Microsoft's First-Quarter Profit Tops Estimates on Cloud Growth

Updated on
  • Nadella's push to sell Internet-based services gains ground
  • Personal-computing division revenue declines 17 percent

The Microsoft Corp. pavilion at the Mobile World Congress.

Photographer: Simon Dawson/Bloomberg

Microsoft Corp. reached a 15-year high after profit exceeded analysts’ estimates, buoyed by demand for Internet-based programs that handle business tasks and host companies’ applications.

Fiscal first-quarter profit excluding items such as severance and acquisition costs, amounted to 67 cents a share, and sales adjusted for deferrals were $21.7 billion, Microsoft said Thursday in a statement. Analysts on average projected profit of 59 cents on revenue of $21 billion for the quarter through Sept. 30, according to data compiled by Bloomberg.

Microsoft shares jumped 10 percent to $52.87 at the close Friday in New York, reaching their highest price March 2000. The stock has climbed 14 percent this year.

Chief Executive Officer Satya Nadella has been focused on selling Microsoft’s Azure cloud services and Office 365 subscription-based products, bolstering the company’s new Intelligent Cloud and Productivity segments. Office 365 added 3 million consumer subscribers and revenue from the commercial version grew almost 70 percent in constant currency, while Azure sales more than doubled from a year earlier.

“In enterprise and cloud their product offerings are strong and their moats are deep,” said Colin Gillis, an analyst at BGC Financial, who has a hold rating on the stock. “The enterprise base is the pillar of the company, but that doesn’t get you the huge multiple.”

Microsoft also said it cut more jobs in more than one business area and location, an additional workforce reduction following a larger one in July. The company declined to say how many people were involved, but a person familiar with Microsoft’s actions put the number at about 1,000.

Restructuring Costs

Earnings were reduced by restructuring costs of $1.14 billion, the Redmond, Washington-based company said. Microsoft in July announced it would cut as many as 7,800 jobs and incur a massive writedown on its Nokia handset unit, plus take a restructuring charge as it scales back its ambitions for making its own mobile phones.

Including the costs, net income in the first quarter rose to $4.62 billion, or 57 cents a share, from $4.54 billion, or 54 cents, a year earlier. The company, which has been cutting costs, will look to use the savings to build key new businesses, Chief Financial Officer Amy Hood said in an interview.

“We are really focused on our ability to take savings and put them back into the business,” Hood said. “We’re creating new categories, entering new total addressable markets and introducing new products. ”

Microsoft reduced operating expense forecasts for the full year.

The company last month announced a reorganization of the units for which it reports revenue into three categories: Intelligent Cloud, which includes Azure and server software; Productivity and Business Processes, including Office and Office 365; and More Personal Computing, or products like Windows, Web-search services, Xbox gaming and devices such as the Surface tablet.

Cloud Software

On the cloud side, Microsoft is persuading both consumers and businesses to sign on for Internet-based versions of its Office suite of productivity programs, called Office 365, and is focusing more of its engineering work on those iterations rather than traditional software that is purchased once and installed on customers’ own machines. Late in the quarter, Microsoft released the new Office 2016, which includes flagship tools such as Word and Excel.

Revenue in the Intelligent Cloud segment was $5.89 billion, compared with an average estimate of $5.72 billion, based on the projections of four analysts polled by Bloomberg. Sales in Productivity were $6.31 billion, while analysts had predicted $6.46 billion. Many of the analysts who cover the company didn’t redo their division-sales estimates after the company announced the new reporting segments.

On an annualized basis, the company’s commercial cloud revenue topped $8.2 billion last quarter, Hood said.

Revenue in the More Personal Computing segment fell to $9.38 billion, compared with the $8.8 billion estimate of four analysts.

Microsoft released Windows 10 on July 29 in a staggered launch that meant all customers didn’t get it at once. Nadella said at a Dell Inc. conference on Wednesday that the rollout was the fastest of any version of Windows to both consumers and the enterprise. The company has pledged to reach 1 billion Windows 10 users within three years.

Windows Debut

Even with the debut of the new Windows, sales of the operating system to computer makers who pre-install it on their machines fell 6 percent. That was still better than the overall PC market, owing to the new Windows, Microsoft said. Earlier this month, researcher Gartner Inc. said global shipments declined 7.7 percent in the third quarter, as the industry heads toward a fourth annual contraction.

Further weighing on the More Personal Computing segment, phone revenue dropped 54 percent on a constant currency basis, as Microsoft narrowed its efforts to make and sell its own handsets.

In the fiscal second-quarter, the company expects sales of as much as $6.7 billion in Productivity and $6.3 billion for Intelligent Cloud. More Personal Computing sales will be as high as $12.4 billion, Hood forecast on a call with analysts.

The forecast was “much better than feared,” said Daniel Ives, an analyst at FBR Capital Markets, who rated the outlook a “B” where investors and analysts were expecting a “C-plus.”

Unearned revenue in the first quarter, a measure of future sales, was $24.39 billion. Five analysts polled by Bloomberg had expected $23.98 billion, on average.

— With assistance by Beth Mellor

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