.
Microsoft, which has outperformed industry rivals like Apple AAPL, Alphabet GOOGL and Amazon AMZN over the last six months, finally hit a significant speedbump as sales of its core cloud-services Azure offering showed signs of slowing down. The company is in the middle of a transition to cloud computing and software-as-a-service products, as PC-based software becomes less and less important, so this slowdown is certainly something that could concern many investors. Here’s what the important numbers were.
Azure growth slowing down
Revenue for the quarter (second quarter of Microsoft’s fiscal year 2019) came in at $32.47 billion, missing analyst expectations of $32.51 billion. Earnings per share clocked in at $1.10, missing forecasts of $1.09 -- not huge misses for sure, but still a little disappointing for a company whose cloud software is priced for breakout growth.
However, Microsoft divides itself into three operating groups, all of which showed growth during the quarter.Ă‚ Productivity and Business Processes, which includes the Office suite and LinkedIn, showed 13% growth in the second quarter. Intelligent Cloud, of which Azure is a central part, was up 20%. Critically, Azure revenue was up 76%, which is certainly a highly impressive showing, but also compares less favorably to the 98% growth it posted this time last year.
More Personal Computing, which includes the Xbox gaming software, Microsoft Surface and Windows, grew 7%. With total revenue of $13 billion, this segment remains Microsoft’s largest seller.
Long-term prospects
Both CEO Satya Nadella and CFO Amy Hood emphasized the importance of large long-term Azure contracts with companies like Walgreens Boots Alliance (WBA) and Mastercard (MA) to Microsoft’s long-term growth. Nadella commented on some of the latest uses of Microsoft’s cloud computing division:
“And just this week, Albertsons chose Azure as its preferred cloud. In financial services, MasterCard is partnering with us on a new, more secure way to verify digital identities. BlackRock is applying the power of the Microsoft Cloud to reimagine retirement planning, and UBS is using Azure to increase agility across the organization while meeting the highest bar of compliance and security. In healthcare, Walgreens Boots Alliance chose Azure to put people at the center of their health and wellness with digital solutions to improve healthcare outcomes and lower costs.
In addition, they will roll out Microsoft 365 to more than 380,000 employees in stores globally. We're accelerating our innovation in emerging workloads like IoT and edge AI. At CES, our partners showcased how Azure IoT and Azure AI are enabling them to build new connected devices and experiences that span the cloud and the edge from connected homes to cars to smart cities. Just this month, Starbucks chose Azure Sphere to secure its business-critical edge devices in the stores.”
Clearly, the battle for cloud supremacy is going to be won or lost among these big contracts. Microsoft faces stiff competition in the face of companies like Amazon, IBM IBM and Oracle ORCL, each of which of course have advanced cloud offerings. However, Microsoft may have an inherent head start, as its Office suite provides users with immediate integration with the cloud in a way that those companies do not.
Summary
Overall, the future still looks good for Microsoft. The tech giant is tied with Amazon for the title of largest company in the world by market capitalization, a remarkable turnaround considering where the company was when Nadella took the reins in 2014. Yes, slackening cloud sector growth is a problem, but this may simply be a case of investor and analyst expectations being excessively bullish. Sometimes a small correction to reset expectations is just what a company needs.
Disclosure: The author owns no stocks mentioned.
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