Microsoft Sales Get Azure Boost; Tax Charge Causes Net Loss

Updated on
  • Software maker reports loss of $6.3 billion after tax changes
  • Azure revenue rises 98%; Office 365 Commercial sales gain 41%
Microsoft 2Q Revenue Beats Estimates

Microsoft Corp. topped analysts’ estimates for second-quarter revenue, helped by brisk quarterly growth in its cloud and corporate-software businesses, while a tax charge caused the company to report a net loss.

The software maker took a $13.8 billion charge related to taxes owed on overseas cash, a result of recent changes to U.S. tax law. The net loss in the second quarter, which ended Dec. 31, was $6.27 billion, or 82 cents a share, Microsoft said Wednesday in a statement.

Sales of Azure cloud-computing services almost doubled as businesses increasingly seek to run applications and store data in Microsoft’s data centers. Chief Executive Officer Satya Nadella is adding machine learning and data-analysis features to Azure, seeking to woo customers from market leader Amazon.com Inc. The company is also switching more customers to online subscription versions of productivity programs like Word and Excel, helping buoy Office 365 revenue by 41 percent.

"Office is continuing on its merry way, moving customers to Office 365," said Mark Moerdler, an analyst at Sanford C. Bernstein & Co. "And Azure is continuing to chug along."

Excluding the charge, second-quarter profit was 96 cents, compared with an average analyst projection of 86 cents, according to data compiled by Bloomberg. Sales in the quarter climbed 12 percent to $28.9 billion, exceeding the average analyst estimate of $28.4 billion.

The company’s shares were little changed in extended trading following the report, after closing at a record $95.01 in New York. Microsoft stock jumped 15 percent in the December quarter, outpacing the 6.1 percent gain in the Standard & Poor’s 500 Index.

Cloud Additions

The Redmond, Washington-based company has rolled out services that add artificial intelligence conversations and language understanding into its cloud programs. It also started offering customers the ability to host their workloads in France, bringing the number of regional options for data-center services to 42, and signed a seven-year deal to be the primary cloud provider for Chevron Corp.

The company will boost capital expenditures as it continues to invest in projects like data-center capacity for these businesses, Microsoft said on a conference call with analysts.

As Microsoft’s new data centers come online and become more efficient, their profitability increases. Bernstein’s Moerdler expects Azure’s expansion to continue for the next few years and provide a significant source of revenue and earnings growth for Microsoft.

Growth in Azure was slightly faster than in both the previous quarter and the year-earlier period. Analysts and investors following Microsoft have wondered if Azure’s growth would begin to trail off as the overall revenue number gets larger. "I do, in general, expect our strong performance in Azure to continue," Chief Financial Officer Amy Hood said in an interview.

In the second quarter, commercial cloud sales rose to $5.3 billion, a gain of 56 percent from $3.4 billion in the year-earlier quarter. Gross margin for that business widened to 55 percent, up 7 points compared with a year earlier.

KeyBanc analysts wrote in a note earlier this month that Microsoft will reach $40 billion in total cloud revenue in 2019. The bank estimated Microsoft’s Azure gained market share from Amazon Web Services in the most recent quarter.

Foreign Income

As of June 30, almost $128 billion of the Microsoft’s cash and short-term investments were held overseas. In December, Congress passed a sweeping tax overhaul that scrapped a previous system that let companies defer U.S. income taxes on foreign earnings until they returned that income to the U.S. Now companies will have to pay taxes on accumulated foreign income -- cash at a tax rate of 15.5 percent and less liquid assets at a rate of 8 percent.
 
While Microsoft is accounting for the entire tax charge in the recent period, it will pay the bill over time -- companies have eight years to do so. Hood declined to say how much cash Microsoft would bring back to the U.S., or when, or what the company might do with it.

Total revenue in the company’s More Personal Computing division, which includes the Windows operating system, was $12.2 billion, beating the $11.98 billion average estimate of four analysts polled by Bloomberg. Revenue from Surface hardware was little changed from a year ago, and gaming revenue rose 8 percent, fueled by the release of the high-end Xbox One X console. Productivity sales, mainly Office software, climbed 25 percent to $8.95 billion. Analysts had estimated $8.86 billion.

For the fiscal third quarter, the company forecast More Personal Computing revenue of as much as $9.4 billion, and up to $8.8 billion for the productivity unit. Intelligent Cloud, which consists of Azure and server software, will post sales of as much as $7.75 billion, Hood said on the call.

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