Microsoft Corporation Earnings: Mr. Softee Becomes Mr. Cloud

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Microsoft - Microsoft Corporation Earnings: Mr. Softee Becomes Mr. Cloud

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Expectations were high going into earnings for Microsoft Corporation (NASDAQ:MSFT). Earnings were estimated to come in at 85 cents per share on $25.71 billion of revenue, and there was a “whisper number” of 91 cents, a sign of analyst confidence.

The company beat on both counts with net income of 95 cents per share, on revenue of $26.82 billion. Revenue claimed for the cloud was $7.9 billion, up 17%. Even LinkedIn, its social network, was up 37%.

Considering the initially negative reaction to earnings from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), there was more than the normal tension awaiting the result. Shares rose almost 3% in trade April 26, in expectation of good news.

Rugged Elbows

While the “cloud czars” — Apple (NASDAQ:AAPL), Alphabet, Microsoft, Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) — have previously stayed in their own lanes, focused more on their strongest niches than in areas of competition, that is rapidly changing.

Google, for instance, is going after Microsoft with its G Suite of applications, which compete with Office, and now include a new version of Gmail with many features similar to Microsoft Outlook.

Regarding Amazon, analysts were looking at total Azure revenue numbers, and specifically what they might contain. They see Windows and Office taking a “supporting” role in the company’s future, which will be led by Azure and Azure-driven applications.

Amazon, however, is still dominating in raw infrastructure, while Microsoft is selling applications. The two companies are no longer offering apples-to-apples comparisons, as hardware capacity is never going to cost as much as software applications.

Microsoft tends to throw all its enterprise revenue into the “cloud” category, since that’s how its software is now sold, claiming revenue growth of 98% in the December quarter based on its enterprise software.

Microsoft is also trying to keep big accounts away from Google. During the quarter the company bought Avere, which manages cloud workloads in the entertainment industry, and said its focus is on “hybrid cloud,” where its cloud is matched with a compatible system at customer premises containing key data they’re afraid to allow outside.

Excuses for Disappointment

MSFT fell slightly in the minutes after the earnings announcement, as analysts expressed disappointment over the cloud services revenue gain, although Office 365 commercial revenue was up 42%. On Friday, MSFT was up 3% briefly before paring gains to just over a percent as of this writing.

CEO Satya Nadella has focused the company on cloud applications and services delivered through the cloud since becoming CEO in 2014. Microsoft no longer thinks of itself as producing “platforms”  it can charge others for developing under. Instead, it is developing software for the platforms people use.

Instead, Nadella has invested in Azure Sphere, a system of chips and software designed to bring secure sensor intelligence to factories, warehouses, and even homes.

Gone is the animus toward open source. Gone is the not-invented-here syndrome. Gone is the attitude that security is someone else’s problem.

Microsoft has delivered a major asset of its Edge browser, the ability to detect phishing scams that can insert malware, to Google Chrome browsers.

The company has also sought to protect internet users from “phishing” calls, where thieves pretend to be part of the company’s tech support effort and try to get personal information they can use to hijack bank accounts or charge for what amounts to malware.

Early this decade Microsoft had two big problems. Open source advocates hated it for its rejection of open technology. Consumers found the company arrogant and unhelpful.

The Bottom Line

Microsoft shares were up 42% for the previous year going into earnings, 91% over the previous two years, as it battles with Apple and Amazon to becoming the first $1 trillion company. It may well lose that battle to Amazon, but any fall after earnings is a buying opportunity.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, and MSFT.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/microsoft-corp-msft-mr-softee-becomes-mr-cloud/.

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