Microsoft Corporation's Cloud-Computing Business Is Surging

By Daniel Sparks Markets Fool.com

Software giant Microsoft's (NASDAQ: MSFT) stock rose about 2.3% on Friday after the company reported better-than-expected fiscal 2017 second-quarter results. Adjusted earnings per share (EPS) of $0.83 on adjusted revenue of $25.8 billion were 6% and 2%, respectively, better than analysts' consensus estimate for the quarter.

Continue Reading Below

But there's a more interesting story from the quarter than the company's market-beating financial results. Microsoft's cloud-computing business, Azure, which competes directly with Amazon.com's (NASDAQ: AMZN) Amazon Web Services (AWS), saw its revenue skyrocket 93%, or 95% in constant currency.

Here's a look Azure's growth, and why it's important.

Image source: Getty Images.

About Azure's growth

Azure is a cloud-computing business giving enterprise customers scale and efficiency for secure server infrastructure and cloud applications. And it's driving results for Microsoft.

Continue Reading Below

With 93% year-over-year growth in revenue, Azure played an important role in the growth in Microsoft's intelligent cloud segment, which delivered $6.9 billion in revenue for the company during the second quarter, up 8% year over year and 10% in constant currency.

Investors should take notice of this key growth driver for Microsoft's intelligent cloud segment. Though Microsoft doesn't break out Azure's exact revenue figures, or even Azure's operating margin, there's no mistake that the intelligent cloud segment to which Azure belongs is important to the company's results. The overall segment accounted for 43% of Microsoft's overall operating profits in Q2 -- a level that will likely grow as Azure becomes a larger part of this segment.

Big opportunity

If the performance of Amazon's AWS is any indication of the potential for Azure, Microsoft's cloud-computing segment has a promising future. Indeed, based on AWS' robust performance, Azure has likely already morphed into a significant cash cow for Microsoft.

Amazon, which provides direct visibility into the financials of its AWS unit, generates about 75% of its total operating profits from the cloud-computing segment. Further, AWS is a growth machine for Amazon. In Amazon's most recently reported quarter, for instance, AWS operating income soared about 100% year over year, to $861 million.

Indeed, Microsoft seemed to confirm the profit-driving characteristics of Azure in the company's second-quarter earnings call. During the call, management said a 2 percentage point year-over-year increase in its commercial cloud gross margin, to 48%, was "largely driven by improvement in the Azure gross margin percentage."

Azure. Image source: Microsoft.

Azure's success is a particularly positive development for Microsoft since management indicates that the segment's performance carries over to the company's intelligent cloud segment in its entirety. Microsoft CFO Amy Hood explained (via a Reuters transcript) this interlinking between Azure and other components of the company's cloud segment:

So, when I think about the material gross margin improvement we saw on Azure, it continues the path we've actually been on. Where we've been discussing, as you continue to see customers ask for us and our help in managing their digital estate consistently, securely, through one interface, you'll actually see growth across all components of that cloud.

It benefits margin, not just in Azure, but across, actually, the entirety of the cloud.

In other words, not only is Azure's revenue and profitability increasing rapidly, but its impact on the company's overall intelligent cloud business is growing. At this rate, Azure is bound to have a meaningful impact on Microsoft's overall growth in the coming years.

10 stocks we like better than Microsoft
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now and Microsoft wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool has a disclosure policy.