Microsoft surprises markets with booming cloud business Azure
Microsoft surprised Wall Street positively after it announced results for the quarter that ended in December by blowing past the consensus estimates in almost all of its business divisions.
The company posted pro-forma earnings per share of 83 cents on revenues of $26.07 billion. According to Thomson Reuters consensus estimates, analysts had projected pro-forma earnings of 79 cents per share on $25.3 billion in revenues. Wall Street rewarded the technology behemoth by sending the shares up 2.35 percent to an all-time intraday high of $65.91.
The result puts Microsoft squarely in the highly coveted club of companies worth more than $500 billion, which includes companies like Alphabet and Apple. The company has also forecast better results for the next quarter in its guidance.
The real star of the show, however, was Microsoft’s Azure cloud service, which clocked 93 percent year-over-year revenue growth. While Microsoft does not break down revenue numbers for specific products, it is believed that the beat for the Intelligent Cloud division, which houses Azure, was made possible by Azure’s success in the enterprise. The cloud business brought in $6.86 billion in revenues during the fiscal second quarter. Wall Street analysts expected the cloud business to bring in about $6.73 billion in revenue against the company’s own guidance of $6.55 billion to $6.75 billion.
Mark Moerdler, a senior research analyst at Bernstein Research estimates that Azure generates about 20 percent of its Commercial Cloud revenue. Morgan Stanley’s Keith Weiss had estimated Azure revenues at $1.6 billion in fiscal 2016, which supports Moerdler’s numbers if the company’s growth figure is extrapolated to Weiss’ estimate.
Walter Pritchard of Citigroup upgraded the company’s shares from Sell to Neutral. In April 2016, he lampooned the Wall Street estimates for the company as being too optimistic and maintained his target price for the stock at $37. The shares have rallied more than 20 percent since his research note and more than 50 percent since Microsoft undertook a $950 million restructuring charge related to Nokia’s phone business and realigned its focus on enterprise where it has been strong historically.
Others, like Michael Turits of Raymond James Financial, were quick to upgrade the stock to a Strong Buy and raised the price target to $73 from the previous $69 citing, “a combination of continued strong cloud growth and stability in the on-premise business suggest Microsoft’s transition to cloud should remain on track.” Brad Reback of Stifel also raised the price target to $68 from the previous $66, noting the ballooning Azure gross margins.
The results bolster Microsoft’s position as a technology leader as well as the company’s ability to move itself away from legacy businesses like personal desktop computing to the new cloud and mobile first reality.
In the past few years Microsoft has renewed its mobile strategy by acquiring new generation technology firms, like 6Wunderkinder, LinkedIn, Mojang, SwiftKey and Yammer, for $26 billion. While Microsoft’s history with large acquisitions like Nokia Skype and Yammer has been doubtful at best. The market seems to put these costly mistakes in the rearview mirror, at least in the short term.
It was also the first quarter where LinkedIn was included in the company’s results. The professional networking service contributed $228 million in revenues and $100 million in losses since closing the acquisition late last year. Microsoft’s justification for paying a hefty price for a loss-making service remains to be seen.
Largely absent from the earnings was Bing, Microsoft’s search engine and the second largest search engine after Google, which was only mentioned once in the entire call. In the past, the business division housing Bing and other web services was a major source of losses for the company.
A welcome change for Microsoft is the stabilizing PC market. PC sales reached the lowest point in a decade last year, as Apple’s market share growth continued to pinch out a gain every year at Microsoft’s expense. The unexpected saviors of PCs have been gamers as Microsoft specially mentioned them in the remarks: “Gamers are increasingly turning to Windows 10 premium PCs for the best gaming experience, logging more than 26 billion hours of game play on PCs and tablets this year.”
Xbox sales, on the other hand, decreased 3 percent due to pricing and volume pressures in competition against Sony; Microsoft phone sales dropped 81 percent.
Once again, Microsoft seems to be one of the few technology companies that has been able to leapfrog constant technological transformations.