Microsoft exceeds sales, profit estimates on cloud gains

Microsoft profit excluding certain items, such as a few weeks of results from newly acquired LinkedIn, was 84 cents a share on adjusted sales of $25.8 billion


Microsoft shares gained 1.2% in extended trading following the report, after climbing to a record $64.27 at the close in New York. Photo: Reuters
Microsoft shares gained 1.2% in extended trading following the report, after climbing to a record $64.27 at the close in New York. Photo: Reuters

Seattle: Microsoft Corp.’s second-quarter sales and profit exceeded analysts’ projections, bolstered by rising customer sign-ups for Azure and Office cloud-computing services.

Profit excluding certain items, such as a few weeks of results from newly acquired LinkedIn Corp., was 84 cents a share on adjusted sales of $25.8 billion, the software maker said Thursday in a statement. Analysts on average had estimated profit would be 79 cents on revenue of $25.3 billion in the period ended 31 December, according to data compiled by Bloomberg.

Chief executive officer Satya Nadella is reformulating the company as a seller of Internet-based corporate services for running applications, storing data, collaborating and enhancing worker productivity. Under brands like Azure and Office 365, these cloud offerings have helped revive sales even as the traditional PC-software market continues to contract. Near the end of the quarter the company completed its biggest acquisition, the $26.2 billion purchase of LinkedIn, whose data and professional networking tools will augment Microsoft’s own productivity products.

“As long as cloud is growing, people are happy,” said Mark Moerdler, an analyst at Sanford C. Bernstein & Co., who rates the shares outperform. “If margins are growing, people are even happier.”

Microsoft shares gained 1.2% in extended trading following the report, after climbing to a record $64.27 at the close in New York. The shares rose 7.9% during the fiscal second quarter.

Cloud surge

Azure revenue almost doubled in the recent quarter, and corporate versions of Office 365 saw sales increase 47%. Almost 25 million consumers are now subscribed to Office 365, the company said.

Redmond, Washington-based Microsoft has been spending on data centers and adding products to win new cloud customers. Chief financial officer Amy Hood said in July that gross margins, a measure of profitability, for the commercial cloud business would “materially improve” in the current year. That’s because previous years of investment are starting to pay off as those data centers support more customers. Second-quarter commercial cloud gross margin was 48%, 2% wider than a year earlier.

Microsoft has pledged to reach annualized revenue of $20 billion in its corporate cloud business by the fiscal year that ends in June 2018. That metric stood at more than $14 billion at the end of the second quarter. The company has been adding customers for its Azure services, which let clients run and store applications in Microsoft’s data centers, as well as for cloud-based versions of Microsoft’s Office applications like Word and Excel. During the quarter, Microsoft announced a corporate chat service called Teams, aimed at taking on Slack Inc.

“Microsoft is the plumbing in the cloud,” Moerdler said. “Amazon is much bigger, but still Amazon and Microsoft are pulling away from the pack. More and more you hear CTOs talking about both, or more of them are talking about Microsoft that weren’t before.”

PC slump

Worldwide PC shipments in the December quarter declined 1.5%, a slower pace than in the previous period, but the industry remains in a multiyear slump.

Microsoft in July said it wouldn’t meet its goal of getting the Windows 10 PC operating system on 1 billion devices within two to three years of the software’s 2015 release. The company blamed the shortfall on the decision to all but exit the phone hardware business, and insisted this year would be a good one for corporate adoption of the system.

Second-quarter sales in the company’s More Personal Computing business, including Windows and Xbox, fell 5% to $11.8 billion. That compares with the $11.44 billion average estimate of five analysts polled by Bloomberg. Gaming revenue for Xbox and PC fell 3%.

In the Intelligent Cloud unit, comprised of Azure and server software deployed in customers’ own data centers, sales increased 8% to $6.9 billion, compared with the $6.68 billion average analyst estimate. Productivity revenue climbed 10% to $7.4 billion. Analysts had estimated $7.02 billion. Bloomberg

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