Microsoft Forges Ahead In Cloud -- WSJ

By Jay Greene Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 21, 2017).

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Microsoft Corp. continued its rebirth as a force in cloud-computing, posting stronger-than-expected gains in its business of selling web-based services to corporate customers.

The software giant has been working to expand the business selling web-based services to corporate customers, and now has solidified its spot as the No. 2 provider of on-demand computing processing and storage behind market pioneer Amazon.com Inc. In its fiscal fourth quarter, Microsoft notched gains in its Azure cloud-computing business and Office 365, the online version of its widely used productivity software.

The Redmond, Wash., company said Thursday that its Intelligent Cloud segment, which includes Azure, rose 11% to $7.4 billion. In the Productivity and Business Processes segment, which includes the Office franchise, revenue climbed 21% to $8.4 billion.

Microsoft doesn't disclose revenue figures for its Azure and Office 365 businesses, but it said Azure revenue jumped 97% and Office 365 revenue rose 43%.

"Azure was the primary source of our outperformance in the quarter," Microsoft finance chief Amy Hood said in an interview. "It's higher than I was expecting."

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Overall, Microsoft posted $6.51 billion in fourth-quarter net income, or 83 cents a share, compared with a profit of $3.12 billion, or 39 cents a share, a year ago. Excluding the impact of revenue deferrals and other items, adjusted earnings climbed to 98 cents from 69 cents a year earlier. Per-share earnings in the most recent quarter included a 23-cent tax benefit related to Microsoft winding down its mobile-phone business.

Revenue rose 13% to $23.32 billion and was $24.7 billion when adjusted to reflect Windows 10 revenue deferrals.

Analysts surveyed by S&P Global Market Intelligence expected Microsoft to report adjusted per-share earnings of 71 cents, a figure that didn't include the 23-cent tax benefit, on $24.29 billion in adjusted revenue.

Shares rose 3.1% to $76.50 in after-hours trading after results beat expectations. The software giant's shares closed at a record on Thursday, after setting its previous high a day earlier.

Microsoft's growth in the so-called hyperscale public cloud market was faster in the quarter than investors anticipated. The cloud unit is still smaller than Amazon in the market but appears to be pulling away from its nearest rival, Alphabet Inc.'s Google, said Stifel Nicolaus & Co. analyst Brad Reback.

"They are the undisputed No. 2 in the hyperscale public cloud market, and it will be extraordinarily difficult for anyone to catch them," Mr. Reback said.

Two years ago, Microsoft forecast its commercial-cloud run-rate -- the last month of sales of its Azure and Office 365 products, multiplied by 12 -- would top $20 billion in the 2018 fiscal year that began July 1. At the end of the fourth quarter, the run-rate stood at $18.9 billion.

"Obviously, we're feeling pretty confident about hitting" the target, Ms. Hood said.

The strides Microsoft has made in the cloud come as its legacy Windows operating-system business shrinks. Revenue in its More Personal Computing segment, which includes Windows as well as the mobile-phone and gaming businesses, slid 2% to $8.8 billion. Last week, International Data Corp. reported world-wide PC shipments fell 3.3% in the second quarter, while Gartner Inc. estimated the drop at 4.3%.

Revenue for Microsoft's Surface line of computers also fell 2%. Three months ago, that business was hit hard, registering a 26% revenue decline, which the company attributed to older Surface computers in the market, as well as increased price competition.

Since then, Microsoft has introduced a new Surface laptop for the education market and an update to its Surface Pro tablet-laptop hybrid device, though those products made their debut with just a few weeks left in the quarter.

LinkedIn Corp., the professional social network Microsoft acquired last December for $27 billion, added $1.07 billion in revenue and posted a $361 million operating loss. Microsoft is working to connect its business products to LinkedIn, giving sales representatives using its Dynamics software, for example, tools to easily mine the professional social network to prospect for leads.

Like its cloud rivals Amazon and Alphabet Inc.'s Google, Microsoft is spending lavishly to build giant and expensive data centers around the world to deliver its cloud services. In the quarter, Microsoft spent $3.3 billion on capital expenses, with much of that money going toward its data center expansion. A year ago, Microsoft had $3.1 billion in capital expenses.

In the current quarter, Microsoft expects revenue in its Intelligent Cloud business of between $6.9 billion and $7.1 billion, up from $6.38 billion a year earlier. Revenue in its Productivity and Business Processes segment should land between $8.1 billion and $8.3 billion, including about $1.1 billion from LinkedIn. A year earlier, that segment posted $6.66 billion. Microsoft said the More Personal Computing segment's revenue will be between $8.6 billion and $8.9 billion, compared with $9.29 billion a year ago.

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

(END) Dow Jones Newswires

July 21, 2017 02:47 ET (06:47 GMT)