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For Microsoft, It’s all About the Cloud

Posted on Tuesday, Feb 2nd 2016

Microsoft (Nasdaq: MSFT) has figured out the key to success. Satya Nadella’s focus on the cloud has helped the company deliver stunning quarterly results for the last few quarters. The latest quarter was no exception.

Microsoft’s Financials

Microsoft’s Q2 revenues grew 8% over the year to $25.7 billion, ahead of the market’s forecast of $25.27 billion. EPS of $0.78 was also ahead of the Street’s expectations of $0.71 for the quarter.

By segment, revenues from Productivity and Business Processes were $6.7 billion, down 2% over the year, but 5% higher than the previous year on a constant currency basis. Within the segment, Office 365 revenues grew 70% in constant currency as the product added 20.6 million subscribers.

Revenues within the Personal Computing segment continued to decline as it reported a 2% decline in constant currency to $12.7 billion. Within the segment the 29% increase in Surface revenues was not able to offset the 5% reduction in Windows OEM revenues and 49% reduction in phone revenues. Xbox Live monthly active users grew 30% over the year to a record 48 million.

Revenues from its Intelligent Cloud segment were up 11% in constant currency to $6.3 billion with Server products and cloud services revenue growing 10% in constant currency and Azure revenues grew 140% with revenue from Azure premium services tripling over the year.

During the first quarter, Microsoft had reported an annualized revenue run rate of $8.2 billion for its commercial cloud segment. It now expects the commercial cloud annualized revenue run rate to be more than $9.4 billion. Overall, the company is targeting a $20 billion run rate for the enterprise cloud segment by the year 2018.

Microsoft’s Personal Computing Growth

Despite the continued reduction in the personal computing segment, Microsoft is not giving up hope. Last quarter, overall PC sales fell 11% over the year while Windows OEM reported a 5% decline. Microsoft is targeting to get Windows 10 on to 1 billion devices by 2018. To help with the goal, the company is making Windows 10 more enterprise friendly with new security and compliance features. The move should help businesses switch and upgrade to Windows 10. Additionally, it is also working on making it more lucrative for developers to produce apps for Windows 10.

Microsoft and the Cloud

According to Synergy Research Group, Amazon is the leader in cloud services with Amazon Web Services accounting for 30% of the market share. It is followed by Microsoft, which claims 10% of the market share. Microsoft witnessed 140% growth rates compared with the 65% growth being delivered by Amazon. It is not just the topline for the segment that is improving – the margins are improving as well. For the quarter, commercial cloud’s profitability improved 900-basis-point to 46%.

Analysts estimate the total cloud infrastructure and services market to be worth $127 billion in the next few years. Microsoft is just talking about a small pie of that market. It is expanding its relationships with vendors like Red Hat, Dell, and Hewlett-Packard Enterprise to strengthen its hybrid cloud infrastructure offerings – another high growth opportunity within the cloud segment.

It continues to improve the product and recently announced the release of Azure Stack. Azure Stack is a hybrid cloud platform product that enables organizations to deliver Azure services from their own datacenter. Organizations are able to decide where to keep their data and applications i.e. in their own datacenter or with a hosting service provider while having the ability to easily access public cloud resources. The Stack will be available later this year and will also include components for storage and virtualized networking.

The market is impressed with Microsoft’s performance. Its stock is currently trading at $54.71 with a market capitalization of $432.7 billion. It hit a 52-week high of $56.85 in December last year.

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