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Microsoft earnings show company ‘firing on all cylinders,’ analyst says

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RBC Capital Markets Rishi Jaluria joins Yahoo Finance Live to discuss second quarter earnings for Microsoft, the Microsoft-Activision acquisition, and the outlook for Microsoft and Zoom post pandemic.

Video transcript

BRIAN SOZZI: The Street is now embracing Microsoft's earnings report after initially being disappointed with slowing growth from Azure Cloud Services. Rishi Jaluria covers Microsoft at RBC Capital Markets and joins us now. Rishi, we were talking a little bit before we started this segment, perhaps Microsoft should put their guidance on this press release here, because there was concern initially about slowing growth in Cloud Services. Were you satisfied with the quarter and the company's outlook?

RISHI JALURIA: Yeah, absolutely. And thanks so much for having me. That's exactly it. And look, my take is this was a really strong print across the board, right? The outlook for cloud and Azure seems really strong. It seems when you think about whatever headwinds or tailwinds there are in the economy, right, be it the labor shortage out there or anything like that, they have solutions that can benefit from that.

And the read-throughs I think are really positive here for broadly tech, right, be it software, be it cloud platforms, gaming, security. Everything, I think, sounded really good to me. And Microsoft seems to be firing on all cylinders here.

BRIAN SOZZI: Rishi, do you think Microsoft has the type of report that will just alleviate any concerns regarding software companies? We mentioned Salesforce earlier on in the show. But, look, Microsoft's quarter was strong. Theoretically you should see strong quarters for many of its competitors, right?

RISHI JALURIA: I think that's the case, right? I think this is very much a broad trend in software, right? We are still very much in the early stages of digital transformation of the migration of the cloud. And so this does bode well for the rest of software.

Look, all of us are keeping our eyes on ServiceNow tonight and Atlassian tomorrow, right, both multibillion-dollar revenue software companies that I think can work along Microsoft to find a good barometer on the software sector as a whole. But it's hard not to look at these results from Microsoft and kind of breathe a sigh of relief that software is here to stay. And these same tailwinds that have been powering software before, during, and now maybe as we start to enter postpandemic are here to stay.

BRIAN SOZZI: Rishi, glad you mentioned ServiceNow. I'm going to be catching up with CEO Bill McDermott later on today to talk about the results. What does that company need to do to arrest the stock price pressure it has seen?

RISHI JALURIA: Yeah, look, I think it comes down to they just need to provide an outlook for next year that is strong and conservative at the same time, which is, obviously, a tough thing that you've got to do. It's really just a tough balancing act. But that's what I think really needs to happen.

Look, if I take a step back and I think about the labor shortages, the increased need for back office automation, ServiceNow should be able to benefit really well from those trends. So I think they're in good position as we head into the print tonight. But I really think it comes down to a good beat, but really the outlook for next year coming in strong.

BRIAN SOZZI: Let's get back to Microsoft. I have a couple more there for you. This upcoming deal or this pending deal with Activision Blizzard, do you view it as a game changer? And how might this shape the financials of Microsoft longer term if, in fact, the deal closes?

RISHI JALURIA: Yeah, absolutely. And look, we do expect the deal to close, right? There might be guardrails around it. It's probably going to be maybe a year and a half from now until it closes. But we do expect it to close.

And I'm glad you said that. I absolutely think this can be a game changer for Microsoft in gaming, right? With the combination of Activision, not only is Microsoft effectively going to be the second largest gaming company out there, slightly behind Sony, but effectively tied with them. But really, I think this bolsters everything they have across the stack and gives them end-to-end gaming, right? From the infrastructure and the raw bare metal behind it with Azure to Xbox to Game Pass to the actual games and IP that they get with Activision to mobile, Microsoft will be the true end-to-end platform for gaming out there.

And I think this just extends the runway of growth for Microsoft. I think that's the amazing thing about this company, is it seems no matter what environment we're in, right, inflationary, temporary recessionary, labor crunch, supply chain, they seem to hold up well and continue to execute strong. And I think gaming just gives them another secular tailwind in the economy that they can continue to benefit from. And this enhances their position against other gaming companies out there.

BRIAN SOZZI: Rishi, I picked up on Satya Nadella, CEO of Microsoft, a minor flex on the earnings call. I'm curious if you picked up on it, too. He said Microsoft Teams is now becoming the dominant player in that work-from-home technology environment, suggested that they are gaining market share. What's the read-through to a company like Zoom, who if we talked to them today, I'm sure they would be saying the same thing?

RISHI JALURIA: Yeah, it's really interesting, because we focus a lot on Teams and Zoom. And we very much take the view that this workplace collaboration space is going to be a two-horse race or a duopoly. And really it is going to be Microsoft Teams on one hand in Zoom on the other, right?

And I've used both platforms. I still think Zoom is the superior platform in my experience. But Microsoft has the integrated experience.

There is a lot of Cisco Webex out there. There is a lot of Google Hangouts and Google Meet, even Blue Jeans, right? There is a lot of non-Zoom, non-Microsoft Teams solutions out there that I think are going to be displaced. And, by the way, I think that rate of displacement, especially of Cisco Webex, will accelerate when we start to see these office reopenings post Omicron and people rip out their traditional hardware meeting rooms and replace them with Zoom or Microsoft Teams and start to move away from their legacy contracts that come up and get onto next-generation platforms. So I think this is one where both Microsoft and Zoom can benefit.

BRIAN SOZZI: Pretty stunning stat, too, also on the call, LinkedIn Sales Solutions passed $1 billion, excuse me, $1 billion in sales over the past 12 months for the first time. That is big money. And Microsoft continues to show that LinkedIn was a very-- was a really good acquisition for them. What's the outlook for that business? And is there any chatter that LinkedIn should be a public company again?

RISHI JALURIA: Yeah, look, I 100% agree that LinkedIn was a phenomenal acquisition for Microsoft, right? A lot of us were questioning it at the time, especially given the price tag. And remember, this is when LinkedIn had its massive pullback. But really, I think LinkedIn would not be in this situation without Microsoft, right? And I think really, LinkedIn is in position to benefit across the board, right, not just the traditional recruiting side of LinkedIn, but yes, sales and marketing and all these new verticalized use cases that they've had, right?

Arguably, LinkedIn is one of the most valuable sales tools for any salesperson or any marketer out there. And then you layer in what they have with LinkedIn Learning and Training. And in this time of a growing skills gap at enterprises, LinkedIn is really well-positioned. So I think there's a really long runway for LinkedIn.

And I think it should stay part of Microsoft, right? Yes, you could probably make an argument for some financial engineering if it got spun out as a separate company. But because of how Microsoft has been able to manage the asset and invest very aggressively in it, I truly believe LinkedIn should remain part of Microsoft.

BRIAN SOZZI: Well, really very helpful analysis for us on Microsoft. Rishi Jaluria covers Microsoft at RBC Capital Markets. Good to see you.

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