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Cloud, Again, Drives Microsoft Earnings

Microsoft's strong financial results for the second quarter of its fiscal year were once again a result of the company's relentless focus on transitioning to cloud.

The company released results after markets closed on Wednesday evening showing revenues of $28.9 billion, a 12% increase over the year-ago quarter, and operating income of $8.7 billion, a 10% bump. Net income was a loss of $6.3 billion, due to a $13.8 billion charge the company took related to the tax bill that Congress passed in December.

Financial analysts greeted the results positively on an earnings call Wednesday night, and MSFT briefly hit record highs in mid-day trading Thursday before falling slightly.

CEO Satya Nadella summarized the big picture for the quarter during the analyst call. "The intelligent cloud and intelligent edge paradigm is fast becoming a reality. Azure growth accelerated. LinkedIn growth accelerated. Microsoft 365 and Dynamics 365 are driving our growth and transforming the workplace. Xbox is reaching new customers with new offers," Nadella said.

An official statement from Amy Hood, executive vice president and chief financial officer of Microsoft, clarified how key cloud was for the results for the October through December period.

"We delivered another strong quarter with commercial cloud revenue growing 56% year-over-year to $5.3 billion," Hood said. The quarterly figure shows Microsoft is now tracking above the famous $20 billion annual cloud run rate that Nadella had set as an audacious goal and that Microsoft first hit last quarter.

While that quarterly cloud figure remains a fraction of Microsoft's overall $28.9 billion in revenues, it's a growing fraction. Cloud's function as a driver of revenue growth is apparent across several of Microsoft's businesses.

The most dramatic example of the trend occurred in the Intelligent Cloud segment. In that unit, server products and cloud services revenue increased by $967 million or 18%. But the cloud portion, represented by Azure revenues, nearly doubled with 98% growth. Server products licensed on-premises also saw revenue growth, but only by 4%.

The story was similar in both Office Commercial and Dynamics. Both segments had 10% overall growth, but Office 365 commercial revenue growth pulled its sector forward with 41% growth, while Dynamics 365 revenue growth galloped ahead at 67%.

Product segments without significant cloud components to bolster them generally languished. Windows revenue was up 1% with Windows OEM revenues up and Windows Commercial revenue down. Surface revenues were also up 1% on the strength of more premium devices sold, even as overall volumes decreased.

Meanwhile, cloud has its own costs, which Hood enumerated during the call. "Excluding LinkedIn, operating expenses increased on cloud engineering and sales capacity investments," Hood said, adding later, "As expected, our capital expenditures, including finance leases, increased sequentially to $3.3 billion due to higher levels of customer demand and usage for our cloud services."

Given cloud's impact on Microsoft's quarter, it's clear why Microsoft continues to invest heavily in cloud, even after the dramatic investments of an estimated $15 billion or more in this decade to kick-start its datacenter footprint.

Posted by Scott Bekker on 02/02/2018 at 8:59 AM


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