Analysis: Microsoft Earnings (Premium)

On Wednesday, Microsoft announced earnings for its second quarter, which ended on December 31, 2017. Brad has already covered the news over on Petri. Here, I'd like to dive a bit deeper and analyze what the results mean for the software giant's core businesses.

Note: As you may know, I normally provide my "morning after" overview of Microsoft's quarterly earnings in Paul Thurrott's Short Takes, an often-humorous set of blurbs that appears on Fridays on Petri. But doing so was just a matter of timing: With Microsoft normally issuing its earning announcements on a Thursday, it made sense to provide more depth the following morning. But as Brad recommended to me last night, moving this coverage to Thurrott.com and making it a Premium article makes more sense. That will allow me to continue with the usual frivolity in Short Takes on Friday.

Here, I will examine some, but not all, of Microsoft's key businesses. The focus is on those products and services that I, and I think readers of this site, care about the most.
The basics
Microsoft posted net income of $8.7 billion on revenues of $28.9 billion in the quarter. These are significant and double-digit gains---10 percent and 12 percent, respectively---over the same quarter a year ago.

I find the earnings trends to be very interesting: In the same way that Microsoft's stock price was stuck at the same general price point for about a decade, Microsoft's quarterly earnings had reached a comfortable and perhaps too-predictable plateau of sorts, too. That is, the firm had been reporting low single-digit billions in net income and mid-$20 billions in revenues each quarter for several years now.

That's starting to change, and in time I expect Microsoft's earnings to settle in at a higher general range---$10 billion-ish in net income and $30 billion-ish in revenues---as its successful transformation continues.

This is impressive, given the ongoing narrative about Microsoft. This is a company that is transforming its own business to the cloud while it guides its corporate customers to do the same. Microsoft's core strength, as I've pointed out before, is that it is uniquely situated to successful undertake both of these transformations, and to do so at the same time. None of its competitors have such a large corporate customer base, once largely using on-premises solutions, that they can transition to hybrid and cloud solutions on an ongoing basis. And none of its competitors can so successfully transition from the increasingly obsolete solutions of the past to more modern offerings, as Microsoft can (and is).
Tax hit
One of the more confusing aspects of Microsoft's earnings this quarter---to me, at least---was that Microsoft actually recorded a net loss of $6.3 billion. This was the result of a $13.8 billion net charge that Microsoft said in its earnings release was "related to the Tax Cuts and Jobs Act (TCJA)."

This surprised me, but it shouldn't have, as it was widely expected b...

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