Microsoft (Nasdaq: MSFT) recently announced its first quarter results that surpassed market expectations and proved to the world its agility. Like I said earlier, it maybe the dark horse in the race, but it is certainly taking the right strides.
Microsoft’s Q1 revenues grew 2% over the year to $26.1 billion, ahead of the market’s forecast of $25.3 billion. EPS of $0.83 was also ahead of the Street’s expectations of $0.79 for the quarter.
By segment, revenues from Productivity and Business Processes grew 10% over the year to $7.4 billion. Within the segment, Office commercial products and cloud services revenue grew 5% driven by 47% growth in Office 365 commercial revenue. Office consumer products and cloud services revenue increased 22% as Office 365 consumer subscribers grew to 24.9 million. Dynamics products and cloud services revenue increased 7%. LinkedIn also added $228 million for the quarter to the segment but was responsible for $100 million in losses as well.
Microsoft’s efforts on cloud computing have borne stellar results. Revenue in the Intelligent Cloud segment increased 8% to $6.9 billion driven by 12% growth in revenues from Server products and cloud services. Azure revenues grew 93% over the year with Azure compute usage more than doubling over the year. For the segment, the market was looking for revenues of $6.73 billion for the quarter. More recent market share results are not available, but in a report published last August, Amazon was still ahead of the pack with 31% share and Microsoft followed it at 11%. Other vendors, including Alphabet and IBM were far behind with 8% and 5% share respectively.
Revenue in More Personal Computing segment fell 5% to $11.8 billion driven by lower phone revenue. Within the segment, Windows OEM and commercial products revenues increased 5%. Search advertising revenue excluding traffic acquisition costs grew 10% driven by increased revenue per search and search volume. Gaming revenue fell 3% due to lower Xbox console revenue.
Microsoft’s Emerging Technology Focus
Microsoft began the year with acquisitions in the emerging technology space. Earlier this month, it announced the acquisition of Montreal-based AI startup Maluuba for an undisclosed sum. Maluuba was founded by University of Waterloo graduates Kaheer Suleman and Sam Pasupalak. It focuses on natural language processing for its AI capabilities with the mission of building computers that can think like humans. It uses deep learning and reinforcement learning to increase the proficiency and effectiveness of computer-based systems that can answer questions and make decisions. Microsoft plans to leverage Maluuba’s capabilities to make AI more accessible to the general public. This is the third acquisition for Microsoft in the AI space. Last year, it had acquired Genee and SwiftKey to build its AI arsenal.
Its second acquisition in the month was that of the 3D optimization service Simplygon. Simplygon was developed by Swedish company Donya Labs AB. Donya was founded in 2006 to be a leading developer of automatic 3D data-optimization solutions. It developed Simplygon which is a leader in 3D game optimization and is dedicated to helping users of 3D data across industries optimize content pipelines and streamline workflows. Terms of the deal were not disclosed. The acquisition will also help accelerate Microsoft’s vision of developing 3D For Everyone which was introduced with the Windows 10 Creators Update last year. Last year, Microsoft had announced its partnerships with hardware companies including Dell, HP, Lenovo, Asus, and Acer to release several PC-tethered VR headsets.
Finally, last quarter, Microsoft completed its earlier acquisition of LinkedIn. I think it is time for it to strengthen its position in the cloud with some other big acquisitions such as those of the IT service management company ServiceNow (NYSE: NOW), business intelligence and analytics company Tableau (NYSE: DATA), data analytics software solutions provider Splunk (NASDAQ: SPLK), or SaaS-based enterprise application services provider Workday (NYSE: WDAY). Ideally, it should buy in all four so that it could become the force to reckon in the Cloud.
Its stock is currently trading at 20- year high levels of $65.72 with a market capitalization of $523 billion. It had fallen to a 52-week low of $48.04 in June last year.
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