Microsoft's Services Revenue Lifts Quarterly Results -- Update

By Jay Greene Features Dow Jones Newswires

Microsoft Corp. has ridden the cloud-computing wave for several quarters, and once again its revenue surged on the strength of its emerging business of selling web-based, on-demand computing services.

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In the fiscal first quarter, the two biggest pieces of Microsoft's cloud-computing operations -- its Azure infrastructure services and Office 365 online-productivity business -- saw revenue soar 90% and 42%, respectively.

While the software giant doesn't disclose revenue figures for those businesses, it said its commercial-cloud run rate -- the last month of sales of its Azure and Office 365 products, multiplied by 12 -- hit $20.4 billion.

Two years ago, when the company's commercial cloud run-rate was $6.3 billion, Microsoft Chief Executive Satya Nadella set a $20 billion goal for the end of the 2018 fiscal year.

"They crushed it again," said Stifel Nicolaus & Co. analyst Brad Reback. "These were really strong growth rates."

Those gains continued to offset the company's Windows PC operating-system franchise, which has slowed in recent years. Revenue in Microsoft's More Personal Computing segment, which includes Windows as well as the mobile-phone and gaming businesses, stayed flat at about $9.4 billion. Microsoft doesn't break out revenue for its Windows business. Earlier in October, International Data Corp. reported world-wide PC shipments fell 0.5% in the third quarter.

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Overall, Microsoft posted $6.58 billion in net income, or 84 cents a share, compared with a profit of $5.67 billion, or 72 cents a share, a year ago.

Revenue gained 12% to $24.54 billion.

Analysts surveyed by S&P Global Market Intelligence expected Microsoft to report per-share earnings of 72 cents on $23.56 billion in revenue.

Shares rose 4.2% to $82.05 in after-hours trading Thursday after results beat expectations. If Microsoft shares stay at these levels when markets open Friday, it would be an all-time high. The stock has gained 27% so far this year.

The engines of Microsoft's growth have been its Intelligent Cloud segment, which includes Azure, and its Productivity and Business Processes segment, which includes the Office franchise. Revenue in Intelligent Cloud rose 14% to $6.92 billion, while revenue in Productivity and Business Processes climbed 28% to $8.24 billion.

Microsoft's cloud growth has been fueled in large part by the so-called hybrid cloud, in which customers mix cloud computing services with software running on servers in their own data centers. It is a particular strength of Microsoft's given its history of selling software to corporate customers. Microsoft finance chief Amy Hood cited the hybrid offerings as a driver of the company's cloud growth.

"We were built for hybrid from the beginning," Ms. Hood said in an interview. "We do believe that it resonates with customers.

The Productivity and Business Processes unit also includes Microsoft's Dynamics business, which sells software and services to help sales representatives manage customer relationships and finance departments manage corporate resources. It is a market where Microsoft competes with Salesforce.com Inc., among others, and one in which the company has placed growing emphasis. Dynamics revenue grew 13%, though the company didn't disclose a revenue figure.

Microsoft purchased LinkedIn, the professional social network, in December for $27 billion, in part, to boost the Dynamics business. In the quarter, LinkedIn added $1.14 billion in revenue and posted a $294 million operating loss.

During a conference call with financial analysts, Mr. Nadella said that Microsoft is "ahead of plan" for LinkedIn's financial contributions to the software giant's results. Microsoft has integrated LinkedIn with a few Microsoft products, particularly those in its Dynamics business.

"You'll see more product integration in fiscal '18 as we continue to accelerate our innovation to connect the world's leading professional cloud with the world's leading professional network," Mr. Nadella said.

To support its growing cloud business, Microsoft is doling out huge sums to build expensive data centers around the world. In the quarter, Microsoft spent $2.7 billion in capital expenses, with much of that money going toward its data-center expansion. A year ago, Microsoft recorded $2.3 billion in capital expenses.

Microsoft launched a bevy of new Surface computers earlier this year, including a refreshed Surface Pro tablet-laptop hybrid and a lightweight laptop to compete with Apple's MacBook Air.

Microsoft didn't break out specific revenue figures for the devices, but noted that Surface revenue gained 12% in the quarter.

For the fiscal second quarter, Microsoft expects More Personal Computing revenue of $11.7 billion to $12.1 billion, compared with $11.82 billion in the year-earlier period. Productivity and Business Processes should hit $8.75 billion to $8.95 billion, up from $7.38 billion in the second quarter of fiscal 2017. Microsoft expects the Intelligent Cloud unit to register $7.35 billion to $7.55 billion, up from $6.86 billion in the year-earlier quarter.

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

(END) Dow Jones Newswires

October 26, 2017 19:14 ET (23:14 GMT)