NEW YORK (TheStreet) -- Microsoft's (MSFT) cloud business produced banner numbers in the company's fiscal second-quarter earnings release last week. However, that didn't halt ongoing worries the cloud is cannibalizing some of the firm's more traditional businesses.
One line item that raised some eyebrows was a decline in Microsoft's short-term unearned revenue to $17.616 billion from $20.639 billion, arguably traceable back to cannibalization issues. Another was the 24%, year-over-year revenue decline in Office Consumer revenue, with two-thirds of it attributable to the shift to prepaid Office 365 home premium services, from the PC version. Weakness in the PC market was responsible for the rest of the 24% slump, a smaller portion of it, indicating there are still consumers willing to buy Office for the PC.
"Them cannibalizing themselves isn't as horrible as it sounds," said Kevin Walkush, business analyst at Jensen Investment Management. Jensen holds more than $6.78 million in Microsoft shares.
Focusing on some of the less pretty numbers may digress from the big picture, which is that Microsoft has carved out a niche area for itself in the stiffly competitive and still fickle cloud landscape. It is on a clear path to a stickier, long-term monetization model for its diverse offerings across infrastructure and software as a service, and cannibalization is just something it has to experience along the way.
With the cloud, much of the client payments get spread over the lifetime of the customer, yielding plenty of additional sales opportunities down the line, even though for now, it's taking take a hit from the lower, upfront costs of the services.
In a bid to compete against competitor Amazon's (AMZN) Amazon Web Services, Windows Azure announced last Friday it was slashing its Azure storage transaction price by 50%. It also cut prices by up to 28% for locally Redundant Disks or Page Blobs Storage. The discount was unveiled shortly after AWS said Tuesday it was cutting the pricing on its Elastic Block Storage services and S3 storage services by up to 50% and 22%, respectively. "We're also making the new prices effective worldwide which means that Azure storage will be less expensive than AWS in many regions," Microsoft said in a blog post. Trey Hays, research analyst for the Hodges Equity Income Fund, which owns 15,000 shares of Microsoft, says there's nothing alarming enough about the cloud numbers to force the Hodges Fund to adjust down its Microsoft stake. In the meantime, while the fund would need to see a more established track record in the cloud business before considering adding to the current position, "thus far they seem to be doing a pretty good job of competing there," said Hays. -- Written by Andrea Tse in New York. Follow @atwtse >Contact by Email.
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