Microsoft reported earnings after the close yesterday, EPS of $0.67 a share non-GAAP, versus $0.59 estimated and revenue of $21.66 billion non-GAAP, versus $21.03 billion estimated. Although I am very fortunate the stock “popped” after buying a bunch of call options on MSFT stock, I have to admit that I am a bit perplexed on why the stock has risen over 10% and hit a new 15 year high all in one day. I also want to say I am not “Microsoft bashing” as most of my career relies on consulting with their software. There are some great items of note in the earnings report, but there are also some odd and even missing pieces of information that has left me asking “why” a bit more. Let’s look at what we know so far…
1. Cloud – Of course, the cloud (Dynamics online, Office 365 & Azure) were the strongest parts of the report. As a side note, AMZN had OVER 50% of its revenue this quarter from AWS (cloud services). This shows just how much money is going to come from the cloud in the future. There is no doubt Microsoft is on it’s way to the 20 billion dollar cloud revenue goal Satya Nadella set out to achieve by 2018.
2. Search & Bing Revenue hit 1 Billion – Seriously, this shocked me. Search revenue hit 1 billion (with a “B”). Bing & Search is now profitable for MSFT — wow. It is hard to say if Yahoo’s! new search partnership with Google will affect search revenue going forward.
3. SQL Server, after 20 years in existence, moved into the #1 position in the relational database segment of Gartner’s Magic Quadrant.
4. Enterprise Mobility now has over 20,000 users and Microsoft is #1 in this new emerging sub-sect of IT.
5. Office365 consumer added approximately 3 million subscribers (paid, unpaid, I am not sure) in the quarter now totalling about 18.2 million subscribers.
1. Surface sales – for the first time in awhile, they did not disclose this figure. Affects from seasonal sales and customers waiting for new models is understandable as it happens to Apple too, and was mentioned on the call, but not reporting the number at all? I found this odd.
2. Due to the restructuring of how they have categorized their sales differently from past quarters and possibly from some carefully highlighted bullet points, there is no revenue number for similar cloud sales from past quarters this go round. Many items have been moved into different categories of revenue reporting (for example, Azure has moved reporting categories now at least 3 times so it makes it very hard to compare year-over-year revenue). See the two following images:
3. Commercial Cloud Revenue Grew by the Smallest Percent in 5 Quarters – 8.2 billion is a big number, but last quarter was 8 billion. Of course it is wonderful that number is going up, not down, but– that was the smallest percentage gain in the past 5 quarters and it makes me uncertain if “seasonality” is really the issue here or not. Perhaps this goes back to the restructuring of which products fall under which reporting category that changed again and is very difficult to follow. I do strongly believe in Microsoft’s cloud future just to say that one more time!
4. Windows OEM revenue declined 6%, but everyone expected a decline and this was a bit less than I personally thought it would be.
5. International markets such as Brazil, China & Russia still present challenges but just about every IT company I know is facing the same challenge in these markets so this isn’t just MSFT.
1. One Thousand More Layoffs – This story didn’t make the earnings call or the press releases, but the news hit the wire via Bloomberg & NYT. The layoffs were reportedly across all units. Does this make the total number of layoffs now over 19,000? Bummer for those folks, I genuinely feel empathy for them and wish them well.
2. Windows Phone – Windows Phone revenue was down 54%. I think the writing is on the wall sadly, even as I write this post I received an email from Mint.com saying they are adding themselves to the list of companies no longer continuing support for their Windows Phone app. It will remain to be seen if a mobile version of Windows 10 will replace everything, a Surface phone really does exist or if the phone business for MSFT is all but gone. Here is a good chart on the shrinking market share and unsuccessful pursuit of Windows Phone in the mobile market (I liked mine, rats!).
Questions Only an IT Pro Would Ask
It was interesting listening to all of these Wall Street analysts asking questions to Satya and Amy on the earnings call, but most of the questions were really generic and it was obvious that these analysts did not work with Microsoft products to ask specifics like an administrator or developer would. What about questions like:
- It is awesome that Azure AD has grown in users, but how many of those are paid and are they leaving paid Windows Server licenses for it?
- How many new customers subscribed to Office365 or Azure that were not using similar on-premise versions of Microsoft software (meaning totally new customers that were on a different software platform previously)?
- How many customers are running hybrid, and are paying dual licensing fees currently (because the tap will run dry eventually for the on-premises part of it)?
- How many customers were completely on-premise and moved fully to the cloud?
- Out of the millions of customers, how many subscribers are from each platform and are cross-subscribers (i.e. a customer subscribes to Office365, Azure and Dynamics online)?
- Since Azure is the only product with variable cost, is the average monthly billing per customer increasing, if so by how much? What is the increase in the amount of IAAS and PAAS services Microsoft is seeing from each customer quarter-over-quarter?
- Why aren’t more product specific revenue numbers ever published? This always provokes thought in my mind, not knowing how many of which type of customers are paying subscribers of Office365 and at what monthly rate per seat is being paid (E1, E2, E3, bulk, education pricing?). What about other cloud add-ons like Project Online or PowerBI? What about Visual Studio/TFS & MSDN subscriptions? Also SharePoint, SQL Server and other server licenses seats are almost never disclosed.
Satya did reiterate on the call that he didn’t see on-premises software sales competing with cloud software sales, he saw them as something that sparked growth in one another. In some ways this is true, in some ways over the longer term it may not be, but we do have to focus on “now” and the “near future” at the moment.
Wrapping it Up
Technically, Microsoft did beat analyst estimates pre-currency conversion (the US Dollar is exceptionally strong), although they have beat before in many quarters and the stock has dropped. Perhaps a combination of cost cutting, cloud growth and Satya’s vision and enthusiasm (I am a big Satya fan myself too!) sparked the stock run. Those who know me understand I would not even be promoting or working with Microsoft’s products if I did not strongly believe in them, believe in the company and in Satya Nadella’s vision for the future. I have written this article just to point out all different views and let each person make a decision for themselves with the information.
Disclosure: I do not hold any positions in MSFT at time of this article being published, my positions were sold this morning. Drinks are on me at the next Ignite conference folks!