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Partners Cheer Microsoft's Q2 Results

Investors weren't thrilled with Microsoft's second quarter financial results, but several partner observers mostly shrugged off the negative parts and applauded Microsoft's performance in strategic areas.

"An initial look at the numbers indicates the [failure to meet analyst expectations] was a miss on the personal computing side, though growth still looks to be strong in the productivity cloud and infrastructure cloud offerings," said Mark Sami, vice president of Microsoft and Cloud Solutions at SPR, a Chicago-based Microsoft managed partner specializing in digital transformation projects.

Of the market reaction that pushed MSFT down by 3% in after-hours trading and continued to trade lower on Thursday, Sami said, "This seems to be an overreaction, as the miss on the desktop side is minimal and many Microsoft users will have to upgrade their Windows 7 environments that will be out of support after this year. This is going to drive a lot of revenue to this sector of the business as well as potentially boost the productivity cloud numbers because of the new way licenses are packaged."

Microsoft on Wednesday reported revenue for the quarter ended Dec. 31 was $32.47 billion, a gain of 12% over the year-ago-period, and below analyst expectations of $32.51 billion. Diluted earnings per share were slightly higher than what Wall Street expected, coming in at $1.10 non-GAAP against predictions of $1.09.

Surprisingly strong quarterly performances by Apple and Facebook seems to have made Microsoft look worse to the market by comparison.

Among Microsoft's three overarching business segments, growth was strongest in Intelligent Cloud, followed by Productivity and Business Processes with More Personal Computing bringing up the rear. Intelligent Cloud revenues rose 20% in the quarter to $9.4 billion. Productivity and Business Processes was up 13% to $10.1 billion, and More Personal Computing delivered single digit growth of 7% to $13 billion.

In a statement, Chief Financial Officer Amy Hood drew attention to revenue growth in Microsoft's commercial cloud category, which crosses boundaries between the business segments. "Our solid execution delivered another strong quarter, with commercial cloud revenue growing 48% year-over-year to $9.0 billion," Hood said.

In a quarter when some infrastructure players like Intel have struggled, Microsoft's best data point came in its Azure line of cloud infrastructure products. The Azure business, which competes against market leader Amazon Web Services and other players including Google Cloud Platform, increased in the quarter by 76%. The growth percentage is sequentially flat for Microsoft, but the high-double-digit result still demonstrates strong momentum.

The numbers also suggest that the massive acquisition of LinkedIn is going well. Revenues for LinkedIn are up 29%, and sessions growth for the work-based social media platform is up by 30%.

A new batch of Surface hardware devices unveiled last October provided a bounce in Surface revenues for the quarter of 39%. Those devices that were all shipping for the holidays included the Surface Pro 6, Surface Laptop 2, Surface Studio 2 and Surface Headphones.

Other highlights included 24% growth in server products, a category that includes and was mostly driven by the Azure performance; and 13% growth in Windows commercial products and cloud services.

The biggest headwind by far in the quarterly results related to desktop Windows, once the crown jewel of the company and now something of a drag as the company transitions to cloud. Windows OEM revenues dropped 5% in Microsoft's second quarter compared to the same October to December period in 2017. Also weak was Office Consumer products and cloud services, which grew, but only by 1%.

Hunter Willis, a product marketing manager at AvePoint, a major SharePoint partner based in Jersey City, N.J., was encouraged by Microsoft's progress in the quarter.

"It's no surprise that Microsoft had another successful quarter after grabbing roughly 15 percent of the cloud market last quarter from IBM, Google and Alibaba. Last year alone, Microsoft made 15 acquisitions – headlined by its purchase of open-source software platform GitHub – which helped the company continue to expand into new growth areas. I expect to see Microsoft's intelligent cloud continue to dominate the market, especially given that its balance of IaaS, PaaS, CRM and Office 365 services have created the complete cloud story for its customers, enabling Microsoft and its cloud business to continue to grow at such a rapid rate," Willis said in an email.

Sharing the view that Microsoft's quarterly results look especially strong on the cloud side is Ryan Duguid, chief evangelist at Nintex, a process management and automation specialist and close Microsoft partner.

"Microsoft has certainly enjoyed an impressive run over the last 5+ years, but to be honest, I think they're only just getting warmed up," Duguid said in an email statement. "Having successfully transitioned away from a dependency on Windows and a perpetual license model across all core franchises, Microsoft has now positioned itself as the dominant player in the cloud, both in terms of core compute power with Azure as well as application delivery through Office 365."

Posted by Scott Bekker on January 31, 2019


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