Microsoft Reported Strong Earnings, Powered by its Intelligent Cloud Segment

Key Highlights from FY Q4 2019 Result:

  • Microsoft recorded revenue of $33.7 billion, an increase of 12% YoY, powered by its Cloud Segment.
  • Revenue in Intelligent Cloud was $11.4 billion in the quarter and increased 19% YoY
  • Xbox hardware revenue declined 48% YoY due to a decrease in volume of consoles sold.
  • Surface revenue grew 14% YoY due to strong growth in the commercial segment.
  • Enterprise mobility installed base grew 41% to over 116 million.

Exhibit 1: Intelligent Cloud Revenue and Azure Revenue Growth Rate YoY %

Intelligent Cloud Revenue

Source:  Counterpoint Research /Microsoft 

Microsoft has enhanced its focus on its Azure business unit with various developments during the quarter:

  • The Intelligent Cloud segment was the star performer and the highest contributor with a 33.8% share in total revenue. However, the Intelligent Cloud segment’s operating margin declined from 41% to 39% YoY due to investments in cloud, AI engineering and GitHub. Server products and cloud services revenue increased 22% driven by Azure’s revenue growth of 64% YoY. The gross margin % in the Intelligent Cloud segment was flat YoY as gross margin improvement in Azure was offset by an increased mix of cloud offerings.
  • Microsoft closed multi-million-dollar commercial cloud agreements, with material growth for $10 million-plus Azure agreements. The Azure revenue growth rate indicates more of a market stabilization rather than a declining trend. We can expect the Intelligent Cloud segment to be the major contributor to Microsoft’s total revenue in 2020.
  • To benefit from the growth in IoT-related data, Microsoft is driving significant growth in the number of datacentres – now numbering 54 including the first in the MEA region. In addition, it is developing its relational database services with its Azure SQL Database.
  • This year Microsoft introduced cloud-to-edge services and devices from Azure Data Box Edge, to Azure Stack HCI, to Azure Kinect which makes Azure the only cloud service offering that extends to the edge. This enables existing Microsoft Azure customers to seamlessly integrate IoT Edge into their current Azure IoT solution by easily deploying edge computing and analytics capabilities.
  • Microsoft added advanced threat protection for Azure Storage, which provides an additional layer of security intelligence that detects unusual and potentially harmful attempts to access or exploit storage accounts.

Microsoft’s strategy is to be at the forefront of cloud and edge technologies by continuing its R&D and other investments to tap untouched markets. It will use mature markets to pilot a smooth transition from cloud to edge solutions. Emerging markets offers opportunities for complete transformation through digitalization. In addition, Microsoft is working closely with semiconductor companies to develop security at the chip level and through to the cloud. Previous approaches run the danger of allowing attack vectors through insecure basic hardware.

A new trend of partnership and collaboration from Microsoft is emerging:

  • Microsoft and Oracle partnered for cloud interoperability enabling customers to migrate and run mission-critical enterprise workloads across Microsoft Azure and Oracle Cloud.
  • Red Hat Enterprise Linux (RHEL) 8 provides Microsoft’s customers a more cloud-centric and container-based IT infrastructure for Red Hat workloads running on Azure.
  • Microsoft partnered with VMware to include support for managing Office 365 across devices via VMware Workspace ONE. The partnership is important for upcoming Windows Virtual Desktop (WVD), and future work on networking and delivery of Azure services for VMware on-premises customers.
  • Mv2-series VMs are certified by SAP for SAP HANA OLTP and OLAP production workloads.
  • Microsoft joins a multiyear alliance with AT&T to provide cloud services, edge computing solutions. The key highlight of the partnership includes: AT&T aiming to migrate most non-network workloads to the public cloud by 2024 to focus on core network capabilities, and the two companies collaborating to test an edge computing-based tracking and detection system for drones.
  • Microsoft partners with Sony to collaborate on cloud-based solutions for gaming experiences and AI solutions. Furthermore, the collaboration will allow these companies to explore other areas including semiconductors and AI.
  • Microsoft is partnering with Alphabet to teach important lessons about quantum computing algorithms through a short online curriculum.
  • Microsoft and Sierra Wireless are simplifying and accelerating the process of getting edge data to the cloud. Furthermore, Sierra Wireless intends to migrate its existing cloud infrastructure from AWS to utilize Azure’s full complement of cloud services.
  • A few days after the earnings report, Microsoft announced it will invest $1 billion in OpenAI to build an artificial general intelligence (AGI). The both companies will jointly develop a new Azure AI supercomputing technology and Microsoft will become an exclusive cloud provider.

Exhibit 2: Microsoft 2Q 2019 Partnership landscape

Microsoft 2Q 2019 Partnerships landscape

Source:  Counterpoint Research /Microsoft 

In the era of IoT, the key trend is that providing end-to-end IoT solutions is not a one-man show; companies either need to collaborate or acquire other companies. Hence, Microsoft made several partnership agreements within the quarter with a long-term perspective and strategy in play. By partnering with key players in the value chain, Microsoft is positioning itself not just as a cloud or edge solution provider but is offering a full suite of solutions for multiple customer types.