Microsoft sales, profit top estimates on cloud; Azure slows
Microsoft posted sales and profit that topped analysts' projections, lifted by demand for Azure cloud-computing programs and internet-based versions of Office productivity software.
Profit in the first quarter, which ended Sept. 30, rose to $10.7 billion, or $1.38 a share, compared with the $1.24 per-share average estimate of analysts polled by Bloomberg. Revenue rose 14% to $33.1 billion, the Redmond, Washington-based company said Wednesday in a statement, better than the $32.2 billion average prediction.
Azure sales rose 59%, compared with 64% in the previous period and 73% growth in the quarter before that. Chief Executive Officer Satya Nadella has spent the past five years shifting Microsoft to focus on cloud-based software, which lets customers avoid having to buy and run their own hardware and applications. As growth decelerates, the company is trying to improve margins and rack up a steady stream of large deals for Azure, which competes with Amazon.com's web-services division. Sales of the subscription-based Office 365, Microsoft's other major cloud business, to corporate customers jumped 25%.
"They've made the migration from core enterprise software to this cloud focus," said Daniel Morgan, senior portfolio manager at Synovus Trust. "You look at cloud, at expanding margins, at the corporate move to Windows 10, and at least the PC market was better than expected in the quarter."
Microsoft shares were little changed in extended trading following the report, after closing at $137.24 in regular New York trading. The stock gained 3.8% in the quarter, while the Standard & Poor's 500 Index rose 1.2%.
The company's shares have jumped this year on optimism about the cloud business. The stock is also being helped by some investors' belief that Microsoft is a safer bet as U.S. and European regulators sharpen their scrutiny of other large technology firms, including Google, Amazon and Facebook. Microsoft's market capitalization rose above $1 trillion briefly in April and returned to that level in June. Apple overtook Microsoft as the most valuable publicly traded U.S. company earlier this month.
Microsoft said commercial cloud revenue rose 36% to $11.6 billion. Margins widened by 4 points to 66%, "driven by material improvement in Azure gross margin," the company said in a slide deck posted on its website. Microsoft doesn't break out Azure revenue separately or comment on whether that business is profitable.
Keith Weiss, an analyst at Morgan Stanley, expects commercial cloud sales of $48 billion for the 12 months that end June 30, rising to $79 billion in fiscal 2022. He also expects continued improvement in margins as increasing use of Microsoft's cloud data centers allows the company to run the services more efficiently.
"They're doing a good job with the move to the cloud," Synovus's Morgan said. "Of all the old smokestack tech companies - you look at IBM, you look at Oracle - of all those companies, Microsoft is the one that has done a really good job."
Sales of Windows to PC makers rose 9%. Surface revenue declined 4%, in part because the company introduced new models for the holiday season after the end of the first quarter.
Microsoft still gets more than 15% of its sales from Windows, and that business remains heavily dependent on the cycle of companies replacing PCs. In the September quarter, global shipments of personal computers increased 1.1%, Gartner said earlier this month, fueled by businesses upgrading to the latest Windows operating system. Microsoft is ending support for Windows 7, which was released in 2009, in January, meaning companies need to upgrade to Windows 10 if they want to continue to receive updates and service on their systems.
The older software's expiration is also helping boost sales of the company's Microsoft 365 bundle, which includes Windows and Office cloud software such as Word, Excel and Teams, Microsoft's rival to Slack Technologies' product.
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