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Microsoft beats expectations on cloud strength

Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss Microsoft’s earnings and AMD’s chip deal with Daniel Newman, Futurum Research Principal Analyst.

Video Transcript

ALEXIS CHRISTOFOROUS: Taking a look at Microsoft, posting another strong quarter in its latest report, beating analysts' expectations on strength in its cloud business. I want to bring in Daniel Newman of Futurum Research now to break down these details. Daniel, always good to see you. What stood out to you in this Microsoft report?

DANIEL NEWMAN: Well, coming off of just one day earlier, where S&P had some questionable results and the market had a big sell-off, there was some wonder on the pressure. Would cloud business be off? And what would happen to Microsoft a day later?

And the company, as I had expected, came in very strong. Its revenues were over target. Its earnings were over target. And its Azure business actually grew more than the quarter before it, at 48%, which is the number I think everybody had their eyes on.

I was looking at three things, Alexis. I was looking at their cloud business. I was looking at their productivity business. And then I wanted to understand kind of their personal business, which is the Xbox and Surface. And all three saw growth.

You know, the cloud was the big one. The productivity business saw 11%. But their dynamics-- their ERP and CRM that competes in that cloud space with SAP, Oracle, and Salesforce grew 38%. And their Surface growth was also very impressive, at 37%. And I think they're going to be challenging that ultra-premium notebook more and more as the year goes on.

BRIAN SOZZI: Some concerns, Daniel, on the outlook they provided-- a little bit below expectations, some slowing growth in the cloud. That slowing growth, does that reflect anything from what Amazon is doing in the cloud?

DANIEL NEWMAN: Amazon will continue to be very strong on the infrastructure side. The company has kept its strengthen and its position. It's still growing at close to 30%, even at $10 billion a quarter. So AWS is always going to be a significant player.

Microsoft's strength comes not only from the infrastructure, but from the platform and software side. And I expect that the companies are going to continue to see growth. I don't think Amazon itself is the reason. I think we're seeing some pressure on the markets. I think the markets are overall under pressure. And I think that CFOs and leaders are going to be a little more conservative with guidance, because it's always better to be a little more conservative and come in really strong than to, you know, kind of overshoot and then come in soft.

And their guidance still reflects solid growth, I think about 8%. And if the company is able to come in at 10, 11, or 12, like it did this quarter, I think the street's going to be very happy. Microsoft seems like it's in a very good position right now.

ALEXIS CHRISTOFOROUS: Daniel, I want to switch gears and talk about the chip sector, because we continue to see consolidation there. AMD this week said it's going to buy its rival, Xilinx. It's a $35 billion all stock deal, just the latest in a string of deals we're seeing in this space. Do you think we're going to see more consolidation? And what do you do if you hold Intel right now?

DANIEL NEWMAN: Yeah, a couple of different points there. So I thought the AMD deal was a solid deal. AMD's had a lot of momentum. And I think the street and investors were looking to see how all that growth was going to be put to use. It's going to expand the TAM over $100 billion. Xilinx diversifies the company deeper into comms and automotive.

I do have a few concerns about the price tag. Will that deal pay off quickly, and how quickly? The synergies are only about $300 million. I really think it's going to need to be overall growth for AMD. But the company's done well. Lisa Su has been very impressive, and I expect her to do well with this transaction.

In terms of the question about Intel, Intel still has a lot of strength. We have to be realistic that AMD has gained market share quarter after quarter in CPUs. It's gained market share in data center. So you can't ignore that fact.

But Intel's market share and data center, for instance, is still over 90%. It had a tough quarter in its data centric business. But you have to remember, the two quarters prior, Alexis, it blew out those numbers. So it was more lumpy is what it has been.

And so I'm not ready to say that Intel is in deep distress. But it's made promises that it's going to improve its process. It's going to deliver on its 10-nanometer, seven-nanometer chips in the next few quarters. And I think the company's going to have to be perfect in its execution, because the street seems to be completely unforgiving when it hits its targets operationally or revenue. It wants both every time. And that's what happens when you're the big incumbent.

BRIAN SOZZI: Daniel, I hear you. It's Intel. Let's not toss it in the trash just yet. But if there's one thing-- if you were sitting next to CEO Bob Swann, you were talking him, what's the one thing you would suggest to turn the business around?

DANIEL NEWMAN: Yeah, I really am saying focus on operational excellence. People are kind of tired of hearing about the delays. They're tired of missed target dates. AMD has continued to, you know, nab market share. And it was ankle-biting. But now it's becoming more legit, and you're seeing real market share being taken in real categories that Intel has had a lot of strength for a long time.

If you can hit your operational targets, hit those process targets, and continue to win the business and keep those strong relationships, Intel still has, like I said, close to 90% of the data center market. Also, last thing, Brian-- I know you only gave me one, but AI. The company has to knock it out with AI, because Nvidia, and now with Arm, has been another very legit competitor.

And they're going to be a bigger one in the CPU area now that they're going to have access to Arm's technology. That wasn't something it had before. Intel's had some stops and starts with its AI recently. Habana was its big acquisition. It needs to nail this in terms of its AI business going forward.

ALEXIS CHRISTOFOROUS: All right. Maybe Bob Swann is listening and will take your advice. Daniel Newman of Futurum Research, good to see you.

DANIEL NEWMAN: Thanks for having me.