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Cloud and Windows 10 Shine for Microsoft

The tech giant posted a better-than-expected start to its fiscal year, but we still see the shares as fully valued.

Solid Windows 10 adoption coupled with continued strong growth in the Intelligent Cloud segment led to better-than-expected results for

Total revenue declined 7% (2% in constant currency) and gross profit declined 3% (up 3%), both ahead of our internal forecast. The Intelligent Cloud segment grew 8% (14%) to $5.9 billion as Azure revenue doubled, and sales of core server products also grew 9% in constant currency. The cloud business was able to realize an 8% (15% in constant currency) increase in gross profit, and management intimated that cloud margins should continue to improve.

In the More Personal Computing segment, performance is tied more closely to product cycles for PCs, gaming consoles, and mobile devices, so we expect more cyclicality in this segment. Revenue declined 17% to $9.4 billion, primarily driven by the phone segment, but management said results for Windows 10 were a welcome surprise. Revenue contribution from Windows OEM deals declined only 6%, less than the overall PC market. Management attributed this outperformance to strong customer adoption and robust pricing for Windows 10. The company says more than 110 million devices are running Windows 10.

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About the Author

Rick Summer

Strategist

Rick Summer, CFA, CPA, is a technology strategist for Morningstar, responsible for Internet and technology research. Before assuming his current position in 2014, he was a senior equity analyst. He joined Morningstar in 2005 as an equity analyst, covering software and Internet companies. He has operating experience in the wireless and software infrastructure industries and has worked as a private equity investor for UBS Global Asset Management.

Summer holds a bachelor’s degree in business administration from Emory University and a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant (CPA).

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