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The chips are down: Now Microsoft blames Intel CPU supply shortages for dips in Windows, Office sales

What went well? Services, services, services, services!

Microsoft on Wednesday credited a boost in its web services operations in driving a 12 per cent jump in sales.

The Redmond software house heaped praise on Azure and Office 365 in announcing its figures for the second quarter of its fiscal 2019. For the quarter, ending December 31 of the 2018 calendar year:

  • Revenues of $32.47bn were up 12 per cent from the year-ago quarter, and slightly ahead of the $32.49 analysts estimated.
  • Net income was $8.4bn, compared to a $6.3bn net loss last year, though that was due to a $14bn tax write-off. Operating income was $10.26bn, up 18 per cent from $8.7bn last year.
  • Earnings per share (non-GAAP) of $1.10 edged out analyst estimates of $1.09
  • Productivity and business (the unit including Office and Dynamics) logged revenues of $10.1bn, up 13 per cent from the year-ago quarter. Office 365 commercial revenue was up 34 per cent. We're told Office 365 consumer subscribers grew to 33.3 million, "a sequential slowdown primarily due to changes made in how Office 365 is sold in Japan," according to chief financial officer Amy Hood on a call with financial analysts today.
  • Intelligent cloud revenue of $9.4bn climbed by 20 per cent on the year-ago quarter. Azure was the big winner, with a 76 per cent surge in revenues. Microsoft doesn't break out the exact figures for Azure, funnily enough, so take it as is.
  • More personal computing (the unit including Windows, Surface, and Xbox) logged $13bn in revenues, a 7 per cent gain. Surface revenues were up 39 per cent, thanks in part to new hardware going on sale, while search ads were up 14 per cent, and Xbox up 31 per cent.
  • The lone outlier was revenues from computer manufacturers bundling Windows, which fell five per cent: non-Pro OEM sales fell 11 per cent, and Pro OEM sales fell two per cent. Microsoft noted the ongoing Intel processor shortage, particular for workstations and PCs, had hurt it this quarter, and could hamstring Windows in the coming months and into next quarter. Specifically, computer makers can't get the parts to ship machines, dinging Windows sales.

    Intel reckons its supply drought, at the client end, will sort itself out by mid-2019. Right now, Chipzilla is hell-bent on fabricating expensive 14nm server-grade CPUs for cloud giants and other large enterprises, to the detriment of the lower-end, all while it battles to get its 10nm factories finally up to speed.

    "In Windows, the overall PC market was smaller than we expected primarily due to the timing of chip supply to our OEM partners which constrained an otherwise healthy PC ecosystem and negatively impacted both OEM Pro and Non-Pro revenue growth," said Hood. "Windows OEM Pro revenue declined 2 per cent, roughly in-line with the commercial PC market. OEM non-Pro revenue declined 11 per cent, below the market with continued pressure in the entry level category."

  • Similarly, consumer sales of Office were hit by a weak PC market, caused in part by Intel's chip shortages. Office consumer revenue grew about one per cent, below Microsoft's expectations, and isn't expected to get any better.

    "We expect Office consumer revenue growth to continue to be in the low single digits as growth in Office 365 will be partially offset by the continuation of the consumer PC market headwinds," Hood said.

    "[Office consumer] Q2 revenue growth was impacted by channel inventories normalizing after the pre-launch builds in Q1, but was further negatively impacted by a smaller than expected consumer PC market and execution challenges during the quarter."

"Our strong commercial cloud results reflect our deep and growing partnerships with leading companies in every industry including retail, financial services, and healthcare,” CEO Satya Nadella said of the strong returns.

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"We are delivering differentiated value across the cloud and edge as we work to earn customer trust every day."

How big was the services surge for Microsoft? When discussing the numbers with industry analysts, Nadella compared the service deals to the Windows PC licenses that established Microsoft as a computing kingpin.

"At this point we are seeing these very large digital transformation efforts and projects that we are partnered with spanning across all industries," Nadella told analysts on a conference call.

"I think of them as what our relationships with our OEMs in the PC market were."

Despite the big services gains, Microsoft took a bit of a hit from investors who had pegged the revenues slightly higher than reported, and a share price of $104.07 was down 1.86 per cent in after-hours trading. ®

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