Now halfway through its fiscal year 2020, Microsoft credits innovation for its second quarter success. For the period ended December 31, 2019, Microsoft had revenue of $36.9 billion, a 14% increase year-over-year. The Redmond, Washington-based technology company also reported net income of $11.6 billion, a 38% increase (GAAP), and diluted earnings per share of $1.51 per share, an increase of 40% (GAAP).

“We are innovating across every layer of our differentiated technology stack and leading in key secular areas that are critical to our customers’ success,” said Microsoft CEO Satya Nadella, in a January 29 news release.

“It was another strong quarter with double-digit top and bottom line growth driven by the strength of our commercial cloud. Stepping back from the quarter and reflecting more broadly on the next decade, the defining secular trend will be the increasing rate of digitization of people, places, and things. This malleable power of software will drive productivity growth across all industries, leading to more inclusive economic growth far beyond the domains of consumer tech today,” Nadella said on the earnings call.

Other highlights for the quarter include the following:

• Microsoft’s gross margin was 67%.
• Revenue in Productivity and Business Processes was $11.8 billion, a 17% increase.
• Office Commercial products and cloud services revenue grew 16%, driven by Office 365 Commercial revenue growth of 27%.
• Office Consumer products and cloud services revenue grew 19%.
• Office 365 Consumer now has 37.2 million subscribers.
• LinkedIn revenue increased 24% with 42% growth in marketing solutions. LinkedIn reported session time increased 25% with record engagement.
• Revenue in Intelligent Cloud was $11.9 billion, a 27% increase.
• Service products and cloud services revenue grew 30%, driven by Azure revenue growth of 62%.
• Revenue in More Personal Computing was $13.2 billion, a 2% increase.
• Windows OEM revenue increased 18%.
• Windows Commercial products and cloud services revenue increased 25%.
• Surface revenue was up 6%, while search ad revenue, less traffic acquisition costs, grew 6%.
• Xbox content and services revenue dropped 11%. While growth in Xbox Game Pass continues, it is offset by a strong third-party title in the previous year.
• Microsoft returned $8.5 billion to shareholders via repurchases and dividends during the second quarter.

Microsoft offered the following guidance for the third quarter of fiscal year 2020:

• Productivity and Business Processes revenue will range between $11.5 billion and $11.7 billion, with anticipated double-digit growth in Office Commercial, Dynamics and LinkedIn.
• Intelligent Cloud will have revenue that ranges between $11.85 billion and $12.05 billion.
• More Personal Computing will have revenue between $10.75 billion and $11.15 billion.
• Windows OEM growth will be in the low to mid-single digits. This will be driven by the discontinuation of support for Windows 7 and steady demand for Windows 10.
• Surface revenue is expected to grow in the low single digits as they work through “execution challenges” on the consumer side.
• Gaming revenue is expected to decline in the low double-digit range.

Since the earnings report on January 29, Microsoft stock has risen in value from $168.04 per share to $180.12 per share. Investors reacted favorably to the financials.

Insider Take:

With revenue of $36.9 billion and earnings per share of $1.51 for the second quarter, Microsoft’s revenue and earnings were above analysts’ predictions of $35.7 billion and earnings of $1.32 per share, reports Venture Beat. Microsoft did well in a number of categories, particularly Azure (though growth is slowing), LinkedIn and Windows. Gaming is not currently profitable for Microsoft, but we expect Xbox Game Pass to grow its subscriber base and it is working toward its launch of the Xbox Series X.