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Microsoft cloud business remains strong despite earnings miss

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Yahoo Finance's Dan Howley joins the Live show to discuss Microsoft's cloud business remaining strong despite falling short on fourth-quarter earnings.

Video Transcript

[MUSIC PLAYING]

BRAD SMITH: Shares of MSFT for Microsoft, you are seeing them move higher on the day by about 4 and 1/2%. And that's despite reporting fourth quarter earnings that missed expectations citing an unfavorable foreign exchange rate and COVID closures in China as key factors. Yahoo Finance's Dan Howley joins us now to break down the details. Dan.

DAN HOWLEY: Yeah. So I think the big takeaway from this was obviously they missed on the top and bottom line. They missed across the board as far as revenue goes. But beyond that, investors are seemingly happy with what Microsoft has done. It's up 5% right now for the morning. And I think-- really 4.5% now-- I think the big takeaway though, is the fact that while there were misses, the cloud still seems to be doing well.

And that goes back to the fact that they had seen a 40% year-over-year increase in revenue for their Azure Service. Now, that comes, by the way, as both their Intelligent Cloud and Productivity and Business Processes-- those are to cloud-heavy business segments for the company-- missed. So we're still seeing Azure do well. That's their big cloud platform. They're kind of AWS fighter, making them the second largest cloud provider in the world. But I think that's really where investors are going.

And you know, Satya Nadella, Microsoft CEO basically said that's because of the consumption model that Microsoft has. People look to kind of optimize how they're spending during this kind of time, and the Azure platform really allows them to do that. So I think that's why we're seeing investors kind of breathing a sigh of relief almost despite the fact that, again, they missed on all of these different segments.

BRIAN SOZZI: Yeah. Microsoft calling out again, weakness in the PC market. We're hearing that a lot. Heard from Texas Instruments as well. But the Xbox business, I would say targets a very economically-sensitive consumer base, didn't exactly light it up in the quarter.

DAN HOWLEY: No, no, that was also off as well. Revenue was down year-over-year. And I think a lot of this has to do with-- you can see on the screen here the 11% on the Xbox hardware, gaming down, content and services down-- I think a lot of that has to do with A, the people who were buying Xboxes have bought them.

They're still hard to come by, but not nearly as hard to come by as they were at one point. There's not a lot of first party titles that we're seeing from Microsoft, and that's kind of an issue when it comes to how they're able to generate revenue for gaming. They're also not getting as much take up in third party as far as monetization once the products are purchased, the games are purchased.

But Microsoft is saying that a lot of that is being offset now by their Game Pass platform. And that's the ultimate goal for Microsoft, Game Pass. They hate this kind of analogy, but it's really a Netflix for gaming, especially the cloud version. That is really kind of where they're going to be pushing for years to come, where you can jump online, start playing games from wherever you want. They signed deals with Samsung, other smart TV makers so that you can access these platforms without needing a console.

And look, I use cloud gaming. I use Game Pass all the time. My wife and I play it every night. It's an amazing deal, and it's recurring revenue. And that's so important when it comes to gaming because look, people go out and they buy a title and then that's it. Unless it's something like Grand Theft Auto where there's the continual uptick in revenue. But a Game Pass would allow people to really do that long term.

BRAD SMITH: And so on the title since you mentioned that, the acquisition of Activision Blizzard it's likely to grow through is what the word on the street is at this point in time. So how immediately accretive might that be to this gaming business? That's going to be looking for some of the in-game purchases to tick up higher. It's going to be looking for more of some of the title purchases to prop up the gaming business.

DAN HOWLEY: Well, look, they have titles that are coming out. They have a game called Overwatch 2 that's going to be coming out. That's a big online multiplayer game. A lot of people like to spend money on that via different types of content, skins, things like that. But they also have obviously, Call of Duty, and that's the big franchise that Activision Blizzard has. On the Activision side at least, that will really generate revenue for them.

Their last Call of Duty title didn't exactly do well as far as individual sales go. But their Warzone, their online game still does incredibly well. And I think they're going to be coming out with a new map for that. That's going to draw more people to it again. As long as they can keep the cheaters away, something that really does annoy players, me included--

BRAD SMITH: It's part of the culture, the cheat codes.

DAN HOWLEY: Oh, no, you can't cheat in online games though. Look, every time my friends and I play and we lose, we call it champions night because all the champions come out and play. And that's the only reason why we lose, not because we're bad. But getting rid of cheaters I think is very important. That ensures that people want to stay in that ecosystem. And I think the fact that they've done so well doing that, that will be very good for the next version that comes out.

BRIAN SOZZI: Real quick, you have a gaming chair?

DAN HOWLEY: I don't. I don't, and I need one. I just have a regular old chair.

BRIAN SOZZI: I don't know, viewers want to know. Dan Howley, thanks so much.