Microsoft Earnings Show Its Growth Is on Track

Microsoft (NASDAQ:MSFT) has been making plenty of headlines lately, as the company has been signing a growing list of high-profile retailers to its Azure cloud-computing platform. This had investors hoping for a better-than-expected earnings report -- something the company has been delivering fairly regularly. When Microsoft delivered results that were mostly in line with expectations, the market gave a collective shrug and went about its business.

For its fiscal second quarter, which ended Dec. 31, Microsoft reported revenue of $32.5 billion, up 12% year over year, near the high end of its forecast and edging past analysts' consensus estimates of $32.49 billion. Operating income increased 18% compared with the prior-year quarter, resulting in adjusted earnings per share of $1.10, topping expectations of $1.09. 

Image source: Microsoft.

Strength across the board

Microsoft saw solid, though not spectacular, growth in each of its major business segments. 

Productivity and business processes produced revenue of $10.1 billion, up 13% year over year. Within the segment, Office commercial products and cloud services increased 11% year over year, as Office 365 commercial revenue jumped 34%. LinkedIn was also a bright spot, with revenue that grew 29% compared with the prior-year quarter and generating record levels of engagement, as sessions grew by 30%. Dynamics revenue increased 17%, driven by Dynamics 365, which grew 51% year over year. 

Intelligent cloud revenue saw the most dramatic segment growth, to $9.4 billion, up 20% year over year. Server products and cloud services revenue grew 24% year over year, driven by Azure cloud revenue growth of 76%. Enterprise services revenue grew a more modest 6% compared with the prior-year quarter. A number of larger, long-term contracts for Azure are use-as-you-go, which will result in variation from quarter to quarter.

Revenue from The More Personal Computing segment saw more modest growth, topping $13 billion, an increase of 7% year over year. The highlight was revenue from the Surface tablet, which increased 39% year over year, while gaming revenue climbed 8% and search advertising grew 14% year over year. Windows OEM disappointed, as revenue declined 5% year over year. Microsoft said this was the result of constrained chip supply felt by its partners, leading to lower sales.

"Our strong commercial cloud results reflect our deep and growing partnerships with leading companies in every industry including retail, financial services, and healthcare," said Satya Nadella, CEO of Microsoft. "We are delivering differentiated value across the cloud and edge as we work to earn customer trust every day."

Image source: Microsoft.

Head in the clouds?

Since cloud computing has become such an important component to Microsoft's growth, it bears spending a moment to see how it compares with its biggest rival -- and Amazon.com (NASDAQ:AMZN) is the undisputed leader in the space.

Amazon Web Services (AWS) reported $25.6 billion over the trailing-12-month period, up 47% year over year. Microsoft's Intelligent Cloud segment clocked in at $36.6 billion over the previous four quarters, up 21% year over year. It's important to note that this isn't necessarily an apples-to-apples comparison, as what's included in cloud revenue is likely different for each company -- and neither provides enough granular detail to make such a comparison. This unscientific approach appears to show that, overall, Amazon's cloud segment is still growing faster.

A look ahead

For the upcoming third quarter, Microsoft is forecasting revenue in a range of $29.4 billion to $30.1 billion, a target which, if met, would represent growth of between 9.7% and 12.3% year over year. The company is also projecting cost of goods sold of $10.45 billion and expenses of $10.15 billion, both at the midpoint of its guidance. The company doesn't provide earnings-per-share estimates.

In the absence of more specific guidance, we can turn to Wall Street, though we don't want to get caught up in its short-term thinking. Analysts' consensus estimates are calling for revenue of $29.88 billion -- near the high end of management's guidance -- and earnings per share of $1.02. 

This was a solid, albeit somewhat unremarkable, quarter for Microsoft. That's OK, though, because the company's growth is still on track.