Overall, its a really strong quarter across the board: Analyst on Microsoft earnings

D.A. Davidson Analyst Rishi Jaluria joins The Final Round panel to break down what to make of Microsoft in it’s better-than-expected earnings report.

Video Transcript

SEANA SMITH: Welcome back to "The Final Round." We have Microsoft earnings. They are out. Shares a little bit higher here after hours, up just around 1%. Right now, the company feeding on the top and bottom lines. Revenue coming in at $37.2 billion. Earnings per share coming in at $1.82. That was better than what the Street was expecting.

Intelligent cloud revenue, we know that that was one of the divisions that analysts were watching very closely during the quarter. That coming in at $12.99 billion. So for a little bit more on today's results, we want to bring in Rishi Jaluria. He is an analyst at DA Davidson. And Rishi, great to have you back on the program. Let's just start big, and what did you think of these results that we just got out here from Microsoft?

RISHI JALURIA: Yeah, and thanks so much for having me. Always a pleasure to be back on this show. You know, I think from my perspective, a lot of investors were really spooked by SAP's announcement from yesterday. And what does that mean for broader enterprise software market?

Now obviously, Microsoft has shown it's a very different beast, right? It's not a legacy back office. It's touching kind of everything within the enterprise. And I thought this was a really strong quarter. It's a great bellwether to tell us that the enterprise software spending environment remains strong. And there remains opportunities. And, you know, to your point on what investors are paying attention to, I mean, it was a very broad based beat.

But the kind of three things I would point to that struck me out as being really positive, the first was Azure, right? Their cloud platform. The growth for Azure was actually in line with the growth from last quarter. And the Street was expecting a pretty decent deceleration, especially after it had decelerated last quarter. So I think that was a really positive mark.

LinkedIn revenue growth actually accelerated, right, to about 16% versus 10% last quarter. And I think that's a great kind of indication of the macro environment starting to work in their favor with, you know, jobless claims coming down, more hiring out there.

And then thirdly, we saw a seed count growth really stable, right? 15% seed count growth this quarter, which is in line with last quarter. So a really strong report I think across the board. And it should give investors some kind of calm of mind that the software spending environment isn't starting to slow down yet.

SEANA SMITH: Yeah, Rishi, that was a huge, I guess, concern here, going into this report. And we were just talking about that in the last block as well. You mentioned Azure, and I just want to drill down a little bit deeper into that. Because the fact that we did see that consistent quarter over quarter growth, that, of course, is a welcome number from the Street, like you were just talking about.

I'm curious just where you think we are in Microsoft's, I guess, foray into the cloud division. Because we know it still lags pretty significantly behind Amazon's AWS. How-- I guess, how critical of a division do you see this being for Microsoft here going forward?

RISHI JALURIA: Yeah, I think Azure is really critical to kind of the future of Microsoft. And you can see that with the investments. You can see that with the language that Satya is using. It is really important. And, you know, it is behind AWS in market share, but Azure has been closing the gap over time. And I think that's the most significant part of it, right? Azure is still growing faster than AWS.

And really, I think Microsoft is in the early innings of kind of converting its existing giant install base in on-premise customers and moving them over to the cloud. And the great thing with moving workloads over to Azure is you get to drag a lot of fact, right? It helps on Office 365. It helps on dynamics. It helps on all their SaaS products. So, really critical, and I think they've been executing really well on Azure growth.

AKIKO FUJITA: You know, no question Azure's growth has been the focus of-- I almost said Amazon-- Microsoft during this, basically, pandemic, but even before that. But there's other areas that Microsoft has done really well in, particularly in gaming activity. We've really seen that pick up over the last half of the year. I'm curious how big of a driver you think that's going to go-- that's going to be moving forward. And how sustainable is the growth that we've seen?

RISHI JALURIA: Yeah, I think you're absolute right. Gaming is going to become an increasingly important part of the business, especially with the upcoming kind of console refresh, the new Xbox coming out. You saw that Microsoft recently purchased a really large gaming studio.

