Microsoft's performance exceeded expectations and it was difficult to hide the embarrassing truth: the slowdown in the growth rate of the cloud business was exhausted

Highlights:

Microsoft's fiscal second quarter revenue was $51.73 billion and net profit was $18.8 billion, both exceeding Wall Street expectations.

· Azure's year-over-year growth rate fell to 46%, which was less than Wall Street expected.

Management released positive signals to push after-hours trading from falling to rising.

Tencent Technology News On January 26, large TECHNOLOGY companies in the United States began to release financial reports this week. As a member of the trillion-dollar club, Microsoft's first earnings report after the close on Tuesday showed that during the 2021 holiday shopping season, the company's quarterly revenue exceeded $50 billion for the first time in history, and easily exceeded earnings expectations. But Microsoft's earnings report also revealed a detail that the company's revenue growth engine over the past few years, Azure cloud computing services, is slowing, which has caused some investors to worry that the growth rate of the division has peaked.

Whether it's the transition to electric vehicles, the surge in demand for connected devices, or the emergence of the crypto economy and metacosm, digital transformation around the world is still in its early stages, with decades to go. Cloud computing and artificial intelligence will transform every industry in the coming years, and investments in cybersecurity need to reach unprecedented scale. The tech industry leader is poised to capture huge consumer and corporate spending.

At the same time, the bear camp has developed an aversion to high-growth tech stocks, especially those that have soared during the pandemic. As the economy opens up, investors are witnessing inflationary pressures and they are waiting for the Fed to raise interest rates. In recent months, with Peloton, Zoom and Netflix all taking a staggering hit, home-based beneficiary stocks are being weighed down. In addition to Microsoft, which released its earnings report on Tuesday, the other members of the trillion-dollar club — Tesla, Apple, Amazon and Alphabet — will report wednesday, Thursday and next week, respectively. So far this year, the shares of the above companies have all retreated by 9% to 15%.

Revenue exceeded $50 billion for the first time

Microsoft's earnings report showed that the company's net profit for the second quarter was $18.8 billion, or $2.48 per share, up 22% from $2.03 in the same period last year; revenue reached $51.73 billion, up 20% from $43.08 billion in the same period last year, and quarterly revenue exceeded the $50 billion mark for the first time in history. Microsoft's revenue and profit in the second fiscal quarter both beat Wall Street expectations. According to FactSet, Wall Street analysts had previously expected Microsoft to earn $2.32 per share and $50.71 billion in revenue for the fiscal second quarter.

However, after the earnings report, Microsoft's stock price fell more than 5% at one point in after-hours trading on the day. Daniel Ives, an analyst at brokerage Wedbush, said expectations for the strong performance of Microsoft's Azure cloud computing platform and concerns about the company's forecasts contributed to the decline. "Microsoft stock is being sold off as Azure's growth rate reaches 46 percent, more than Wall Street's 45 percent, but below what some bullish estimates of 48 percent," Ives noted. Wall Street will focus on Microsoft's estimates for broader enterprise/cloud spending in 2022 in Microsoft's conference call. ”

But during Tuesday's earnings call, Microsoft executives shared optimistic outlook for the fiscal quarter, which pushed up the company's stock price. Microsoft CEO Satya Nadel said demand for services remains strong. "Excluding the impact of the pandemic, we actually see many constraints in the economy, and the only resource that can help increase productivity while reducing costs is digital technology," he said. Microsoft's after-hours trading share price rose from a drop to a rise, and finally closed with an increase of 1.46%.

Azure growth slows

Led by Nadella, Microsoft's Azure business has transformed into the second largest business in the cloud infrastructure services market after Amazon's AWS. While Azure's revenue has been steadily rising, Microsoft faces stiff competition from market leader Amazon and third-ranked Google. While Google is currently ranked third, it continues to pour resources into the business as it struggles to catch up.

Brent Thill, an analyst at investment bank Jefferies, said: "We have reached the highest growth peak we will see in a while. The problem for Microsoft is that growth is slowing down, and more difficult times are coming. As the first tech giant to release earnings reports, Microsoft's comments on the world will lay the groundwork for other tech sectors. Avis also said that in the current panicked market situation, Wall Street hopes to see Microsoft's cloud business grow at a high speed. In Microsoft's first fiscal year ending September 2021, Azure revenue soared 50 percent, and in the fiscal quarter before that, it grew 51 percent.

