UPDATED 21:09 EDT / APRIL 24 2019

CLOUD

Thanks to the cloud, Microsoft briefly tops $1 trillion valuation as earnings top forecasts

Microsoft Corp. briefly became the third company in the world to see its market capitalization top the $1 trillion mark late today after delivering fiscal third-quarter results that easily beat expectations.

The software company reported a profit before certain costs such as stock compensation of $1.14 per share, well above the analyst estimate of $1 per share. Revenue rose 14% from a year ago, to $30.6 billion, above the $29.84 billion estimate. Net income rose 19%, to $8.8 billion.

Microsoft added that its gross margin, which is the percentage of revenue left over after accounting for the costs of its products and services sold, came to 66.7%, up from 65.4% a year ago.

All in all, it was yet another solid quarter for Microsoft, and investors clearly agreed as the company’s stock jumped more than 4% in after-hours trading. However, shares fell back to a 3.5% gain, bringing its market cap back just below the trillion-dollar mark.

“I think it’s safe to say that Microsoft had the kind of quarter most companies would kill for,” said Charles King, principal analyst of Pund-IT Inc. “The company continues to be a driving force and trusted source for both consumer and business customers.”

As always these days, Microsoft officials were keen to talk about the continued growth of the firm’s Commercial Cloud business, which bundles services including Office 365, the Azure cloud and some LinkedIn and Dynamics revenues.

But Windows also had an excellent quarter. Revenue from Windows is bundled within Microsoft’s More Personal Computing division alongside Xbox and gaming, search advertising and also Surface sales. The division contributed some $10.7 billion to Microsoft’s revenue in the third quarter, with Windows OEM Pro seeing 15% growth year-over-year.

That represented a great turnaround, as Windows OEM Pro revenue was down 2% in the previous quarter. Microsoft added that non-Pro OEM growth also improved in the last quarter, with revenue down just 1% compared with a decline of 11% in the previous three-month period.

In a conference call, Mike Spencer, Microsoft’s general manager of investor relations, said Windows was back on track thanks to Intel Corp. fixing its chip supply issues faster than expected. Microsoft had expected Intel’s problems to impact Windows sales until June at least, but Spencer said the recovery came a quarter earlier.

King said the performance of Microsoft’s Windows business was all the more impressive given it’s almost a decade since former Apple Inc. Chief Executive Steve Jobs announced the “Post PC era” during the launch of the first iPhone.

“Though Jobs was explicitly stating that personal computing was headed in a significantly different direction, the company most implicitly threatened by that evolution was Microsoft,” King said. “The company staggered in its first attempts to cope with those changes but has found new life under CEO Satya Nadella (pictured). Today, Apple’s inability to drive meaningful new businesses makes it look like a one trick pony. Meanwhile, Microsoft is making a serious run at being a Triple Crown winner.”

Evidence of that comes from Microsoft’s Commercial Cloud division, which reported revenue of $9.6 billion for the quarter, up 41% from a year ago. Microsoft still doesn’t break out Azure’s numbers separately, but said revenue from the public cloud service rose by 73% from a year ago as it benefits from more enterprises moving their assets to the cloud.

Azure actually performed “stronger than we expected,” Spencer said in the call. Microsoft Chief Financial Officer Amy Hood added the company had seen a big increase in longer-term Azure contracts in the quarter.

Analyst Brad Reback of Stifel told CNBC that he believes Azure is now growing faster than Amazon Web Services Inc. was when it was a similar size.

“We continue to believe the shift to the cloud will be additive to Microsoft given a broader portfolio of products with deeper functionality as well as Microsoft’s ability to enter new categories where it did not compete previously,” Reback said.

Microsoft’s cloud business may yet get another boost from the U.S. military. The company is going toe-to-toe with AWS in the bidding for a $10 billion Department of Defense cloud computing contract known as the Joint Enterprise Defense Initiative. Rivals IBM Corp. and Oracle Corp. were recently knocked out of the running, and while AWS remains the favorite to win the contract, analysts told CNBC that Microsoft is gaining momentum.

In any case, the Azure cloud business is growing so fast that it should be more than enough to compensate for the sluggish growth in other divisions such as Windows and Office, said Holger Mueller, principal analyst and vice president of Constellation Research Inc.

“This business can become big enough to keep all of Microsoft in the positive growth zone, even with more modest returns,” Mueller said. “But a lot more execution has to happen in the next quarters, and we’d like to see Microsoft find a way to grow stronger in software-as-a-service and reconcile its plans with LinkedIn.”

Elsewhere, Microsoft’s Office 365 suite, which includes products such as Excel and Word, also continues to benefit from the move to the cloud, with commercial Office 365 sales growing by 30%, officials said. LinkedIn revenue also grew by 27%.

Patrick Moorhead of Moor Insights & Strategy told SiliconANGLE that Office 365 numbers show how Microsoft’s software-as-a-service strategy is really paying off as enterprises increasingly shift away from traditional on-premises products.

“While Microsoft is taking advantage of a growing market, I believe the company is also siphoning off customers from Salesforce and Oracle,” Moorhead said. “Azure is also showing consistent growth, not enough to get close to AWS but furthering its lead against Google.”

Moorhead added that he’s expecting bigger things from the Surface business in future too: “Surface appears to be a growth, not ‘maintain,’ business,” he said. “This was unclear 12 months ago but I expect even bigger gains in the future.”

Microsoft said in its guidance for the fourth quarter that it expects revenue in the range of $32.2 billion to $32.9 billion, which is more or less in line with Wall Street’s consensus of $32.6 billion.

Photo: Bagogames/Flickr

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