Microsoft is killing it in all businesses except for one

Microsoft is killing it in all businesses except for one

July 19, 2019

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Microsoft revenue is growing across its vast array of businesses, except for one.

Microsoft Corp. just demonstrated why it is the most valuable U.S. company by showing off growth across more than a dozen different businesses within the tech giant. All except for one, basically.

The company reported a better-than-expected fiscal fourth quarter Thursday, and the forecast for the coming year suggested continuing strength. Microsoft MSFT, +1.33% beat on earnings, even excluding a tax benefit of $2.6 billion, or 34 cents a share, for transferring some of its intangible properties to Ireland, and shares added 2.7% to its market-leading $1.045 trillion market cap in the extended session.

Microsoft was led by stellar results in the Azure cloud computing, LinkedIn and cloud-software segments, with only one laggard: The Xbox gaming business and its related services. Revenue in the gaming business fell 10%, as the company lapped last year’s “Fortnite”-fueled services gains and hardware sales plunged 48%.

Those issues are expected to continue, at least until Microsoft releases its next Xbox console that was teased for the first time at the E3 conference earlier this year as “Project Scarlett.” That release won’t happen this fiscal year, however, and Microsoft said that it expects revenue in gaming to be down slightly again this fiscal year, with double-digit growth in software and services offset by declining console sales.

That was the only bad news out of Thursday’s report, though, as the Azure cloud business continued to steal the show for Microsoft. The so-called intelligent cloud segment had the biggest revenue total out of Microsoft’s three baskets of businesses for the first time last quarter, growing sales 19% to $11.4 billion. Azure was up 64%, and Wedbush Securities analyst Dan Ives said the cloud business “was again the star of the show.”

The business has continuing momentum, Chief Financial Officer Amy Hood said, noting that Microsoft has contracted but not recognized revenue of $91 billion, about half of which it expects to recognize in the next 12 months. Company executives also touted recent deals of more than $10 million, including a big cloud computing contract with AT&T T, -0.49% . One analyst asked if some press reports were accurate that the AT&T deal was valued at more than $2 billion.

“It is a very significant deal, I’m not going to comment on any specific dollar terms,” Microsoft Chief Executive Satya Nadella said in the company’s conference call. “It is the largest commercial deal that we have signed of the size and we see we have line of sight onto many more such deals.”

Productivity and business processes software came in at $11 billion, up 14%, with strong growth in its Office products and a surprise beat by its LinkedIn business, which grew to almost $1.9 billion of quarterly revenue and is proving to be one of Microsoft’s savviest acquisitions in recent years. Revenue at the job-seekers social network jumped 25%, better than consensus of 24% growth, said Michael Turits, a Raymond James analyst.

Earnings wrap: Microsoft earnings jump nearly 50% and more growth is in the forecast

The PC business was just behind cloud with a total of $11.3 billion in revenue, though growth of 4% was dragged down by the gaming business. The transition to Windows 10, which Microsoft says is a more secure operating system, was a big driver and will continue to be for the next few quarters as Microsoft ends support for Windows 7 at the end of the year. The Surface tablet even had strong growth of 14%.

“There is, I think, a recognized momentum with Windows 10 in its deployment inside of enterprises for its security and management value proposition," Hood said.

Nadella has unequivocally proved that his strategy to focus Microsoft on cloud computing was a correct one with two straight strong fiscal years that have made Microsoft a trillion-dollar company. If Microsoft can maintain this level of growth through the introduction of the next Xbox, there could be little the rest of Big Tech can do to challenge the most valuable company around.

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