That said, Microsoft isn’t out of the woods just yet: Last week, the company’s stock took a big hit after missing on earnings and weakening its guidance for the rest of the fiscal year.
It was a good reminder that despite the recent Microsoft love-fest, it’s still a company facing shrinking revenue and margins, as analyst Ben Thompson notes in a new edition of his excellent Stratechery newsletter.
It’s easy to read a doom-and-gloom narrative into Microsoft’s miss — to the pessimist, it shows signs that Microsoft’s transformation into a “cloud-first, mobile-first” company is struggling along.
The company has repeatedly committed to the Microsoft Azure and Office 365 cloud services as cornerstones of its strategy.
But as the Wall Street Journal points out, revenue growth in the Intelligent Cloud unit, which includes Azure, as well as Microsoft’s old-school server software product lines, was down about 3% compared with the same period in 2015. And Azure revenue growth was down 20% over the same timeframe. And the Office unit, which contains the Office 365 cloud suite, only posted a paltry 1% increase from the last quarter.
But here’s the thing: As Microsoft CFO Amy Hood discussed on the company’s earnings call, the revenue slowdown came down to two harsh factors.
First, a big tax hit adversely affected the cloud business. Second, and more interestingly, much of that revenue slowdown came from customers buying less of those old-school server products.
That’s good news in the long run, as Microsoft continues to emphasise the Azure cloud platform as a great alternative or augment to existing server infrastructure. It’s less great in the short-to-medium term, especially for Wall Street, because those legacy products are traditionally a huge cash cow for Microsoft.
Eventually, Microsoft hopes, the shrinking software business will transition into a booming cloud business. But as this cloud transformation marches on, those dips are going to keep happening.
Thompson, at least, isn’t too worried, arguing that Microsoft’s priorities and gameplan are in the right place. He writes:
Ultimately, I don’t [think] the miss was a big deal, but for the reminder that Microsoft is by no means in the clear: the company is fully committed to shifting its business, and it has done an excellent job of bring Wall Street along with it, but given the scale of contribution to the bottom line any unexpected acceleration of decline in legacy business will be hard to spin.
Nadella has long been a proponent of ignoring stuff like share price and revenue, choosing to focus instead on “customer love.” His big idea is that if people genuinely like the stuff Microsoft makes, profits will follow. So far, Wall Street has mostly been on board. This is just a big sign that it’s not an easy road, and that Nadella’s honeymoon period with investors may be coming to an end amid hard fiscal realities.