Microsoft profit beats expectations on strong cloud demand

The Microsoft logo is shown on the Microsoft Theatre at the E3 2017 Electronic Entertainment Expo.
The Microsoft logo is shown on the Microsoft Theatre at the E3 2017 Electronic Entertainment Expo. PHOTO: REUTERS

SAN FRANCISCO (REUTERS) - Microsoft reported strong fourth-quarter earnings on the back of its fast-growing cloud computing business, stoking optimism that the once-stagnant company has found a new groove.

The results, released on Thursday (July 20), were the clearest sign yet that the strategy put in place by chief executive Satya Nadella when he assumed the top job in 2014 is paying off. He has shifted the company's focus away from a dying personal computer software business and reinventing it as a provider of cloud computing and subscription-based software.

"Our technology world view of an intelligent cloud and an intelligent edge is resonating with customers everywhere," Nadella said on the company's earnings conference call with investors on Thursday afternoon.

Most notably, revenue from the cloud unit, which includes the flagship Azure platform and server products, rose about 11 per cent to US$7.43 billion (S$10.2 billion) in the fiscal fourth quarter ended June 30.

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Analysts on average had expected cloud revenue of US$7.32 billion, according to data and analytics firm FactSet. Revenue from Azure, which competes directly with Amazon.com's market-leading AWS division, nearly doubled in the quarter.

Highlighting Azure's growth were notable increases to Microsoft's long-term unearned revenue, which rose by more than 61 per cent year-over-year. The metric is used to indicate long-term commitments for services and products, said Kim Forrest, vice-president and senior equity analyst at Fort Pitt Capital Group, a portfolio management firm.

In a bid to continue this momentum, Microsoft last week launched Azure Stack, a new service that allows customers to run a local version of the company's cloud technology.

"This isn't just a one-quarter wonder," Forrest said."Amazon is going to be paying attention to this."

Michael Turits, analyst at Raymond James & Associates, noted that Azure is smaller than Amazon's service but that it is growing faster. "I think it is appealing well to existing enterprise customers who might not immediately be drawn to the Amazon platform," he said.

Beyond cloud, Microsoft's various businesses mostly performed well.

The commercial offering of Office 365 was up 43 per cent while Dynamics 365, Microsoft's customer relationship management and enterprise resource planning service, saw a year-over-year increase of 74 per cent.

Revenue dropped 2 per cent in the personal computer division, which includes Windows 10 and Microsoft's line of Surface hardware.

The company said it recorded US$306 million in restructuring charges following a reorganisation of its sales and marketing teams that was announced earlier this month. The restructuring resulted in layoffs for thousands of Microsoft employees.

"I don't think the layoffs are a worry at all," said Jan Dawson, chief analyst at Jackdaw Research. "They're just part of the ongoing transition Microsoft is going through as cloud grows and its legacy business shrinks."

Microsoft's net income more than doubled to US$6.51 billion or 83 cents per share in the quarter, from US$3.12 billion or 39 cents per share in the year-earlier period.

Excluding one-time items, Microsoft earned 98 cents per share.

On an adjusted basis, revenue rose 9.1 per cent to US$24.7 billion.

Analysts on average had expected an adjusted profit of 71 cents per share and revenue of US$24.27 billion, according to Thomson Reuters I/B/E/S.