And so there's a lot that Microsoft is doing because they recognize that there's a huge opportunity not just in owning the console, but the full kind of cloud distribution platform, like we've seen, you know, Sony is doing with the Playstation, and buying the content was an important part in kind of closing the gap there. So I think it is going to be really important for them.

And that's-- a lot of these areas you talk about with Microsoft are seeing a lot of great tailwinds that are being accelerated by the pandemic, right? It's not just the move to the cloud or a Teams adoption. Even gaming with social distancing and stay at home orders and the possibility of a second lockdown coming, those are all areas that I think Microsoft can see some tailwinds for.

MYLES UDLAND: And so then, Rishi, kind of building off of that and sticking with the gaming point, you know, just kind of looking at the revenue growth here, in this quarter last year, Xbox was up 1%. And now it's up 30%.

And I guess, as you as an analyst try to model out where that could kind of float to, I mean, do you think this put that part of the business on a different trajectory? Are you looking at a-- I don't know, whatever-- 7% growth going forward, terminal growth versus maybe 3% previously? How are you kind of thinking about some of these major changes we've seen in the last couple of quarters because of the pandemic?

RISHI JALURIA: Yeah, it's a great question. And even putting aside, you know, the launch of the new console, I think the fact that they will own more actual intellectual property on top of what Microsoft already has is a national accelerant to that business.

You know, I think with the tailwinds that the current environment has created, it has probably not just led to people who stay at home and are bored and are playing games. But it's also probably created a lot of new gamers out there, who will stick with that habit. So I think you're hitting on exactly the right point.

This is a long-term accelerant to Microsoft's gaming business. It's not just a temporary spike. We might see the kind of return to more normal levels post-pandemic. But I think that the growth trajectory has accelerated and will continue to do so.

SEANA SMITH: And Rishi, are you-- just curious, at these levels that we're seeing Microsoft trading right now, so the stock is up, what, 37%, 38% year to date, getting a little bit of a boost here, although not much movement, on the heels of these results, are you a buyer of Microsoft at these types of levels? Or do you think maybe some of that growth that we've seen could, I guess, stabilize just a little bit here over the coming months?

RISHI JALURIA: Yeah, I mean, look, I think we will see some stabilization in certain growth areas. But, you know, I think long-term, I still really like the Microsoft story, right? The fact is, they've executed really well under Satya. They've got multiple growth drivers. And I think they're still in the early innings of a lot of these opportunities, right? Be it Azure migrations, be it Microsoft Teams adoption.

And so, for me, I look at it and I say, yes, it's had a nice run up. But I always go back to the quote that Satya gave us very early in the pandemic, which is they saw two years worth of digital transformation in two months. And I think that this is kind of an irreversible trend, right? That this digital transformation trend has overused those phrases I think it is, is real.

And companies are realizing with this work from anywhere environment, that it is increasingly important to have distributed, scalable cloud-based solutions versus kind of the legacy way of doing things.

MYLES UDLAND: And then, Rishi, you know, kind of going back to a different version of the question I asked on gaming, but this time for Azure, just thinking about that terminal growth rate again, Azure is still growing 47% year over year.

Does this again-- does this pandemic change what you think either of the terminal growth rate of that business is, or how long it will take Microsoft to get there? Because for a company this size, with a unit that size, growing at that kind of pace, you know it's going to slow, but I think it's exceeded a lot of expectations for several quarters now.

RISHI JALURIA: Yeah, it's a great question. And the way I think about it is, yes, it means there's more growth opportunities. But for me, it's really about extending the runway of growth more than, you know, bringing up what that terminal growth rate looks like. Because what I think has happened as a result of the pandemic is, you probably had a lot of organizations that were not willing to adopt the public cloud in a meaningful way. And now they see, hey, there is really no other option, right?

So if we were heading into a future that, 10 years from now, you know, 2/3 of all workloads are going to be in the public cloud and the rest are on premise, now we're looking at that number probably being closer to 75%, 80%, or even higher. And so this expands their market opportunity. And it really does extend that runway of growth for them. And it means that Microsoft could eventually become a much bigger company than even the path they were on pre-pandemic.

SEANA SMITH: Rishi Jaluria, always great to have you on the program, analyst at DA Davidson. We look forward to talking with you again soon.