Analysis: Microsoft Earnings (Premium)

Last night, Microsoft announced earnings for its second fiscal quarter, which ended on December 31, 2018. 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 usually provide a “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.com. But with Microsoft moving its earnings announcement from Thursday to Wednesday, I think it makes more sense for me to do this here, and in a non-humorous way.

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.
Windows
Microsoft noted that Windows revenues from PC bundles were “lower than expected,” and I’m interested to see that it parroted Intel’s line about the chipmaker somehow not being able to meet demand in what is a years-long down market.

“In Windows, the overall PC market was smaller than we expected primarily due to the timing of chip supply to our [PC maker] partners which constrained an otherwise healthy PC ecosystem and negatively impacted both [PC maker-based] Pro and Non-Pro revenue growth,” Microsoft CFO Amy Hood claimed. “Windows [PC maker] Pro revenue declined 2 percent, roughly in-line with the commercial PC market. [PC maker] non-Pro revenue declined 11 percent, below the market with continued pressure in the entry-level category.”

I’m sorry. “An otherwise healthy PC ecosystem”? Seriously?

As a recap, PC sales fell in 2017 for the seventh straight year. The last time PC makers sold fewer PCs than they did in 2018 was in 2006, when Windows Vista still had that factory fresh smell. And the PC industry today is only about one-third the size it was at its peak in 2011. This market is far from “healthy.” But it is arguably stabilizing, which is the most positive thing one can say about it: The past two years of shrinking sales were very tiny drop-offs. So maybe the worst is behind us.

But I am surprised to see Microsoft aping Intel’s line about not meeting demand, as if there was some wellspring of new PC sales to be had if only they could have made enough product. Intel first cracked open this little chestnut back in September, when it warned ahead of the holiday quarter we’re now discussing that it wouldn’t be able to meet the demand for PC chips thanks to the expected “modest growth” that was then happening in the PC market.

Again, that never happened: PC sales fell in 2018, again. But Intel’s warning is curious. It seemed to suggest, at the time, that it was over-emphasizing on expensive chips for premium and gaming PCs and that the additional demand for which it was unprepared was coming from customers wanting lower-end products.

I didn’t buy this excuse then. And I certainly don’t buy it now. And I�...