Microsoft cloud business fails to brighten picture

Tech giant's hope in tough personal computer market unable to help company meet Wall St estimates

Microsoft's store in Sydney. Its traditional profit engines, like Windows, have weakened considerably.
Microsoft's store in Sydney. Its traditional profit engines, like Windows, have weakened considerably.PHOTO: EUROPEAN PRESSPHOTO AGENCY

SEATTLE • Cloud computing is seen by many investors as Microsoft's salvation, a growing business that has convinced many there is a bright future for the company beyond the troubled personal computer (PC) market.

But Microsoft's cloud business did not grow quite fast enough during its last quarter to keep investors happy. The company missed Wall Street estimates, though Microsoft executives said it would have beaten them without the effect of unexpectedly high taxes.

For its fiscal third quarter, which ended March 31, Microsoft reported net income of US$3.76 billion (S$5 billion), or 47 US cents a share, down from US$4.99 billion, or 61 US cents a share, a year ago. Revenue fell to US$20.53 billion, from US$21.73 billion.

Microsoft's traditional profit engines, like Windows, have weakened considerably as sales in the PC market have remained in a multiyear slump. Last week, the research firm Gartner reported that worldwide PC shipments in the first quarter fell 9.6 per cent from a year ago.

Weak PC sales are affecting many large tech companies.

Last Tuesday, Intel, the chipmaker that for many years was Microsoft's inseparable partner in the PC business, reported disappointing earnings and said it would cut about 11 per cent of its workforce, roughly 12,000 people.

The revenue Microsoft gets from licensing Windows to PC makers did better than the market overall, but it still fell 2 per cent, excluding the effect of foreign currency fluctuations. Yet Microsoft has convinced many investors that it has found a way to adapt to technology changes, in part by vigorously embracing cloud computing.

Shares were trading at US$55.78.

The optimism stems from its success in transitioning legacy software businesses like Office to a cloud business model in which customers subscribe to the applications.

There are now 22.2 million subscribers to Office 365, the subscription version of its Office business, up from 12.4 million a year ago.

Microsoft is second to Amazon in the business of renting computing infrastructure to other companies in Microsoft-owned data centres, a business it calls Azure.

"It remains clear we're one of two leaders in this market," Mr Satya Nadella, its chief executive, said in a call with investors on Thursday.

One of the brightest spots at Microsoft during the last quarter was its intelligent cloud business, which includes Azure.

Revenue in that group increased 8 per cent, excluding the effect of foreign currency, to US$6.1 billion.

Mr Brad Reback, an analyst at Stifel Nicolaus, said that the company did not do quite as well in its cloud business as he had forecast, but he believed that area was still performing well. "I think they're doing a good job of focusing on areas where they can make healthy returns," Mr Reback said.


A version of this article appeared in the print edition of The Straits Times on April 23, 2016, with the headline 'Microsoft cloud business fails to brighten picture'. Subscribe