Microsoft sales, profit jump on cloud growth

By BLOOMBERG

SEATTLE • Microsoft Corp posted another quarter of brisk revenue growth driven by cloud services, underscoring the company’s success in shifting its business toward Internet-based computing. The stock rose in early trading yesterday.

Profit and sales for the period ended Sept 30 exceeded analysts’ estimates, with revenue from Azure cloud-computing services jumping 76%.

Office 365, the Internet-based versions of the company’s productivity applications, saw sales to corporations climbing 36%.

CEO Satya Nadella has been working to transform the company into a seller of services that let businesses store data and run applications from Microsoft’s data centres, instead of their own in-house machines. Amazon.com Inc is the market leader, but booming demand means Microsoft has still been able to carve out a solid business with its Azure cloud services.

Redmond, Washington-based Microsoft dominates in the fast-growing market for cloud-based office software, and corporate upgrades to Windows operating systems are keeping that product’s sales growing even as personal computer (PC) sales remain flat.

Profit in the fiscal first quarter (1Q) rose to US$8.82 billion (RM36.78 billion), or US$1.14 a share, topping the 96-cent average estimate of analysts polled by Bloomberg. Sales climbed 19% to US$29.1 bill ion, Microsoft said on Wednesday in a statement, higher than predictions for US$27.9 billion.

Microsoft’s shares rose about 2.8% early yesterday. They had declined 5.4% to US$102.32 in New York on Wednesday amid a late-day market rout. The company’s stock has gained about 20% so far this year, but the shares have slipped in recent weeks in line with a broader equity market sell-off.

Commercial cloud sales rose 47% to US$8.5 billion in the quarter, while margins for that business widened by four percentage points to 62%, the company said in slides on its website. Microsoft has improved profitability in the division as it adds customers, letting it run services more efficiently and spread costs across more clients.

With cloud demand rising, Microsoft has also said it will continue to invest in new products and data centres.

As a result, capital expenditures will increase this fiscal year, but at a slower pace than last year, CFO Amy Hood said in an interview.

Microsoft is seeing more large and long-term cloud deals, and more deals that make use of so-called hybrid cloud, where some applications and data stay in a customer’s facilities and some move to Microsoft’s, Hood said. That boosts sales of Windows Server, SQL databases and Azure.

Microsoft has been upgrading its cloud software, and has also revamped its sales force to do a better job getting customers to buy.

The hope among Microsoft investors is that Azure keeps growing and drives sales in other parts of the business as well, as customers invest in new applications running in Microsoft’s cloud, Moerdler said.

Windows commercial product sales climbed 12% in the period, sending revenue in the More PC division up 15% to US$10.7 billion.

Though it’s staking its future on the cloud, Microsoft still sells billions of dollars of Windows software, particularly for corporate desktop computers.

Sales in Microsoft’s Xbox and video-game business rose 44%. That unit has been expanding quickly for the past few quarters, fuelled by what Microsoft executives like to call “third-party” software, mostly meaning players flocking to titles created by other game makers — especially “Fortnite” — but played on Xbox. Revenue from Microsoft ’s Surface hardware gained 14%.

On a conference call, Microsoft executives said 2Q sales for the cloud unit will be US$9.15 billion to US$9.35 billion, while revenue in the Productivity business, mostly Office software, will be as much as US$10.2 billion. In the More Personal Computing unit — including Windows and Xbox — sales will be as much as US$13.2 billion.

Commercial cloud margins will continue to widen, but at a slower rate than last year, Hood said on the call. Operating expenses will rise 8%, more than previously forecast, because Microsoft is taking into account the impact of the GitHub acquisition.

Daniel Ives, an analyst at Wedbush Securities, said the forecast looked strong. “Cloud numbers are defying gravity and it speaks to a bullish forecast” heading into the rest of the fiscal year, Ives said.