Microsoft results top estimates as cloud revenues surge 95 percent

Satya_Nadella

Microsoft Corp. beat revenue and profit estimates in its fiscal second quarter, buoyed by impressive growth in its Azure cloud computing business and strong gains in the cloud-based Office 365 productivity suite.

Revenues of $26.1 billion eclipsed analyst consensus estimates of $25.3 billion and were slightly ahead of the $25.7 billion reported a year ago. Earnings per share of 83 cents beat analysts’ estimates of 79 cents and were up a nickel from a year earlier. Net income rose to $6.5 billion, from $6.15 billion in the same quarter of 2016.

Investors were unimpressed initially. In after-hours trading, Microsoft stock drifted sideways. Update: On Friday, they thought better of it, and shares were up 2.3 percent in midday trading.

But the big story was in the cloud, where Microsoft appeared to draw closer to Amazon Web Services. Azure revenues jumped 95 percent year-over-year on a doubling of Azure compute usage compared with last year. Chief Executive Satya Nadella (pictured) said the company’s commercial cloud annualized run unit rate now exceeds $14 billion and is on track to hit $20 billion in fiscal 2018. Azure Premium revenue grew in the triple digits and more than 75 percent of customers are now using premium services, Nadella said.

Office 365 enticement

Office 365 commercial revenue shot up 49 percent, a fact that no doubt influenced overall cloud revenue growth. Microsoft has leaned on Office 365 to lure customers into its cloud, where it can sell add-on services. Recent surveys have shown that Office 365 is pulling away from the cloud applications pack.

Server products and cloud services revenue rose 14 percent, driven by double-digit annuity revenue growth, the company said. Office 365 leverage is critical to Microsoft’s strategy, Nadella said. “We have a cloud strategy that is not just about infrastructure, it’s about applications and infrastructure,” he said. “That’s where our fair share will come from: thinking about differentiation.”

“If the company continues to migrate traditional Office customers to Azure, the benefits will be both substantial and long-lasting,” said Charles King, president and principal analyst at Pund-IT Inc. “Doing so would also flip conventional beliefs about cloud’s primary value as an IT infrastructure play on their head. Office 365 may come to be the cloud’s reigning killer app.”

The company also benefited from what appears to be some stabilization of the personal computer market. Windows original equipment manufacturer revenues grew five percent on the back of 52 percent growth in enterprise and education deployments. Office commercial product revenues were up seven percent in the quarter. International Data Corp. recently estimated that worldwide shipments of PCs fell 1.5 percent in fourth quarter, which is an improvement over declines of between four and 12 percent in the previous quarters.

The shift in Microsoft’s strategy is reflected in the way the company categorizes customers. “Our large accounts are no longer determined by the number of PCs but by their spending on cloud services,” he said.

Importantly, Microsoft may have turned the corner In the shift from packaged software licensing to cloud subscriptions. Brad Reback, an analyst at Stifel Nicolaus & Co., Recently wrote that Office 365 has reached “the inflection point where recurring subscription revenue more than compensates for lost license revenue,” according to The Wall Street Journal.

“Some of the standouts to me were huge increases in Office 365, Azure cloud, Bing search and even some modest growth in Windows OEM revenue,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. “The only real blemish is the continued drain by winding down the phone business.”

Microsoft blamed a 5 percent decline in the “More Personal Computing” category — one of the three pillars of its financial reporting structure — on lower phone revenue following the sale of its feature phone business last spring. Device revenues fell 81 percent in the quarter as a result.

On the company’s earnings’ call, Nadella said Microsoft was investing heavily in deep learning and artificial intelligence technology, as evidenced by its purchase of Maluuba Inc. earlier this month. He said users have asked 18 billion questions of its Cortana personal assistant, creating a strong base for machine learning.

Photo courtesy of Wikimedia

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