M+E Connections

Robust performance in Microsoft’s Intelligent Cloud business again provided a boost for the company’s results in the second quarter (ended Dec. 31) as a 46% year-over-year increase in Azure and other cloud services revenue drove a 29% increase in server products and cloud services revenue, the company said Jan. 25.

Intelligent Cloud revenue grew 26% from a year ago to $18.3 billion, while total Microsoft revenue jumped 20% to $51.7 billion and net income increased 21% to $18.8 billion, with earnings per share increasing 22% to $2.48.

In an earnings call with analysts, Microsoft CFO Amy Hood said: “In our commercial business, strong execution by our sales teams and partners combined with continued demand for our Microsoft Cloud offerings drove significant growth in large, long-term Azure contracts, as well as increased usage of Teams and our advanced security and identity offerings.”

The 46% growth in Azure and other cloud services was “driven by continued strength in our consumption-based services,” she said.

Intelligent Cloud revenue included a “one-point [foreign exchange] headwind relative to expectations,” she noted, explaining: “Excluding this headwind, revenue grew ahead of expectations driven by continued customer demand for our differentiated hybrid and cloud offerings.”

A “Distributed Computing Fabric” is Needed

Providing details on the growing demand for Azure services, Satya Nadella, Microsoft CEO and chairman, said: “As every company becomes a digital company, they will need a distributed computing fabric to build, manage, secure, and deploy applications anywhere.”

Microsoft is “extending our infrastructure to the 5G network edge, helping operators and enterprises create new business models and deliver ultra-low latency services closer to the end user,” he told analysts.

As an example, AT&T is “bringing together its 5G network with our cloud services to help General Motors deliver next-generation connected vehicle solutions to drivers,” he noted.

Microsoft’s Azure Arc customer base, meanwhile, has “tripled year over year” and the company is “now helping thousands of organizations – from BP to Rabobank – unify their on-premises, hybrid, and multi-cloud infrastructure,” he said.

As the “digital and physical worlds come together, we are seeing real enterprise metaverse usage,” he told analysts. “From smart factories, to smart buildings, to smart cities, we are helping organizations use the combination of Azure [Internet of Things], Digital Twins and Mesh to help digitize people, places and things in order to visualize, simulate and analyze any business process.”

Additionally, “across Azure, we are seeing growing adoption across every sector,” he said, noting CVS Health, Johnson & Johnson Medical Devices and Wells Fargo were among the companies that “all chose our cloud as their preferred provider this quarter.”

With Azure Synapse, Microsoft is “removing traditional barriers between enterprise data warehousing and big data analytics so anyone can collaborate, build and manage analytics solutions,” he went on to say.

Data governance, meanwhile, is “emerging as an important and growing category and Azure Purview is leading here, helping thousands of organizations achieve a more complete understanding of their data estate,” he said.

Moving on to artificial intelligence (AI), he said: “We have one of the most powerful supercomputers in the cloud, and we’re using it not only to train new models but to deliver them as platforms to our customers. Our new Azure Open AI Service is in preview and that brings together advanced language models with the enterprise capabilities of Azure. GitHub Copilot is using this capability to help developers write better code.”

Xbox Performance Strong

In gaming, revenue increased 8%, “in line with expectations,” during the second quarter, according to Hood.

Xbox hardware revenue grew 4%, “driven by continued strong demand and better than expected console supply on a strong prior year comparable that included the launch” of the Xbox Series X and S consoles, she said.

Xbox content and services revenue increased 10% but that was “lower than expected, as strong growth in first-party titles and Game Pass subscriptions [were] partially offset by weaker third-party title performance,” she said.

The “big bets we have made across content, community, and cloud over the past few years are paying off” in gaming, Nadella said, noting: “We saw record engagement, as well as revenue this quarter.”

Game Pass now has over 25 million subscribers across PC and console, he pointed out. “Our differentiated content is driving the service’s growth and we released new AAA titles this holiday to rave reviews and record usage,” he told analysts.

Eighteen million gamers have played Forza Horizon 5 so far and over 20 million have played Halo Infinite, making it the strongest Halo game launch to date, he added.

With Microsoft’s recently announced plan to acquire Activision Blizzard, “we are investing to make it easier for people to play great games wherever, whenever, and however they want, and also shape what comes next for gaming as platforms like the metaverse develop,” he added.

Q3 Outlook

For Intelligent Cloud, Microsoft expects to report revenue between $18.75 billion and $19 billion for the third quarter, Hood said.

“Revenue will continue to be driven by Azure,” where revenue growth is expected to be up from Q2 in constant currency, “driven by our Azure consumption business, with strong growth on a significant base,” she told analysts.

In gaming, compared to Q3 last year that included “significant strength in hardware from our new consoles as well as across Xbox content and services, we expect revenue growth in the mid-single digits,” she said. In Xbox content and services, Microsoft expects to report revenue growth “in the mid- to high-single digits with strong engagement and continued momentum across the platform,” she added.

But she warned: “Console sales will continue to be impacted by supply chain uncertainty.”