On the back of strong growth in its enterprise divisions — known internally as the Intelligent Cloud Unit — the company posted revenues of $US21.66 billion (£14 billion) with a profit of $US4.62 billion (£2.9 billion), beating analysts’ expectations soundly.
CEO Satya Nadella told investors that “[Microsoft is] making strong progress across each of our three ambitions by delivering innovation people love.” The three ambitions are: Reinventing productivity, building an “intelligent cloud,” and making computing more personal and natural.
It wasn’t all good news, however. Microsoft sold just 5.8 million Lumia devices and continued to see a rapid decline in PC-related revenue.
Here’s what analysts had to say about the results:
Microsoft is “starting to hit its stride.”
Barclays notes that Microsoft is “starting to hit its stride,” with all of the key businesses growing rapidly. “Microsoft’s results were better than anticipated across the key figures, mainly due to better adoption of premium server products, a less severe drop in Windows revenue, and better growth in its Azure cloud computing platform,” a research note to investors says.
Pacific Crest notes that the company has “started to deliver on the changes promised last year,” an area that Satya Nadella has been vocal about. By increasing enterprise sales, Microsoft is able to lessen the effects of the shrinking PC market and poor hardware sales.
FBR & Co. said that Microsoft’s results were “solid,” as the company avoids sitting on the “innovation treadmill” — the process of plodding along — that its competitors, which includes Oracle, Cisco, HP, and IBM, are on. “With many of the mature tech stalwarts on the ‘innovation treadmill,’ Satya Nadella has instead helped navigate Microsoft toward the cloud quicker and more successfully than its peers.”
Jefferies highlights that Windows 10 is performing well. “[Microsoft] reported solid results on the back of what appears to be a strong Windows business, which is consistent with the traditional channel inventory build that it has seen with every Windows launch since 2003,” the note reads.
Enterprise brings it home
Many of the research notes noted that it was the Intelligent Cloud Unit, which includes Azure, the cloud platform that a company can use to host applications and services, that drove the majority of the revenue. Microsoft’s business increasingly appears to be a cloud and services business with Windows (as well as Lumia and Surface) on the side.
Jefferies described Azure as “impressive,” but gave the crown to Amazon. “While Amazon remains a clear, distant leader in enterprise-level IaaS/PaaS [Infrastructure as a Service/Platform as a Service] with an $US8 billion revenue-run rate, Azure, which we estimate has a run-rate of over $US1 billion, has established itself as a formidable [number two],” the note reads. According to Microsoft, the revenue generated by Azure increased 135% year-over-year.
The transition is still underway, but analysts seem positive about it. J.P Morgan notes: “We reaffirm our positive fundamental view, underpinned by the opportunity for Microsoft to favourably reshape its long-term future, especially based on the strength of its commercial cloud platform.”
Piper Jaffray offered a positive take: “While [Microsoft] stock has seen ups and downs this year, Q1 might mark a turning point for the business, with solid growth in the enterprise segments, outperformance in consumer, and start-up like growth in Azure and [Office] 365 providing evidence that they have ‘turned the corner’ into the new world of cloud, mobile and devices.”
The reaction to Windows 10
One area that did impress analysts was the launch of Windows 10. Microsoft confirmed the 110 million user figure on the conference call, highlighting just how fast people have upgraded to the newest version of Windows.
“Much discussion on the conference call noted surprise and wonder at the strength in Windows and its effect on the financials. We’re not sure why,” said analysts for Jeffries.
On a macro level, the PC market is shrinking and so analysts were pleased to see Microsoft making changes that will work in its favour. “We believe Nadella is taking necessary steps (e.g., free Windows on certain mobile devices, laser-focus on cloud/mobile) to ensure Windows successfully makes the transition to mobile devices and that longer-term growth coming off the PC market will be more than offset by growth in the cloud,” analysts for FBR & Co. said in a note.
One of the weaker segments of Microsoft’s earnings report was hardware.
Revenue from the Surface dropped from $US888 million (£576 million) to $US672 million (£436 million), a 26% decrease, while the company sold just 5.8 million Windows phones (i.e. Lumia devices). According to Barclays, “although the company just released new Lumia branded smart-phones, we do not anticipate this to have a material impact on phone hardware revenue this fiscal year.”
The reaction to the Surface Pro 4 and Surface Book has been positive, with praise being given to the Book’s innovative design and speed. Whether the new hardware can change the tide remains to be seen, especially as the Book starts at $US1,499 (£999).
While not mentioned in yesterday’s call, HoloLens also has a bright future ahead of it, according to analysts. Brian Blau, an analyst for IDC, told Business Insider that “there is potential for disruption with Hololens but it will be a slow rise vs. a fast takeover.”
“Overall, we believe the ‘Nadella era’ at Microsoft is on track as he veers away from the status quo, representing a breath of fresh air for investors,” wrote FBR & Co. analysts in their note. This sentiment is echoed among almost all research firms, many of which rated Microsoft as “overweight,” a sign that the stock is good value compared to others.
The general consensus in terms of pricing was $US55 (£35), an increase of $US7 over the pre-results closing price. In explaining the “overweight” rating, Barclays analysts wrote: “Microsoft is arguably the leader in the cloud services market with Windows Azure and Office 365. It can drive better earnings growth as it transitions its on-premise install bases (Office and Windows Server) to its cloud platforms.”