Microsoft Versus Amazon: What Acquisitions Could Move The Needle?

Earlier this week, Microsoft (Nasdaq: MSFT) reported a mixed quarterly result. While revenues missed the market’s forecast, it managed to deliver a slight earnings beat. Its cloud business continued to deliver growth, but Microsoft Azure’s performance failed to impress.

Microsoft’s Financials

Microsoft’s Q2 revenues grew 12% over the year to $32.47 billion, marginally shy of the market’s forecast of $32.51 billion. Microsoft attributed the miss in revenues to the PC market as revenue from copies of Windows software pre-installed on PCs fell 5% over the year. EPS of $1.10 was marginally ahead of the Street’s expectations of $1.09.

By segment, revenue in Productivity and Business Processes grew 13% over the year to $10.1 billion driven by an 11% growth in Office Commercial products and cloud services. Office Consumer products and cloud services revenue increased 1% with Office 365 Consumer subscribers growing to 33.3 million. LinkedIn revenue increased 29% with LinkedIn sessions growing 30%.

Revenue in the Intelligent Cloud segment grew 20% to $9.4 billion with Server products and cloud services revenue growing 24% and Azure delivering a 76% growth.

Revenue in More Personal Computing grew 7% to $13 with Windows OEM revenue declining 5% and Windows Commercial products and cloud services revenue increased 13%. Gaming revenue increased 8% with Xbox software and services revenue growing 31%.

For the current quarter, Microsoft expects revenues of $29.4-$30.1 billion for the quarter, compared with the market’s forecast of $29.9 billion. The currency headwinds are expected to hurt Microsoft’s intelligent cloud business segment revenues by 2 percentage points.

Microsoft’s Azure Growth

Microsoft continued to drive growth within the cloud segment. But the market is used to seeing stronger numbers from Microsoft. For the recently ended quarter, Azure recorded a 76% growth – which was flat to the previous quarter and significantly lower than the 98% growth reported a year ago. Analysts are worried that Azure may be losing traction. But during the quarter, Microsoft has won some big names for its commercial cloud. Within the retail segment, it has seen strong adoption with names like Walgreens, Walmart, and Gap becoming its cloud clients. Part of the reason for the retail growth is that retailers want to own their own data and they want a partner, not a potential competitor. Amazon’s presence in the e-tail market hurts its prospects within the segment.

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