Daily Management Review

Soaring Demand for Cloud Service Helps Raise Microsoft Profits


01/27/2017




Soaring Demand for Cloud Service Helps Raise Microsoft Profits
While Microsoft Corp saw a slight decline in margins in the unit that includes its flagship cloud platform Azure, but helped by growth in its fast-growing cloud computing business, the company reported a 3.6 percent rise in fiscal second-quarter profit.
 
The company has been steered away from its slowing traditional software business and towards cloud services and mobile applications by Chief Executive Satya Nadella since taking charge in 2014.
 
Chris Suh, head of Microsoft's investor relations said that the gross margins were 48 percent for Microsoft's so-called "commercial cloud" business, which includes Azure and versions of its online Office 365 product sold to businesses.
 
Suh said that while that figure was up from 46 percent a year ago, it is down from last quarter's 49 percent. To gain a whiff of the actual profit made of Microsoft's cloud products, which the company does not publish, investors closely watch the figure.
 
Cloud infrastructure offerings from market leader Amazon.com Inc, Alphabet Inc's Google, IBM and Oracle Corp are fought against by the company by the Azure platform.
 
"We're not at Amazon's margin today," said Suh. "Their infrastructure business is much larger. They have the benefit of scale. We track more like what Amazon was when they were closer to our size."
 
While not disclosing a number, Chief Financial Officer Amy Hood said that there was a "material improvement" since last quarter while taking questions from investors on the company's earnings in a conference call about Azure-specific gross margins.
 
Similar to how the company did with its historical business as a combination of products with different margins, like Office and Windows Server, the company thinks of its cloud offerings as comprehensive lineup of both software and infrastructure, said CEO Nadella.
 
"We have a cloud strategy that is not just about infrastructure," Nadella said, pointing out differences with Amazon Web Services.
 
There was a rise of 8.0 percent in the quarter to reach $6.9 billion for the revenue from Microsoft's 'Intelligent Cloud' business, which includes Azure, along with other data center software. According to research firm FactSet StreetAccount, that beat analysts' average estimate of $6.73 billion.
 
In contrast, while being at a good pace but still the lowest growth rate since Microsoft began disclosing the number in 2015, Azure's revenue was down from 121 percent the previous quarter but grew 94 percent year over year.
 
"In general, as long as it's close to doubling right now, that's extremely solid performance given the business is getting big from an overall standpoint," said Cross Research analyst Shannon Cross.
 
Down from 54 percent in the previous quarter, sales of Office 365 to businesses rose 49 percent. Microsoft does not give an absolute dollar figure for Office 365 sales as with Azure.
 
On the other hand, while slightly beating the rate at which personal computer sales fell in the quarter, there was a drop of 5.0 percent in the sales in Microsoft's personal computing business, which includes its Windows software, once the bedrock of the company, to reach $11.8 billion.
 
(Source:www.reuters.com)






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