Microsoft beats forecasts as demand for cloud service soars

A woman rides a bicycle past a Microsoft Corp sign on the company's main campus in Redmond, Washington, US.
A woman rides a bicycle past a Microsoft Corp sign on the company's main campus in Redmond, Washington, US.PHOTO: BLOOMBERG

BENGALURU (REUTERS) - Microsoft Corp reported a 3.6 per cent rise in fiscal second-quarter profit on Thursday (Jan 26), helped by growth in its fast-growing cloud computing business, but it saw a slight decline in margins in the unit that includes its flagship cloud platform Azure.

Shares of the world's biggest software company were up about 1.1 per cent in after-hours trading.

Since taking charge in 2014, chief executive Satya Nadella has steered the company toward cloud services and mobile applications and away from its slowing traditional software business.

Gross margins for Microsoft's so-called "commercial cloud" business, which includes Azure and versions of its online Office 365 product sold to businesses, were 48 per cent, said Chris Suh, head of Microsoft's investor relations.

That is down from last quarter's 49 per cent but up from 46 per cent a year ago, Suh said. The figure is watched closely by investors as a sign of the actual profit made of Microsoft's cloud products, which the company does not publish.

The Azure platform competes with cloud infrastructure offerings from market leader Amazon.com, Alphabet's Google, IBM and Oracle.

"We're not at Amazon's margin today," said Suh. "Their infrastructure business is much larger. They have the benefit of scale. We track more like what Amazon was when they were closer to our size."

On the company's earnings conference call, chief financial officer Amy Hood fielded questions from analysts about Azure-specific gross margins. She did not disclose a number but said there was a "material improvement" since last quarter.

Analysts also questioned Microsoft's practice of providing a combined gross margin for cloud infrastructure, which at other firms tends to have gross margins around 30 per cent, and cloud software, which at other firms has higher margins of 70 per cent or 75 per cent. "I do think it will be a blend of those," Hood said.

But CEO Nadella emphasized that the company thinks of its cloud offerings as comprehensive lineup of both software and infrastructure, as it did with its historical business as a combination of products with different margins, like Office and Windows Server.

"We have a cloud strategy that is not just about infrastructure," Nadella said, pointing out differences with Amazon Web Services.

Revenue from Microsoft's 'Intelligent Cloud' business, which includes Azure, along with other data centre software, rose 8.0 per cent to US$6.9 billion in the quarter. That beat analysts' average estimate of US$6.73 billion, according to research firm FactSet StreetAccount. Microsoft's estimates for next quarter were US$6.45 billion to US$6.65 billion.

In constant currency, Azure's revenue grew 94 per cent year over year, a good pace but still the lowest growth rate since Microsoft began disclosing the number in 2015, and down from 121 per cent the previous quarter.

"In general, as long as it's close to doubling right now, that's extremely solid performance given the business is getting big from an overall standpoint," said Cross Research analyst Shannon Cross.

Sales of Office 365 to businesses rose 49 per cent, down from 54 per cent in the previous quarter. As with Azure, Microsoft does not give an absolute dollar figure for Office 365 sales.

Sales in Microsoft's personal computing business, which includes its Windows software, once the bedrock of the company, fell 5.0 per cent to US$11.8 billion, slightly beating the rate at which personal computer sales fell in the quarter.

Along with his push into cloud and mobile, Nadella also orchestrated Microsoft's biggest acquisition, the US$26.2 billion deal for LinkedIn, which closed last month.

LinkedIn contributed US$228 million of revenue in the quarter, Microsoft said, but reported a net loss of US$100 million, or one cent per share.

Excluding LinkedIn and some other items, Microsoft earned 84 US cents per share in the quarter. That beat Wall Street's average estimate of 79 cents, according to Thomson Reuters I/B/E/S.

The company's net income rose to US$5.20 billion, or 66 cents per share, in the quarter ended Dec. 31, from US$5.02 billion, or 62 cents per share, a year earlier.