By Aaron Tilley
Microsoft Corp.'s cloud business is continuing to serve as a
source of strong profits even as the company spends heavily to
expand its offerings and acquire new customers.
The Redmond, Wash., software giant Wednesday posted stronger
fiscal second-quarter earnings on record sales, driven by growth in
its cloud-computing offerings. Gross margins for the commercial
cloud business, which includes Azure computing services and Office
365 applications, grew to 67%. And while margins for the business
rose for a fourth-consecutive quarter, executives told analysts on
a conference call that percentage should continue to rise this
year.
Revenue from the commercial cloud business grew 39% to $12.5
billion, which Chief Executive Satya Nadella said reflected the
company's ability to sell a broader set of cloud products,
including cloud infrastructure as well as cloud-based productivity
applications.
Microsoft said improving gross margins is indicative of the huge
opportunity in the cloud business.
"If we can continue to capture the revenue growth, continue to
meet customer needs and scenarios, pick and thoughtfully invest in
industry level solutions to grow those things, I worry less about
the mechanics of the [gross margin]," said finance chief Amy Hood
on a conference call.
Shares in Microsoft steadily climbed following the earnings
report, where it posted record revenue and soundly beat analysts'
quarterly financial expectations, and recently traded up 4.4% after
hours. The company's stock has gained 63% over the past 12 months,
roughly doubling the rise in the tech-heavy Nasdaq Composite
Index.
"I think their vision across infrastructure, productivity and
applications is starting to resonate with customers," said Alex
Zukin, an analyst at RBC Capital Markets.
Improved margins are surprising as Microsoft has spent heavily
to fuel cloud growth and narrow the gap between it and Amazon,
which still has a dominant market share in the business
world-wide.
The battle between the two firms remains heated as Amazon has
contested the Pentagon's October award of a massive cloud-computing
contract to Microsoft. The deal is valued at up to $10 billion over
the next decade, the Pentagon has said.
Overall Microsoft's quarterly revenue rose 14% to $36.9 billion.
Earnings rose to $1.51 a share, up from $1.08 a share for the same
period last year. Analysts surveyed by FactSet had expected
earnings per share of $1.32.
For the fiscal third quarter Microsoft guided revenue to rise
between 12% to 14% from a year earlier to $34.1 billion to $34.9
billion, as analysts polled by FactSet expected $34.11 billion. Ms.
Hood said the wider guidance for one of its segments reflected
uncertainty related to the spread of coronavirus in China.
Azure sales increased 62% in the second quarter from a year ago,
a steeper increase than the first quarter.
Brad Reback, an analyst at Stifel, Nicolaus & Co., expects
that Azure will be Microsoft's single biggest revenue contributor
in the next two to three years.
Microsoft's intelligent cloud segment, which includes its Azure
cloud services, had sales of $11.87 billion, up 27% from the
year-ago period and exceeding analysts' expectations of $11.4
billion, according to FactSet.
Microsoft's productivity and business process division, which
includes LinkedIn and commercial subscriptions to the Office 365
product suite, had $11.83 billion in sales, up 17% from the same
quarter a year ago. Analysts were expecting sales of $11.43 billion
for the quarter.
The division that includes the legacy Windows personal computer
operating software business, the Xbox gaming business and Surface
hardware also surprised Wall Street as the company had forecast for
sales to be down as much as 3% from the second quarter last year.
Instead, sales rose 1.7% to $13.21 billion, helped by stronger
Windows operating system installs as well as commercial products
and cloud services.
"We don't think we'll see sustainable growth with Windows, but
we also don't think a cliff is coming," Jonathan Neilson, a finance
director with Microsoft's investor relations team. "The underlying
demand is there."
Microsoft this month ended support of its Windows 7 software.
That deadline helped drive PC sales in recent months as customers
such as large enterprises bought devices featuring the newer
Windows 10 operating system.
Revenue from its Surface hardware such as tablets and laptops
came in lower than expected, rising roughly 6% from the previous
year. Microsoft has been working to expand the line of Surface
products and signaled it would continue such investments.
Another point of weakness was the performance of Microsoft's
videogame unit. Games revenue fell 21% from a year earlier, even
though the company owns several development studios, while Xbox
content and services revenue fell 11%.
The decline was expected, in part, as Microsoft prepares to
launch its next-generation gaming console this year, the Xbox
Series X. Microsoft's chief competitor in the console-gaming space,
Sony Corp., is also expected to launch a new console in 2020.
Sarah E. Needleman contributed to this article.
Write to Aaron Tilley at aaron.tilley@wsj.com
(END) Dow Jones Newswires
January 29, 2020 21:22 ET (02:22 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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