Windows Plays a Surprisingly Positive Role in Microsoft Earnings
Surprisingly strong demand for Windows, partly driven by important end-of-support deadlines, was among the major factors helping Microsoft exceed Wall Street expectations for its most recent quarter.
Microsoft on Wednesday evening reported revenues of $36.9 billion and diluted earnings per share of $1.51, both well ahead of consensus analyst expectations. The earnings period covered Microsoft's second financial quarter, which spans the last three months of 2019. The usual growth sources, like Azure, Office 365, Dynamics and LinkedIn, all delivered in the quarter. But Windows, which has been more of a drag of late, was a standout in Q2.
It was the last full quarter before end-of-support deadlines hit on Jan. 14 for Windows 7, Windows Server 2008/R2 and Hyper-V Server 2008/R2.
Microsoft's overall business unit that includes Windows clients is More Personal Computing, and the sector outpaced the company's previous guidance. "Revenue was $13.2 billion, increasing 2% and 3% in constant currency, ahead of expectations as better-than-expected performance across our Windows businesses more than offset lower than expected search and Surface revenue," Microsoft CFO Amy Hood said during the earnings call with investors Wednesday.
The end-of-support effects were strong in the OEM Pro sector, which Hood said makes up roughly 40% of total Windows revenue. Those revenues, she said, "grew 26%, driven by continued momentum in advance of Windows 7 end of support and strong Windows 10 demand."
Windows Server 2008 end-of-support also contributed to overperformance in a different business unit, Intelligent Cloud. "Our on-premises server business grew 10% and 12% in constant currency with roughly four points of benefit from the end of support for Windows Server 2008," Hood said.
End of support was only one among several factors affecting the gains for Windows. On the PC side, market growth was stronger than Microsoft anticipated. It also benefited from comparisons to last year, when a chip shortage was inhibiting OEM partners' ability to ship PCs. Microsoft's More Personal Computing unit also benefitted from revenue growth in commercial products and cloud services, which includes Microsoft 365.
On the server side, Hood also credited some of the growth to Azure Hybrid Benefits, which allow Software Assurance customers to put Windows Server licenses into virtual machines on Azure at a reduced cost.
For the current financial quarter, Microsoft expects the support deadlines that just passed to provide a continuing boost to revenues.
"In Windows, overall, OEM revenue growth should be in the low to mid-single digits and continue to reflect healthy Windows 10 demand, end of support for Windows 7 and the supply chain's ability to meet demand," Hood said. "Growth in our on-premises server business should be high single digits, again driven by strong hybrid demand, as well as some continued benefit related to the end of support for Windows Server 2008."
One variable for Windows revenues in Q3 is a question mark for everyone -- the coronavirus outbreak, which has led to the quarantining of 16 cities in China and prompted Russia to begin closing its border with China.
Hood cited the "uncertainty related to the public health situation in China" as the reason Microsoft's guidance for next quarter in More Personal Computing covers a wider range of revenues than usual.
Posted by Scott Bekker on January 30, 2020 at 10:50 AM