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3 Takeaways From Microsoft Corporation's First-Quarter Earnings Call

Microsoft (NASDAQ: MSFT) impressed investors last week with revenue for its first fiscal quarter of 2018 coming in about $1 billion higher than estimates. Higher-than-expected earnings per share followed suit, rising 17% year over year. The double-digit growth in both revenue and earnings per share highlighted strong execution across several major areas of the business.

The interesting news from Microsoft continued in the company's conference call with analysts about the quarter. Management's commentary on LinkedIn, Azure, and gaming was particularly interesting. Here's a look at what management said about these topics.

Image source: Microsoft.

An update on LinkedIn

It's been nearly a year since Microsoft closed on its acquisition of LinkedIn. Considering the fact that it was Microsoft's biggest acquisition ever, investors deserve a timely update on how well LinkedIn is performing under Microsoft's leadership. Fortunately, Microsoft CEO Satya Nadella shared some details on LinkedIn's recent progress: "From the outset, priority No. 1 was to ensure that LinkedIn on its own could accelerate its mission and growth, while retaining its culture as part of Microsoft. Nearly one year in, we are ahead of plan, with LinkedIn contributing positively to EPS ex-purchase accounting in fiscal 18." 

Nadella went on to say that LinkedIn is seeing record levels of engagement and is on track to exceed 21 billion sessions during the calendar year. In addition, Nadella said Microsoft has "seen its fourth consecutive quarter of 20%-plus-sessions growth."

Other data about LinkedIn's increasing engagement that Nadella cited included the following:

  • 65% year-over-year growth in Jobs visitors
  • 60% year-over-year growth in feed update views
  • 40% year-over-year growth in messages sent

Azure is firing on all cylinders

One of Microsoft's strongest segments during the quarter was its server products and cloud services. Revenue in the segment increased 17% year over year. While the segment benefited from a number of drivers, Microsoft's cloud computing service Azure stood out.

Microsoft CFO Amy Hood explained: "Azure revenue grew 90% and 89% in constant currency, and Azure premium revenue grew triple digits for the 13th consecutive quarter. Our unique ability to provide a distributed hybrid model for the intelligent cloud and intelligent edge continues to attract customers to Microsoft."

Hood also noted three key drivers that are helping Azure's gross margin increase materially. The first is "pure revenue scale," as Hood explained. Second is the impact of growth in the segment's "premium services revenue mix." Last is simply improved efficiencies in hardware and software infrastructure.

Growth opportunities in gaming

Microsoft is bullish on gaming. Nadella said there are two primary reasons it is optimistic about the segment's potential.

The first driver, Nadella explained, is a growing opportunity to build what could increasingly look like "a Netflix for games":

I'll say it from a gaming perspective, one of the bigger changes that has happened in the last I would say couple of years is one, of course, the vibrancy of the Xbox Live network across the PC and the console, and now increasingly even on the phone, because of titles like Minecraft. And once you have the network, you have plenty of different opportunities. In particular, we now have a subscription offer with Game Pass that's off to a very good start, and our goal is to be able to have essentially a Netflix for games so that we can have the game subscriptions that people can use across all of the devices they play in.

The second driver, Nadella said, is streaming live games. "As you know," he noted, "there is game playing and game watching."

To keep an eye on how these drivers are faring, Nadella said investors can turn to growth in gaming software in services, noting, "That's perhaps a leading indicator of where we think the opportunity lies." In Microsoft's first quarter, Xbox software and services revenue was up 20% year over year.

Updates on LinkedIn, Azure, and gaming highlighted some of the strongest areas of Microsoft's business and its biggest opportunities for further growth.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.