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Microsoft Became a Trillion Dollar Company Thanks to Azure

Posted on Tuesday, Apr 30th 2019

Last week, Microsoft (Nasdaq: MSFT) announced its quarterly results that surpassed market expectations and sent the stock soaring. Not only did its stock scale record high levels, but its value also sent Microsoft into the trillion-dollar valuation territory. It became the third public company to cross that threshold after Apple and Amazon did that last year.

Microsoft’s Financials

Microsoft’s Q3 revenues grew an impressive 14% over the year to $30.6 billion and were significantly ahead of the market’s forecast of $29.84 billion. It ended the quarter with a net income of $8.8 billion, reporting an 18% growth over the year. Diluted EPS grew 20% over the year to $1.14 for the quarter. The Street had forecast an EPS of $1 for the quarter.

By segment, revenues in Productivity and Business Processes grew 14% to $10.2 billion with Office Commercial products and cloud services revenue growing 12%. Office Consumer products and cloud services revenue increased 8% with Office 365 Consumer subscribers growing to 34.2 million. During the quarter, LinkedIn revenues increased 27% and Dynamics products and cloud services revenue increased 13% over the year.

Revenues in Intelligent Cloud grew 22% to $9.7 billion with Server products and cloud services revenue increasing 27%, driven by Azure revenue growth of 73%. Enterprise Services revenue increased 4% over the year.

Revenues in More Personal Computing grew 8% to $10.7 billion with Windows Commercial products and cloud services revenues growing 18%, Surface revenues growing 21%, and Gaming revenues increasing 5%. Within the segment, Search advertising revenues excluding traffic acquisition costs increased 12% over the year.

Overall, Microsoft reported its commercial cloud business run-rate of $38.4 billion compared with the market’s forecast of $38.5 billion.

For the current quarter, Microsoft expects revenues of $32.55 billion with an EPS of $1.20. The Street expects Microsoft to end the current quarter with revenues of $32.6 billion and an EPS of $1.18.

Microsoft’s Azure Growth

Microsoft’s continued growth is attributed to the strong focus it has put on Azure under Satya Nadella’s leadership. According to a Canalys report for 2018, Azure now accounts for 16.8% of the global cloud infrastructure spending market compared with Amazon’s 31.7% share and Google’s 8.5% share. A year ago, Microsoft was operating at 13.5% market share while Amazon held 31.5% share.

During the quarter, Microsoft continued to add additional features to Azure. To add to Azure’s hybrid nature, it recently released Azure Stack HCI (hyperconverged infrastructure). Azure Stack HCI will allow customers to build and run virtualized applications on-premise in a consistent way. Similar to other on-premise solutions, Azure Stack HCI solutions are made for running virtualized applications. But the service also provides simplified access to Azure for customers interested in running hybrid cloud scenarios. It will allow organizations to leverage existing skills to run virtualized applications on HCI, while taking advantage of cloud capabilities and features.

Earlier this month, Microsoft also announced the general availability of Azure Data Box Edge. The Data Box Edge is a new AI-enabled edge appliance that resides within a customer’s environment to allow them to use AI to reason over data at the edge. Microsoft believes that the solution will help organizations deliver on an intelligent cloud and an intelligent edge strategy. It will act as a bridge between the local data sources and cloud storage allowing organizations to use the appliance for processing, filtering, and analyzing the data before storing it in the cloud.

Over the past few years, Microsoft has been focused on Azure’s growth. It has developed Azure not only as a PaaS product that provides services such as databases, messaging queues and caching, but also as an IaaS product that provides services such as virtual machines and object storage. The Azure PaaS allows developers to build and deploy apps through software development kits that are available for several languages and server-side technologies including.NET, Node.js, PHP, Python, Java, GO, and Ruby. Its apps cover an entire range of services such as analytics, AI, collaboration, sales and marketing and many more. The use cases of these apps scale across industries such as agriculture, education, health and retail to name a few. The recent addition of capabilities such as AI will make the platform more intelligent and help Microsoft reduce its gap with Amazon.

Analysts are pleased with Microsoft’s platform strategy. According to Wedbush’s Daniel Ives, Microsoft’s “cloud party is just getting started”. They also believe that growth in the scale of the cloud business will also drive higher margins in the years to come.

Microsoft’s stock is currently trading at $129.89 with a market capitalization of $996.5 billion. It had climbed to an all-time high of $131.37 soon after result announcement. The stock was trading at a year low of $92.45 nearly a year ago.

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