3 Critical Takeaways From Microsoft’s Latest Earnings
Investors are watching Microsoft's Azure, Surface, and video gaming businesses.
Wall Street is getting a bit jaded about Microsoft consistently posting quarterly sales growth.
The Windows and cloud-computing titan said Wednesday that it had $33.1 billion in sales for its latest quarter ending Sept. 30. Although that figure beat analyst expectations of $32.23 billion, Microsoft shares were flat in after-hours trading at $137.24.
Part of the tepid response to a seemingly solid earnings is partly due to the company’s Azure cloud computing unit not growing as fast as previously. Additionally, Microsoft CFO Amy Hood told analysts during a conference call that sales in some of its consumer-facing businesses like Surface computers and gaming services had declined.
Here are a few key takeaways from Microsoft’s fiscal first quarter 2020 earnings:
Azure ain’t what it used to be
Because Microsoft’s Azure cloud computing service is a strategic anchor under CEO Satya Nadella, investors are scrutinizing any signs of weakness in the business.
For the latest quarter, Microsoft said it’s Azure unit revenue grew 59% year-over-year, less than the 64% in the previous quarter. Although the company doesn’t break out Azure’s specific sales numbers, investors have gotten used to seeing huge growth with little slowing.
Last year during the first quarter, for instance, Microsoft said Azure grew 76% year-over-year, and 90% for the first quarter of 2018.
As Hood explained to analysts, Azure is having “moderating growth in our per-user business given the size of the install base,” a wonky way of explaining that Azure’s year-over-year percentage increases were bigger when there was less revenue.
Gaming takes a hit
Microsoft’s gaming business—a mix of Windows-based games, Xbox video game hardware and subscription services, and a cut of revenue from the sales of third-party titles—dropped 7% year-over-year to $2.5 billion. Hood attributed the decline to lower Xbox sales, which is likely because the company is preparing to release its latest Xbox console—codenamed Project Scarlett—in the fall of 2020, a year from now.
Additionally, she said that revenue from Microsoft’s gaming business could plummet 20% in the next quarter because of slower sales of its current Xbox as well as a drop in sales from an unspecified “third-party title,” which analysts believe to be the online game Fortnite.
So did Surface
Revenue from Microsoft’s Surface brand of laptops and computers dropped 4% in the latest quarter to an unspecified number. Similar to the Xbox, Microsoft believes the decline is due to the company recently introducing a newer lineup of Surface devices.
Hood is more hopeful, however, that the newest devices will lift the Surface business by “low, double-digit growth” in the next quarter.