Amy Hood, Microsoft's chief financial officer, said in an interview that demand for Azure and the cloud in fiscal second quarter was actually better than Microsoft expected. "The continued growth of Azure actually makes us very happy," she says. Customers are turning to Azure and the Microsoft cloud to truly fundamentally change their business. ”

Microsoft said commercial cloud revenue increased 32 percent year-over-year to $22.1 billion in the quarter. The gross margin of the business (i.e., the percentage of remaining sales after deducting production costs) narrowed slightly to 70%. Without the impact of the accounting change, the gross margin would have widened by 3 percentage points.

Surface, Windows, and search revenue exceeded expectations

In the second fiscal quarter, Microsoft's More Personal Computing Division, which includes Windows Licensing, Surface, Xbox and Bing, reached $17.47 billion, up 15% year-over-year, outpacing the previous outlook of $16.35 billion to $16.75 billion and Wall Street's expectation of $16.62 billion.

Microsoft Surface revenue topped $2 billion in the second fiscal quarter of fiscal 2021. While Microsoft has stopped providing Surface revenue data, the business grew more than expected in the 2021 holiday shopping season, at 8 percent. Microsoft predicted much worse numbers on the last investor call, expecting a single-digit percentage decline in Surface revenue, noting that this is largely due to ongoing supply chain issues for high-end devices.

Microsoft said that surface revenue is mainly driven by Surface laptops, which is interesting. In the first fiscal quarter, Surface revenue fell 17% year-over-year due to supply chain constraints. In fact, it wasn't until recently that Microsoft started running nationwide TV ads for the new Surface Pro 8 in the U.S., suggesting that the company is finally getting its supply chain back up and running. Microsoft also eventually released LTE and commercial versions of its latest Surface devices, and expanded the new Surface Laptop Studio to other countries such as the UNITED Kingdom. Surface Laptop Studio is currently only available in the U.S. and Canada, but is expected to go on sale in 47 markets in the coming months.

Regarding Windows OEM licensing, Microsoft expected growth in the second fiscal quarter to be "around 10 to 16 percent" in its recent guidance. The company's earnings report on Tuesday showed revenue from the business up 25 percent year-over-year, beating expectations. This figure is in line with revenue from PC manufacturers such as Dell, Lenovo and HP, all of which have outpaced expectations and set records in recent quarters. It's also in line with market research firms Canalys and Gartner's prediction that 2021 will be the best year for global PC shipments since 2012.

On last quarter's earnings call, Nadella noted a "structural shift" in PC demand due to the global pandemic. Chief Financial Officer Hood said Windows OEMs' revenue was "stronger than expected" due to commercial interest.

In addition, Microsoft's Bing and MSN.com-related search and advertising revenue increased 32% year-over-year, driven by "customer ad spend improvements"; Xbox and gaming revenue also increased 8% year-over-year, and Xbox has grown steadily in hardware, games and services.

Hugely invested in the acquisition of Activision Blizzard

More than a week before Microsoft released its earnings report, the software giant announced the largest acquisition in the company's history, with a $69 billion acquisition of troubled video game maker Activision Blizzard. Activision Blizzard will join Microsoft's more Personal Computing Division. While Microsoft executives held a conference call after announcing the acquisition of Activision Blizzard, they did not answer any questions and kept some of the information confidential. Analysts at investment bank Cowen & Co. expect to hear some additional news around the proposed Microsoft-Activision Blizzard acquisition during Tuesday's conference call. In particular, they wanted to see how the video game publisher was boosting profit margins in the PC space.

Microsoft has $125 billion in cash on its books, which supports the $69 billion acquisition of Activision Blizzard. Bank of America analysts see the acquisition as a "shrewd strategy" and "a strategic and financial positive move that could accelerate Microsoft's gaming business on a multitude of platforms." ”

Over the past few years, Microsoft has become more aggressive when it comes to gaming. In 2014, the company spent $2.5 billion to acquire Minecraft developer Mojang. Last year, Microsoft completed a $7.5 billion acquisition of game developer Bethesda. Microsoft's acquisition of Activision Blizzard also reflects Microsoft's long-term vision as it competes with Meta to develop technology to create a metaverse. In fact, Microsoft CEO Nadella was the first CEO of a big tech company to publicly acknowledge the value of metacosmity, months before Meta CEO Mark Zuckerberg.

"When we think about the vision of the metacosm, we believe there won't be a single, centralized metacosm," Nadella said on a conference call last week. That means Nadella sees many software developers creating many different virtual worlds in the future, rather than having a dominant company control most of the activity. (Compiled by Tencent Technology/No Taboo)