Microsoft Corp. crushed analysts’ estimates for sales and earnings in the quarter ended June 30, providing further evidence that it has successfully turned the corner from packaged-software company into cloud services provider.

Investors rejoiced, sending the company’s shares to an all-time high of more than $76 in after-hours trading. After languishing for years, Microsoft shares have climbed more than 33 percent in the past year.

Revenue of $24.7 billion for the fiscal fourth quarter toasted analysts’ estimates of $24.3 billion. Earnings per share of 98 cents smoked estimates of 71 cents and nearly tripled last year’s earnings of 39 cents per share.

“Analysts were expecting Microsoft to achieve a solid performance this quarter, but few were giddily optimistic enough to forecast what the company delivered,” said Charles King, president and principal analyst at Pund-IT Inc.

The company’s Productivity and Business Processes group recorded a healthy 21 percent revenue increase, with the Office 365 cloud service growing 44 percent and surpassing revenue from traditional software licenses for the first time. The Dynamics 365 cloud-based financials suite grew 74 percent.

Intelligent cloud revenue of $7.4 billion were up 11 percent and beat Microsoft’s earlier guidance of $7.3 billion. Azure revenue grew 97 percent compared with 94 percent growth in the first quarter, demonstrating that growth is actually accelerating on top of a larger base. “Microsoft is clearly achieving its cloud business goals,” King said.

This was a critical quarter for Microsoft because a large number of customers with enterprise agreements were up for renewal at their fiscal year end. “The positive results are an indicator that they’ve been doing well in converting customers from traditional licenses and software assurance to Office 365,” said Christopher Voce, vice president and research director at Forrester Research Inc.

Microsoft’s annuity revenue – or that which comes from predictable sources such as subscriptions – hit 86 percent in the quarter, up 3 percent year-over-year. As recently as 2014, annuity revenue were just 50 percent of total sales.

Bottom-line focus

On its earnings call, Microsoft executives indicated that growth in cloud won’t come at the expense of profitability. “We remain focused on maintaining our commercial cloud margins in each of our businesses,” said Chief Financial Officer Amy Hood. But that doesn’t mean growth will necessarily slow, she indicated.

“We felt very good about cloud demand in this quarter, in particular with Azure,” Hood said. “I feel confident in our ability to produce gross margin growth across all those services and I’m encouraged by the demand signals we’re getting.”

In the one weak spot of the previous quarter – the Surface portable computer line – Microsoft covered its bases, reporting a 2 percent revenue decline on the back of a recent product line refresh. Surface revenue had fallen 25 percent in the previous quarter.

Microsoft’s traditional lines of business continued to reflect customers’ shift to the cloud and flat to declining personal computer sales and server sales. Gartner Inc. recently forecast that PC shipments will hit 267 million units in 2018, up about 2 percent from this year’s 262 million units. Gartner expects worldwide server revenue to be down 4.5 percent in the first quarter of 2017, similar to estimates from International Data Corp.

In light of those dour forecasts, Microsoft’s on-premises businesses looked pretty strong. Office licenses rose 5 percent, server products and cloud services grew 15 percent and Windows original equipment manufacturer revenue was up 1 percent. While those businesses are making up a smaller and smaller part of Microsoft’s total business, “they also set it well apart in ways that will be difficult or impossible for other cloud service providers to equal,” said Pund-IT’s King.

“These are very positive signs of just how much progress the company is making in newer product segments,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. “Microsoft is one of the few companies to turn the corner from classic enterprise to cloud-native.”

The results should put to bed concerns raised by recent reports of layoffs. In light of the strong performance of growth businesses, it appears the reductions “are primarily ‘re-balancing’ versus a permanent headcount reduction,” Moorhead said. “It’s intended to accelerate cloud, Internet of things and customer relationship management revenue.”

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