Microsoft Tops Estimates, Stoking Optimism on Cloud Strategy

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Microsoft Beats Forecast: What's Going Right?
  • Commercial cloud revenue reaches $12.1 billion on annual basis
  • Software maker is shifting customers to web-based products

Microsoft Corp. reported quarterly sales and profit that topped analysts’ estimates, rekindling optimism about Chief Executive Officer Satya Nadella’s cloud strategy as more customers shifted to the company’s internet-based software and services. Shares jumped as much as 4.7 percent.

Key Points

  • Including some adjustments, fiscal fourth-quarter revenue was $22.6 billion, compared with the average analyst estimate for $22.1 billion, according to data compiled by Bloomberg.
  • Revenue from Azure, the company’s corporate cloud platform, doubled in the quarter that ended June 30.
  • Profit, excluding certain items, was 69 cents a share, Microsoft said Tuesday in a statement. Analysts on average had forecast profit of 58 cents.
  • During the quarter, Microsoft recorded total charges of $1.11 billion, related to the restructuring of the phone business it acquired from Nokia and job cuts.
  • Shares rose as high as $55.60 after closing at $53.09 in New York. The stock has gained 14 percent in the past year.

The Big Picture

Nadella, well into his third year at the helm, has been reorienting Microsoft’s business around cloud and productivity services to fuel growth as traditional software sales shrink. Annualized revenue from commercial cloud products was more than $12.1 billion in the recent quarter, a number that Microsoft has pledged will reach $20 billion by fiscal 2018. The company is relying on the switch to recurring cloud contracts to help make up for weaker one-time corporate software purchases, which are still on course to decline but came in stronger than the company projected in the recent quarter.

CFO Interview

  • Microsoft continues to see businesses moving to the cloud and subscription-based software and services, Chief Financial Officer Amy Hood said via telephone. Transactional purchases of legacy products were “a little better this quarter,” she said.
  • “There’s a structural trend and shift to the cloud,” she said. In traditional products, “quarter to quarter, you see some volatility in the results.”
  • “The PC market was a little better than we had expected three months ago,” she said. “We saw it more specifically in more developed markets.”

The Detail

  • Corporate versions of the Office 365 cloud-based productivity software saw revenue increase by 54 percent in the fiscal fourth quarter, the Redmond, Washington-based company said.
  • Net income was $3.12 billion, or 39 cents a share, including the Nokia-related charges, compared with a loss of $3.2 billion a year earlier.
  • Revenue in the Intelligent Cloud division rose 6.6 percent to $6.71 billion, compared with the $6.58 billion average estimate of analysts polled by Bloomberg. In the current period, Microsoft forecast unit sales of $6.1 billion to $6.3 billion.
  • Productivity group sales gained 4.6 percent to $6.97 billion. Analysts had projected $6.64 billion. In the fiscal first quarter, the company expects to report $6.4 billion to $6.6 billion.
  • More Personal Computing division sales, which include Windows and Xbox, fell 3.7 percent to $8.9 billion in the recent period, slightly better than the $8.87 billion average analyst estimate. Revenue will be $8.7 billion to $9 billion in the current quarter, Microsoft said.
  • Fourth-quarter unearned revenue, a measure of future sales, was $33.9 billion. Five analysts polled by Bloomberg expected an average of $30.88 billion.
  • Microsoft’s profit was boosted in the recent period by a more favorable tax rate. Minus the effects of that gain, profit would have been 63 cents a share, according to a research note from UBS Group AG analyst Brent Thill.
  • Microsoft in June agreed to buy professional networking service LinkedIn Corp. for $26.2 billion.

Street Takeaways

  • “What’s comforting is the key underlying trends are in place,” said Sid Parakh, a fund manager at Becker Capital Management, which owns Microsoft stock. “At least the long-term trajectory is intact here. There was concern last quarter.”
  • “Deferred revenue growth was pretty decent,” Parakh said.


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