Microsoft's Q2 FY 2018 earnings: What about that cash and Cortana?

Microsoft's cloud services continue to make it rain for the company as it passes the mid-way mark in its fiscal 2018. But what about Surface, Cortana and some other less sunny spots?
Written by Mary Jo Foley, Senior Contributing Editor

Earnings calls are often frustrating for us reporters, as we're not allowed to ask execs questions. We -- OK, maybe it's just me -- shout at our PCs during the quarterly webcasts with product and strategy queries we wish financial analysts would ask but never do.

Microsoft's Q2 FY 2018 earnings call on January 31 was a bit less aggravating. During the Q&A at the end of the call (transcript is here), analysts asked about Cortana's future and rumors around Microsoft making a big acquisition in order to take advantage of new tax laws.

Analysts also asked about a downturn in commercial-business bookings, but they didn't poke much around a softening of sequential growth rate around commercial cloud, which my ZDNet colleague Larry Dignan noticed as part of yesterday's numbers.

Credit: Microsoft

Microsoft no longer talks about "commercial cloud" in terms of runrate; it now releases the actual quarterly numbers and gross margin percentage for this category. For Q2, commercial cloud revenues were $5.3 billion, up from $5.0 billion in Q1 FY 2018, and gross margins were 55 percent, down from 57 percent in Q1 FY 2018.

Overall, Microsoft's Q2 non-GAAP earnings were $7.5 billion, or 96 cents a share, on revenue of $28.9 billion, up 12 percent from a year ago. The company reported a net loss in the quarter of 82 cents a share due to a $13.8 billion charge due to tax changes.

During yesterday's earnings call, no one asked about Microsoft's Surface business, which was up just one percent, year over year in spite of the company launching three new products (Surface Laptop, Surface Pro and Surface Book 2).

Chief Financial Officer Amy Hood perhaps headed off that question, proactively noting that "Surface revenue should grow year-over-year from continued launch momentum from the latest Surface Pro, Book and Laptop, but decline sequentially consistent with holiday seasonality."

On the Cortana and home automation front, Microsoft CEO Satya Nadella said Microsoft thinks about investments in this space as broader than just an intelligent agent in a speaker.

"Right now most assistants are fairly dumb in terms of just doing one-turn dialogue, but where we're going to go is multi-turn dialogue and that requires real natural language understanding," Nadella said.

He reiterated that Microsoft's AI play in this space is about Cognitive Services running on Azure, and that Cortana's role will be "as an agent from Microsoft that has some special skills, especially around that crossover between work and life."

For those wondering whether Microsoft's silence about the promised integration between Cortana and Alexa might mean the deal announced last year by Amazon and Microsoft was off, seemingly the answer is no. Nadella said Microsoft is working with Alexa, and repeated the corporate line that Microsoft is onboard with seeing Alexa on Windows devices -- which is a good thing, since a number of OEMs have agreed to an Amazon-developed Alexa app for PCs which should be coming out sometime soon.

As to the analyst question about the potential for a "large strategic deal," (EA/Valve/PUBG, cough, cough) Hood noted that Microsoft hasn't waited around for tax reform to make key acquisitions in the past.

"We made acquisitions when they made sense. We have used the capital markets and the debt market to fund those to make sure that we made the right investments to grow our business," she said.

"I am pleased obviously, to be able to access the cash more easily and not has to go through the debt market to be able to make these choices. Whether it's investment in ourselves, and the returns you've seen in this quarter in revenue growth, whether it's the acquisitions like LinkedIn that are performing better than we expected," she added.

For those pooh-poohing the possibility Microsoft might go for a huge gaming studio, Nadella's comments from yesterday's call are worth remembering: "Gaming also is a growth area for Azure. In other words, we have now increasing past services that we are going to reinforce on Azure and attract more game developers."

For Microsoft these days, it all comes back to the cloud.

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