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Microsoft Riding High on the Cloud

Posted on Thursday, Jul 27th 2017

According to an enterprise software survey conducted by Credit Suisse about cloud platforms, nearly 40% of those surveyed expressed Microsoft Azure as their preferred choice. That number has grown 21% over the last six months. Another survey by data analytics firm Sumo Logic also came up with a similar result. Clearly Microsoft’s (NASDAQ: MSFT) Azure focus is bearing fruit. It is also evident in its latest financial results.

Microsoft’s Financials

Microsoft’s Q4 revenues grew 3% over the year to $24.7 billion, ahead of the market’s forecast of $24.31 billion. EPS of $0.83 was also ahead of the Street’s expectations of $0.61 for the quarter.

By segment, revenues in Productivity and Business Processes grew 21% to $8.4 billion driven by a 43% growth in Office 365 commercial revenues. Within the segment, Office consumer products and cloud services revenue increased 13% and Office 365 consumer subscribers grew to 27 million. Dynamics products and cloud services revenue increased 7% due to a 74% growth in Dynamics 365 revenue. LinkedIn contributed revenue of $1.1 billion during the quarter.

This was the first quarter that LinkedIn revenues surpassed $1 billion since its $26.2 billion acquisition last year. A quarter ago, LinkedIn had brought in $975 million in revenues. To continue to drive growth, Microsoft recently announced the rollout of a Windows 10 app for LinkedIn. The app will offer an integrated LinkedIn experience including real-time notifications, new messages, insights on calendar, trending news in your industry, and other updates.

Revenue in Intelligent Cloud grew 11% to $7.4 billion with Server products and cloud services revenue growing 15% and Azure revenue growing 97%. Enterprise Services revenue decreased 3% over the year.

Revenue in More Personal Computing was $8.8 billion and recorded a decline of 2% over the year despite a 1% growth in Windows OEM revenues. Windows commercial products and cloud services revenue increased 8% but Surface revenues fell 2%. Search advertising revenue excluding traffic acquisition costs increased 10% and gaming revenue increased 3% over the year.

Microsoft ended the year with revenues of $90.0 billion on a GAAP basis and $96.7 billion on a non-GAAP basis. Net income came in at $21.2 billion GAAP, and $25.9 billion non-GAAP translating to an EPS of $2.71 on a GAAP basis and $3.31 on a non-GAAP basis.

For the current quarter, Microsoft projected revenues of $23.6-$24.3 billion, compared with the Street’s estimate of $24.18 billion. The company forecast operating expenses of $8.6-$8.7 billion.

Microsoft’s Azure Growth

Microsoft’s robust quarterly performance was attributed to its Cloud segment. During the quarter, its Intelligent Cloud segment revenues grew 11% to $7.4 billion, contributing to nearly 30% of its total revenue. Azure revenues grew 97% over the year and its commercial cloud revenue run rate exceeded $18.9 billion. Microsoft does not break out the revenue contribution from Azure separately. For comparison, Amazon’s AWS revenues grew 43% over the year in the last quarter to $3.6 billion. Microsoft had targeted a goal of $20 billion by 2018 for the commercial cloud revenue, and it is confident of achieving it.

Microsoft attributes the growing adoption of Azure to its hybrid cloud offering Azure Stack. Azure Stack allows organizations to use Microsoft’s public cloud while also running some applications in their own data centers. According to Microsoft, nearly 80% of the organizations that they talk to like this hybrid version. AWS does not offer a similar hybrid offering.

To continue to drive higher adoption of these services, Microsoft is also launching new offerings. It released Azure IoT Edge, a new service that will allow organizations that are deploying the Internet of Things (IoT) devices to use all of the capabilities of the Azure IoT cloud. Azure IoT Edge extends cloud intelligence to edge devices so that IoT devices can act locally at the edge, while taking advantage of the cloud for global coordination and machine learning at scale.

It is also helping organizations leverage Azure for AI adoption. Azure Cosmos DB is the industry’s first globally distributed database service that enables customers to securely and reliably power data-intensive applications. As more and more organizations turn to AI, they will need access to this data to be able to convert it into meaningful, actionable information for AI.

Microsoft is also investing in the infrastructure needed for Azure’s expansion. It launched a datacenter in South Africa, bringing Azure to 40 regions globally – more than any other cloud provider. Last month, it also announced the acquisition of Cloudyn, a Cloud services company that helps organizations optimize their investments in cloud services. Cloudyn gives enterprise customers the ability to identify, measure, and analyze consumption of the Cloud so that they can forecast future cloud spending. Cloudyn has been a Microsoft partner and has supported cost management for Azure and other public clouds. Microsoft did not disclose the terms of the deal, but analysts peg the deal in the range of $50-$70 million.

Given Microsoft’s focus on the cloud, I won’t be surprised if it also makes other acquisitions in the segment. I am still rooting for it to evaluate analytics offerings Tableau or Splunk and enterprise software offerings Workday or ServiceNow.

Its stock is currently trading at record high levels of $74.31 with a market capitalization of $572 billion. It had fallen to a year low of $55.61 in September last year.

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