Microsoft Makes Gains On the Cloud -- WSJ

By Jay Greene Features Dow Jones Newswires

Microsoft Corp.'s cloud business surged in the fiscal third quarter, continuing the company's transition from legacy vendor of packaged software to a leader in the booming business of web-based, on-demand computing.

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Microsoft's Azure business again posted torrid growth as corporate customers adopt the cloud service to handle larger pieces of their computing operations. And Office 365, the online version of Microsoft's widely used productivity software, reported huge gains as well as businesses increasingly subscribe to email, word-processing and spreadsheet applications that run in Microsoft's data centers.

Even as the Windows operating-system franchise continues to generate big profits, the cloud gains are crucial as Microsoft battles Amazon.com Inc. and Alphabet Inc.'s Google for a piece of the so-called cloud-infrastructure market that is expected to reach $71.55 billion in 2020, up from $25.29 billion last year, according to market-research firm Gartner Inc.

Revenue from the Redmond, Wash., company's Intelligent Cloud segment, which includes Azure, rose 11% to $6.76 billion. In the Productivity and Business Processes segment, which includes the Office franchise, revenue climbed 22% to $7.96 billion.

The biggest blemish came in the More Personal Computing segment, where revenue fell 7% to $8.84 billion. Microsoft's Surface line of computers was hit hard, with revenue dropping 26%.

In an interview, financial chief Amy Hood attributed the decline to older Surface computers in the market, as well as increased price competition. "It had more impact than we anticipated," she said.

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At the same time, Windows revenue from PC makers grew 5%. That is better than the market for world-wide PC shipments as a whole, which inched up 0.6% in the quarter that ended in March, according to International Data Corp.

This was the first full quarter in which Microsoft included results from LinkedIn Corp., the professional social network it acquired in December for $27 billion. LinkedIn added $975 million in revenue in the quarter, but Microsoft reported it had a $386 million operating loss. Microsoft acquired LinkedIn, in part, so it can weave data about the network's members into its own offerings. That would allow Microsoft, for example, to provide more insight on potential prospects to sales representatives using its Dynamics software for managing customer relationships.

Microsoft doled out $2.1 billion in capital spending in the quarter, most of it to support "growth in our cloud offerings." The lion's share of that support goes toward building massive, expensive data centers around the globe to keep pace with Amazon and Google. In the year earlier period, Microsoft had $2.3 billion in capital spending.

Overall, Microsoft posted $4.8 billion in third-quarter net income, or 61 cents a share, compared with a profit of $3.76 billion, or 47 cents a share, a year ago.

Excluding the impact of revenue deferrals and other items, adjusted earnings rose to 73 cents a share. A year earlier, Microsoft reported adjusted earnings of 63 cents a share. Revenue gained 7.6% to $22.1 billion and was $23.56 billion on an adjusted basis.

Shares fell 1.4% to $67.34 in after-hours trading as adjusted per-share earnings beat expectations and revenue fell just short of expectations. Analysts surveyed by Thomson Reuters expected Microsoft to report adjusted per-share earnings of 70 cents on $23.62 billion in adjusted revenue.

"This is a lather, rinse, repeat quarter," Stifel Nicolaus & Co. analyst Brad Reback said.

Write to Jay Greene at Jay.Greene@wsj.com

(END) Dow Jones Newswires

April 28, 2017 02:47 ET (06:47 GMT)