UPDATED 17:41 EDT / APRIL 27 2017

CLOUD

Intel, Microsoft miss estimates, but growth businesses remain strong

Two giants of the personal computer era slightly underwhelmed investors with earnings reports today but indicated that their comeback plans are making steady progress.

Microsoft Corp. beat earnings estimates for its third fiscal quarter on a 94 percent surge in its Azure infrastructure as a service business, nearly matching the second-quarter growth rate of 95 percent off a much larger base. Revenues came in slightly below analyst estimates, however, sending the stock down about 2 percent in immediate after-hours trading.

Intel Corp. also narrowly missed revenue estimates for the quarter, despite raising its annual revenue estimates by $500 million. First-quarter revenues were $14.8 billion, up 8 percent over the same period last year. Operating income of $3.9 billion rose 20 percent over the same period.

Investors were troubled that revenue at Intel’s core data center group, which contributes about 30 percent of the company’s revenue at strong profit margins, came in at $4.2 billion, about 4 percent below analysts’ estimates. Intel said its Internet of Things business grew 11 percent to $721 million, ahead of analyst estimates of $714 million. Intel shares fell more than 4 percent in immediate after-hours trading.

Crowing about cloud

Microsoft’s earnings message was all about cloud, and it has reason to crow, not least because its growth rate is more than double that of rival Amazon Web Services. The company’s overall cloud business is on an annual run rate of more than $15.2 billion, which would technically make it bigger than Seattle neighbor AWS, which posted strong earnings today.

However, the figures aren’t directly comparable, since Microsoft’s cloud business includes numerous software as a service offerings that Amazon doesn’t offer. “Increasing Azure consumption has been their No. 1 sales priority,” said Chris Voce, vice president and research director at Forrester Research Inc.

Microsoft reported second-quarter revenues of $23.56 billion, slightly below consensus analyst estimates of $23.62 billion as reported by Thomson Reuters. Earnings per share came in at 73 cents against a consensus estimate of 70 cents.

Office 365 commercial revenue grew 45 percent and the cloud version of Microsoft’s Dynamics 365 integrated customer relationship management and enterprise resource planning service group jumped 82 percent, although off a much smaller base. “All this is very impressive,” commented Patrick Moorhead of Moor Insights & Strategy. The LinkedIn unit contributed revenue of $975 million, up less than 2 percent from the $960 million it reported in its last full quarter as a public company.

“They’ve really made leaps from being a Windows-centric company to a cloud-centric one, making offerings like Office available to anyone on nearly any device,” Voce said. “They’re ensuring people continue to work on their platform, no matter what the device is.”

Microsoft’s legacy business continues to show resilience. Enterprise services revenue was flat, Windows revenue from sales to PC and other device makers increased 5 percent and Office commercial products grew 8 percent. Revenues for the company’s Surface line of portable computers fell 25 percent as Microsoft continues to lag in refreshing that product family.

“The company continues to execute well in the broad shifts in strategy led by Nadella,” said Charles King, president of Pund-IT Inc. He cited the strong progress in Microsoft’s cloud and Office units, as well as the unexpectedly strong growth in Windows licenses. However, the hardware business is a concern, particularly the slowdown in Surface sales. “Outside of stating that it will eventually deliver ARM-based Surface solutions, Microsoft has been oddly mum about its long term plans for the platform,” King said.

Intel investors fret

Intel said its growth businesses collectively grew by double digits over the same quarter last year and that the memory business had record quarterly revenue on the backs of its new Optane high-performance memory products. Revenue in the Client Computing Group – which includes desktop PCs – was up 6 percent, to $8 billion. Non-volatile memory revenue grew 55 percent, to $866 million.

Data Center Group revenue edged up only 6 percent, however, as the enterprise market softened. Intel had initially forecast revenue in the group to grow by double digits this year, but scaled estimates back to the high single digits early this year.

Moorhead said investors’ focus on DCG revenues overshadows the strong progress the company is making. “Intel had a record quarter driven by acquired growth with Altera [Corp.] and organic growth in flash memory,” he said. The data center business, he said, “is taking some of the early cost hit” on Intel’s shift to 10 nanometer chips.

King agreed that Intel has been up-front about what to expect from its data center business. “Intel’s explanation that funding the processes required for new chips was more costly than expected was entirely reasonable, but not especially satisfying for some folks,” he said. “On the plus side, those new manufacturing process costs are likely to drop over time, so Intel’s optimistic revenue and profit expectations for the rest of the year seem entirely achievable.”

Intel CEO Brian Krzanich would probably agree. He issued an optimistic outlook, saying the company is on track to lead in growth areas like artificial intelligence and autonomous driving. “The ASP [average selling price] strength we saw across nearly every segment of the business demonstrates continued demand for high-performance computing, which will only increase with the the explosion of data,” he said.
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