UPDATED 19:54 EDT / APRIL 26 2018

CLOUD

Microsoft shares hit all-time high as cloud business nearly doubles again

For those who been wondering how long Microsoft Corp. can continue the blistering growth of its cloud infrastructure business, the answer is: We still don’t know.

The desktop and cloud computing giant rode 93 percent growth in its Azure infrastructure-as-a-service business to $22 billion in fiscal third-quarter revenue, up 15.5 percent over the same period last year. Revenue was nearly $1 billion ahead of consensus estimates. Earnings per share of 95 cents also handily beat consensus estimates of 85 cents.

Growth was strong across the board. Office commercial products and cloud services revenue rose 14 percent on the back of 42 percent growth in Office 365 commercial revenue. Consumer subscriptions to Office 365 hit 30.6 million, driving 12 percent growth in consumer products and cloud services.

The Dynamics applications group, which Microsoft Chief Executive Satya Nadella (pictured) characterized as “our third growth engine” behind cloud infrastructure and desktop applications, was up 17 percent, with Dynamics 365 growing 65 percent. Even the Surface mobile business grew by a third.

Investors liked what they heard. Though shares rose only 2 percent in after-hours trading, they reached an all-time high. They had also risen more than 2 percent in regular trading, to $94.26 a share.

“Dynamics is a great example of a business whose health and future are linked to the cloud, and one that helps the company stand apart from technology-centric cloud players, especially Amazon Web Services Inc.,” said Charles King, president and principal analyst at Pund-IT Inc.

Microsoft executives attempted to dampen expectations that the Azure business can continue the near-doubling it has seen in each of the last five quarters, but only because the scale is so large. “The growth will moderate as the numbers become big — and they’re already pretty big — but we will continue to grow because of the size of the markets in which we participate,” Nadella said.

Wikibon Analyst Ralph Finos summed up the opinion of analysts contacted by SiliconANGLE, Wikibon’s sister company: “Microsoft killed it across the board.”

The results underlined commercial customers’ growing confidence in Microsoft’s ability to navigate successfully in a world that isn’t defined by the desktop, and they underscored what Nadella called Microsoft plans to “double down on areas of differentiation.”

In some cases, that means leveraging its success in some legacy markets into new areas, such as driving Dynamics growth from the Office base. The company has also moved its Dynamics, Azure and Office platforms to a common architectural base, which greases the skids for customers to expand their Microsoft investment.

Customers appear to be responding. Windows commercial products and cloud services revenue rose 21 percent, driven in party by “an increased volume of multi-year agreements,” the company said.

“Microsoft still owns a great deal of the workplace, and even mature products like Office continue to drive double-digit growth – even as the company transitions from traditional to cloud products,” said J. P. Gownder, vice president and principal analyst at Forrester Research Inc.

Customers are also buying into some of the vendor’s new initiatives in such areas as security, collaboration and machine learning. Nadella said more than 200,000 organizations now use the Teams collaboration platform, an alternative to Slack Technologies Inc.’s highly successful competitor.

Microsoft’s ability to add services such as artificial intelligence-based scheduling, real-time transcriptions and integration with its Cortana virtual assistant illustrates how the company is mustering technologies from across its product line to drive into new markets. Nadella even boldly asserted that the company’s PowerBI software “is now the leader in business analytics in the cloud.”

The company’s assault on cloud leader AWS is being aided by the on-premises Azure Stack version of its cloud platform. Without offering specifics, Nadella said Azure Stack, which shipped only nine months ago, is seeing “strong customer demand across industries and its unlocking new scenarios across hybrid clouds.”

Whether the company can catch up to Amazon is an open question, but the trends point to continued share gains, said Patrick Moorhead of Moor Insights & Strategy. “It’s simple math; with Azure growing at near 100 percent and AWS growing at 50 percent, at some point Azure catches up,” he said. “But right now, everyone is growing, so it’s not really that relevant.”

Gownder agreed that Azure looks to be the growth leader in the immediate term. “As Microsoft continues to weave more AI offerings into its intelligent cloud strategy, and offers a differentiated hybrid strategy with Azure Stack, the Azure business looks to continue fast growth,” he said.

What’s all the more remarkable is that Microsoft’s business is becoming more profitable, even as it grows. For example, commercial cloud revenue grew 58 percent while gross margins in that business improved to 57 percent up from 51 percent a year ago. “Even with accelerated spend, we improved margins,” said Chief Financial Officer Amy Hood.

If there are any icebergs floating ahead, analysts don’t see them. “Microsoft is doing what it takes to be a leader in the same vein as Google, Amazon and Apple,” said Moorhead.

The company has figured out how to make its dominance in productivity applications the spearhead of its cloud strategy, and in a year when its cloud-native competitors have faced a lot of political and social headwinds, Microsoft has come out clean, at least for now.

“Microsoft appears unlikely to face the kinds of political storms that Facebook, Amazon and Google are currently weathering,” said Pund-IT’s King. “The old saw about not expecting your competitors to make mistakes — but being able to take advantage when they do — applies clearly to Microsoft.”

Photo: Bago Games/Flickr CC

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