Microsoft’s cloud soars, while consumer businesses like Xbox slide
As long as Microsoft’s cloud continues to soar, investors will forgive a few of the company’s weaker consumer businesses.
Microsoft stock jumped 4.3% to $175.26 in after-hours trading after the technology titan reported its earnings for another solid quarterly earnings. Overall sales jumped 14% to $36.9 billion in Microsoft’s fiscal second quarter, beating analyst expectations of $35.7 billion.
On a call with analysts, Microsoft CEO Satya Nadella pointed to the company’s cloud and related enterprise software business as the key drivers for growth. Indeed, sales in its cornerstone Azure cloud computing unit rose 62%, a slight increase to the previous quarter when revenue (which Microsoft doesn’t disclose) rose 59%. Azure’s slight sales bump in its most recent quarter reversed a two-year trend of slowing growth, albeit still substantial gains that any company would crave.
But while Nadella bragged about the company’s various enterprise focused services, ranging from artificial intelligence technologies to so-called hybrid cloud products, he glossed over some of the company’s less rosy businesses.
For instance, Microsoft’s gaming business dropped “$905 million or 21%” year-over-year in its latest quarter, the company said without revealing a specific number. Sales of the company’s flagship Xbox consoles declined 43%, which Microsoft CFO Amy Hood attributed to the upcoming launch of Microsoft’s newer Xbox console during the 2020 holiday season. Hood did highlight a positive note about Microsoft’s current weak Xbox sales—it’s gross margins, or profits, benefited “from lower console sales.”
Nadella did mention that there are now “hundreds of thousands of people participating in initial trials” of the company’s ambitious Xcloud service, which will let people stream powerful video games to smartphones and computers. But it will likely take years before that service makes a significant impact to Microsoft’s current gaming businesses, considering it hasn’t been widely debuted to the public.
In the mean time, Nadella mentioned rival Sony as an example of a customer who can use some of the same underlying Azure cloud gaming technology for their own services, implying that Microsoft sees big money in selling game-streaming tools to other companies, as opposed to merely being a consumer business.
Meanwhile, sales of Microsoft’s Surface lineup of laptops and computers rose 6% year-over-year to $1.98 billion. Hood mentioned that while sales of Surface devices to businesses were strong, Microsoft faced unspecified “execution challenges in the consumer segment,” underscoring difficulties the company is facing pitching the Surface devices to the broader public.
Hood also mentioned “lower Bing volume,” suggesting that the company’s Google search engine rival Bing failed to grow as expected. Indeed Bing’s sales growth (Microsoft doesn’t break out specific Bing advertising sales) was only 6% year-over-year in its latest quarter, compared to the previous quarter when it grew 11 % year over year.
Despite some of the challenges Microsoft’s various consumer businesses face, not one analyst on the earnings call wanted to probe the problems. Instead, they generally congratulated Microsoft for another successful quarter, thanks to the cloud.
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