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Microsoft slips on revenue miss

Key Points
  • Microsoft's revenue was slightly below consensus as revenue from Windows device makers fell.
  • Azure's revenue growth was flat sequentially at 76 percent.
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Microsoft posts positive earnings report

Shares of Microsoft stock fell as much as 4 percent Wednesday after the company issued its fiscal second-quarter earnings report with slightly lower revenue than expected.

Here are the major numbers:

  • Earnings: $1.10 per share, excluding certain items, vs. $1.09 per share as expected by analysts, according to Refinitiv.
  • Revenue: $32.47 billion, vs. $32.51 billion as expected by analysts, according to Refinitiv.

Revenue increased 12 percent year over year in the quarter, which ended on Dec. 31, Microsoft said in a statement.

While Microsoft again declined to disclose exact revenue for the Azure cloud business that's contributed to the company's success in recent years, Microsoft did say Azure grew 76 percent, which is flat sequentially from the previous quarter.

Given comments from Intel, Juniper and other companies related to spending on infrastructure, Microsoft investors had reason to be concerned about what that means for Azure, said Brent Bracelin, an analyst at KeyBanc Capital Markets who has a "buy" rating on the stock. Bracelin had predicted around 74 percent growth, or $2.85 billion in revenue.

Microsoft said it collected $9 billion in revenue from its Commercial Cloud category, which includes the Azure public cloud, commercial subscriptions to the Office 365 productivity software bundle, the Enterprise Mobility and Security products and commercial LinkedIn services.

The unit was up 48 percent, reflecting a sequentially higher growth rate from 47 percent one quarter ago. Bracelin had estimated it would rise 44.8 percent this time around. The gross margin for Commercial Cloud held steady sequentially at 62 percent.

Azure is second to Amazon Web Services in the market for cloud infrastructure, which lets companies offload their computing and data storage. Bracelin predicted Azure would contribute $2.85 billion in the quarter, implying around 74 percent growth, down sequentially from the prior quarter. Amazon, which publishes results tomorrow, is expected to report AWS revenue of $7.3 billion, according to analysts surveyed by FactSet.

"Within the next five years I don't envision Azure catching up," Bracelin said in an interview this week. He said that within 10 years, Azure could be bigger if AWS is still part of Amazon.

"The debate becomes at some point, do Amazon.com's ambitions limit the opportunities for AWS because of the competitive aspirations they have, that just limits the ability for AWS to grow," Bracelin said.

Microsoft's top business segment, More Personal Computing -- which encompasses gaming, search advertising, Surface and Windows -- hit $12.99 billion in revenue, below the $13.08 billion consensus estimate among analysts polled by FactSet.

Revenue from Windows device makers fell 5 percent year over year in the worst results there in more than two years. On a conference call with analysts, Microsoft's chief financial officer, Amy Hood, attributed those results in part to the timing of the supply of processors to PC partners. Meanwhile, Microsoft's Surface revenue, at $1.86 billion, was up 39 percent.

The company's Productivity and Business Process Segment -- including Dynamics, LinkedIn and Office -- generated $10.10 billion in revenue, coming in barely over the $10.09 billion FactSet analyst estimate. Office revenue from consumers was affected by the PC environment, along with "some execution challenges we had," Hood said.

And the Intelligent Cloud Segment, which includes Azure, enterprise services, SQL Server and Windows Server, posted revenue of $9.38 billion, beating the $9.28 billion estimate. In the past few years Microsoft's capital expenditures -- to support Azure and other products -- has risen sequentially from the fiscal first quarter to the fiscal second quarter, but this time it fell sequentially, going from $4.3 billion to $3.9 billion.

In the quarter Microsoft had 33.3 million Office 365 consumer subscribers, up from 32.5 million in the fiscal first quarter. In December Microsoft had 64 million monthly active Xbox Live users, up from 57 million in September.

Microsoft announced some notable cloud deals in the quarter including Gap and Walgreens. The company also acquired Glint and disclosed a change to its Edge browser strategy, a market where it competes with Google Chrome.

In terms of guidance, Hood said Microsoft expects between $29.4 billion and $30.1 billion in revenue in the fiscal third quarter. The midpoint of that range is just below the Refinitiv consensus estimate of $29.87 billion. She said Microsoft expects "continued market impact" because of a more limited supply of chips, and she said the PC conditions could also hinder Office consumer revenue growth. Microsoft's stock rose slightly in extended trading after Hood provided guidance.

Microsoft has been going back and forth with Amazon in recent weeks for the title of world's most valuable company by stock market value. The shares are up about 4 percent so far this year.