Cloud delivers for Microsoft as CEO Nadella pitches his metaverse vision

Microsoft turned in a profit of $18.8 billion and revenues of $51.7 billion for Q2 2022, driven by 32% year-on-year growth for Microsoft Cloud, accounting for north of $22 billion of total turnover.

CEO Satya Nadella claimed growing adoption of Azure across every business sector, citing CVS Health, Johnson & Johnson Medical Devices, Kyndryl, and Wells Fargo as wins during the past three months. He also pointed to success stemming from the introduction of vertically-focused clouds:

Just over a year ago, we introduced our first industry cloud offering, bringing together industry-specific customizations with our entire stack to help customers improve time to value, increase agility, and lower costs. We now have six industry clouds, and they're driving significant increases in usage across the Microsoft Cloud.

Our Cloud for Retail was front and center at NRF [Big Show] with retailers from Ahold Delhaize and GNC sharing how they're using our solutions to deliver seamless customer experiences. Our Cloud for Sustainability unifies data to help customers record, report, and reduce their carbon emissions. Industry leaders, including Nissan Motor, are turning to the offering to help meet sustainability goals.

Other notable growth sectors included:

LinkedIn, which Nadella said now boasts 24,000 events and 1.5 million RSVPs per week:

We are experiencing a Great Reshuffle across the labor market as more people in more places than ever rethink how, where, why they work. In this new economy, LinkedIn has become mission-critical to connect creators with their communities, job seekers with employers, learners with skills, and sellers with buyers. Last quarter, we once again saw record engagement…Confirmed hires were up 110 % year over year, and we've added tools to make it easier to discover open roles that align with how and where people want to work.

Microsoft Teams, which has now passed 270 million monthly active users. Nadella said:

Organizations are using Teams to run their business with collaborative applications that bring business process data right into the flow of work. Monthly usage of third-party applications and custom-built solutions has grown ten times in the last two years, with new and updated apps this quarter from Atlassian, Monday.com, SAP, and Workday. United Airlines is using bots within Teams to create tighter connections between operations and flight crews. And Marks & Spencer uses Power Apps and Teams to streamline internal help desk requests. As hybrid work becomes the norm, every organization will need to rethink their approach to space.

Teams is rapidly becoming the standard for unified communications. Over 90% of Fortune 500 companies used Teams Phone this quarter, and we continue to take share across PSTN and VoIP as organizations like Bank of Montreal, Chevron, General Motors, LVMH, and NetApp turn to Teams to meet their internal and external collaboration needs. All-up, we're seeing Teams growth in every segment, from frontline worker usage up two times year over year. Zebra Technologies will bring Teams Walkie Talkie communication to devices used by millions of employees on retail floors. And Walmart chose Teams for their more than 2 million frontline workers this quarter.

Windows, with Nadella pointing to what he called “a structural shift in PC demand”:

More than ever, people are turning to PCs to exercise their agency and unleash their creativity, whether it's meeting in virtual reality or for remote work, writing code or collaborating in documents, live-streaming video or playing games, or for graphic design and engineering design. As new use cases are born every day and existing ones see a resurgence, we're experiencing a PC renaissance with increase in time spent on PCs and PCs per household. Three months in, we're delighted by the response to Windows 11. We're seeing more usage intensity and higher quality than previous versions of our operating system, and Windows took share this quarter.

Gaming, with Microsoft Game Pass now having more than 25 million subscribers. Nadella said:

Our differentiated content is driving the service's growth, and we released new AAA titles this holiday to rave reviews and record usage. Eighteen million have played Forza Horizon 5 to date, and more than 20 million have played Halo Infinite, making it the biggest Halo launch in history. And with our planned acquisition of Activision Blizzard, announced last week, we are investing to make it easier for people to play great games wherever, whenever, and however they want, and also shape what comes next for gaming as platforms like the metaverse develop. In closing, as digital technology as a percentage of global GDP continues to increase, we are innovating and investing across a diverse and growing TAMs (Total Addressable Markets) with a common underlying technology stack and an operating model that reinforces a common strategy, culture, and sense of purpose.

Metaversal thinking

With the main driver for the Activision Blizzard planned takeover cited as a metaverse land grab, Nadella outlined more about Microsoft’s overall thinking around the concept, pitching it as “an opportunity in a very classic Microsoft sense” at the platform infrastructure level and in the application level. There are key areas of investment which will help customer use cases to emerge, he added:

The first place where we see this is the increasing digitization of people, places, and things to be able to really help businesses automate processes to the next level. Today, between Azure IoT, Digital Twins, and Mesh, we have many examples where customers are engaged with us. So that's what will show up in Azure, and we're investing significantly there.

Up the stack, I would say, Dynamics 365 Connected Spaces. That's a solution that's in preview today. That's about really being able to take a retail space or a connected factory or a building and essentially create a complete new software category, which is about managing physical processes. Just like CRM and ERP and supply chain management, we now have a suite, which is all driven by connected spaces, which is going to automate physical processes.

Teams is going to have Mesh meetings or these immersive meetings, which will start, first of all, on 2D screens, whether it's PCs or phones, and then lead up to even immersive experiences if you wear your VR or AR goggles. So that's another place.

And then, of course, gaming, that will be a natural place for us…I mean, that's a place where you could say already people are investing in their avatars, people are building Minecraft worlds. And so very naturally, you can see us extend gaming as the metaverse evolves. On the devices side, one of the things we are very excited to be doing is what we're doing with HoloLens and all the experience we're gaining on the optics, on the silicon side, and all the way to the cloud in terms of some of the foundational services driven by all the HoloLens use cases in the enterprise.

And he predicted:

The demand will come in different forms for different categories, but we feel very well positioned to be able to catch what, I think, is essentially the next wave of the internet, right? Just like the first wave of the internet allowed everybody to build a website, I think the next wave of the internet will be a more open world where people can build their own metaverse world, whether they're organizations or game developers, or anyone else.

My take

Microsoft was the first of a series of Big Tech firms out of the gate with its latest quarterly numbers, with Apple, Amazon, Alphabet and The Company Formerly Known As Facebook coming shortly. Despite impressive results that comfortably beat expectations, Wall Street initially reacted with a 5% drop in the share price. That's not as bad as the pasting that Netflix got last week, but indicative perhaps of a current mood against the tech sector?  It will be interesting to see how the rest of the big names get on.