Microsoft Tops Estimates Amid Nadella's Cloud Transformation

Microsoft Beats Estimates: Is the Turnaround Working?
  • Results bolstered by Web-based services, Office 365 software
  • Shares rise after quarterly results surpass analyst estimates

Satya Nadella’s turnaround of Microsoft Corp. persisted in the fiscal second quarter, as more businesses bought cloud services and Internet-based tools like Azure and Office 365 from a company once mainly known for personal-computer software.

Revenue from Azure -- Microsoft’s platform that sells data-center based computing power and services -- more than doubled as customers signed up for pricier offerings that can handle machine learning and process large reams of information. Subscriptions for Office 365 productivity software also lured both businesses and consumers, and even Windows sales came in better than the overall PC market, fueled by the adoption of Windows 10.

The gains add to optimism that Chief Executive Officer Nadella can revitalize growth by focusing on Web-based services and productivity applications. More than 70 percent of Fortune 500 companies are now using at least two different Microsoft cloud services, Nadella said on Thursday. His plan to focus on apps for rival platforms is also attracting users, with 340 million downloads of Office apps on Apple Inc.’s iOS and Google’s Android.

While Nadella pushes expansion, Chief Financial Officer Amy Hood is reining in costs.

“They have two things going for them -- one, the belief that Nadella is driving innovation towards the cloud, and No. 2, Amy Hood has had a blowtorch out on expenses," said Brent Thill, an analyst at UBS AG, referring to Microsoft’s chief financial officer. “It’s a totally different vibe coming out of that place that it was three years ago."

Microsoft shares rose 5.8 percent to $55.09 at the close in New York. The stock climbed 25 percent during the three months that ended in December on optimism about Nadella’s turnaround, compared with a 6.5 percent gain in Standard & Poor’s 500 Index.

Profit excluding certain items in the second quarter, which ended Dec. 31, was 78 cents a share, and sales adjusted for deferrals were $25.7 billion, Microsoft said in a statement Thursday. Analysts on average estimated profit would be 71 cents on revenue of $25.3 billion, according to data compiled by Bloomberg.

Microsoft is also slashing costs and focusing on Windows 10 to restore momentum to the personal-computing business, seeking to make up for revenue lost when the company scaled back its unprofitable smartphone efforts. While the company lowered operating expense forecasts for the rest of the year, Microsoft said it would be spending more on capital costs like building more data centers to run cloud services.

Net income in the recent period declined to $5 billion, or 62 cents a share. The Redmond, Washington-based company in July announced it would cut as many as 7,800 jobs and take a massive writedown on its Nokia handset unit, plus take a restructuring charge as it scaled back its ambitions for making its own mobile phones.

Unearned revenue, a measure of future sales, was $25.03 billion. Three analysts polled by Bloomberg had expected $23.5 billion, on average. Sales in the recent quarter were reduced by $1.9 billion because of deferrals of sales related to Windows 10 software and the new Halo 5 game.

Corporate Cloud

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 has now reached $9.4 billion, Hood said after Thursday’s report. While Microsoft has faced difficult conditions in Brazil, China, Japan and Russia, Hood said, the company has been adding customers and workloads for its Azure services, which let clients run and store applications in Microsoft’s cloud-data centers.

“We’re very proud of it and we’re halfway to our goal for 2018,” Hood said. “It was a challenging market to execute in this quarter, and frankly I’m very proud of our sales team’s execution to remain focused on what we can control.”

While the traditional Office business -- the software suite that includes Word, Excel and PowerPoint -- has been lackluster in recent quarters, the Office 365 cloud versions of those programs are growing in both consumer and corporate usage.

Excluding the impact of foreign-currency exchange rates, revenue from Azure in the second quarter rose 140 percent, and sales of Office 365 increased almost 70 percent, the company said.

Windows 10

The company’s latest operating system software, Windows 10, released at the end of July, is now on running on more than 200 million devices and outpacing the previous version’s adoption by almost 400 percent, the company said earlier this month. To promote uptake, the company offered it as a free upgrade for many consumers. While Windows revenue was still falling in the fiscal first quarter, the decline was smaller than in previous periods, and Sanford C. Bernstein & Co. analyst Mark Moerdlersaid he expects the improvements to continue.

Sales of Windows to PC makers declined 5 percent for the quarter, Microsoft said, but that was better than the broader PC market, where shipments dropped 8.3 percent, according to Gartner Inc., ending the year at fewer than 300 million units for the first time since 2008.

Revenue in the Intelligent Cloud segment, which includes Azure and server software, rose 5 percent to $6.34 billion, compared with an average estimate of $6.3 billion, based on the projections of five analysts polled by Bloomberg. Sales in Productivity, comprised of Office and Office 365, slipped 1.9 percent to $6.69 billion, matching analysts’ predictions.

Revenue in the More Personal Computing unit, including products like Windows, search, Xbox and devices, fell 4.7 percent to $12.7 billion, compared with the $12.4 billion estimate of five analysts.

The Xbox business was bolstered by the October release of Halo 5, the first new title since 2012 in Microsoft’s most successful game franchise. Revenue from the company’s Surface tablet rose 29 percent on a constant-currency basis, and sales in the Phone group fell 49 percent, hit by Microsoft’s retreat from that business.

For the third quarter, Microsoft said Productivity group revenue will be $6.4 billion to $6.6 billion. Intelligent Cloud sales are forecast to be $6.1 billion to $6.3 billion, and More Personal Computing will come in with revenue of $9.1 billion to $9.4 billion. Foreign-currency exchange rates are projected to reduce sales by 4 percentage points, Hood said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE