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Microsoft Management Talks Gaming, LinkedIn, and Commercial Cloud

By Daniel Sparks – May 7, 2019 at 7:16PM

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These three catalysts continue to deliver for the software giant.

Microsoft (MSFT -2.20%) has been on a roll, to say the least. This was especially evident in the company's recent fiscal third-quarter results, which featured revenue and adjusted earnings per share that blew past analysts' estimates for the quarter. Revenue during the period jumped 14% year over year as adjusted earnings per share came in at $1.14, handily trumping an average analyst estimate for $1.00.

Unlike Apple, which has an easy-to-understand business driven by just a handful of product lines, as well as a simple services segment, Microsoft's business is more complex, featuring a wide range of products and services for both consumers and businesses. This means investors benefit from investing some extra time into analyzing the many different aspects of the software giant's business. One place to start is with Microsoft's earnings calls.

During the company's fiscal third-quarter earnings call, Microsoft management provided lots of interesting context on its business, but these four quotes stand out.

Microsoft CEO Satya Nadella

Microsoft CEO Satya Nadella. Image source: Microsoft.

Success in gaming-as-a-service

As part of Microsoft's transformation to a cloud-based business, it has been bringing its games online and making them available through subscriptions. The company calls its online-based gaming revenue its Xbox software and services revenue -- and it was the primary driver of Microsoft's overall gaming business in fiscal Q3, management said. In addition, this software and services revenue is growing at a nice double-digit rate.

"Xbox software and services revenue grew 12% and 15% in constant currency, with continued momentum in Xbox LIVE and Game Pass subscriber growth," said Microsoft CFO Amy Hood.

LinkedIn continues to thrive

Since acquiring LinkedIn in 2016, the purchase has proved to be a smash hit for Microsoft. And this continues to be the case, according to Microsoft CEO Satya Nadella. "LinkedIn again exceeded expectations across all lines of business driven by record levels of engagement in the feed, content shared across the platform, [and] messages sent this quarter," the CEO said.

Of note, the social network for professionals saw its marketing solutions revenue rise 46% year over year and job postings hit a record high in fiscal Q3.

Commercial cloud's improving gross margin

Microsoft's commercial cloud business, which encompasses revenue from Office 365 Commercial, Azure, and Dynamics 365, rose a nice 41% year over year to $9.6 billion during the quarter. Even more impressive, however, is the segment's improving profitability.

"Commercial cloud gross margin percentage increased 5 points year over year to 63%, driven again by significant improvement in Azure gross margin," said Hood.

Big opportunity for Office 365

Office 365 Commercial continues to be a key catalyst for Microsoft, with revenue from the cloud-based subscription product rising 30% year over year in fiscal Q3. When asked during the earnings call if there's still meaningful room for further growth, Nadella responded optimistically.

"In terms of overall reach of Office 365, we continue to see significant opportunity going forward on multiple dimensions," said the CEO. More specifically, he said Office's software-as-a-service model has opened the product up to more small and medium businesses with sophisticated workloads, or what Nadella calls: the non-developed market. Second, the company is reaching more first-line workers because of non-core solutions like messaging and business process workflows. Finally, the CEO said there's room for upselling customers to pricier Office 365 Commercial tiers.

All three of these catalysts for Microsoft's business -- Xbox software and services, LinkedIn, and Office 365 Commercial -- are showing no signs of slowing down.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Microsoft. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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