Following better-than-expected fiscal Q2 report from software giant Microsoft (MSFT) this afternoon, management held a conference call with analysts to offer its outlook for this quarter.

Microsoft forecast a combined revenue range of $23.15 billion to $23.85 billion, topping consensus for $22.65 billion.

The surprising part — or perhaps not surprising, given PC trends that helped Q2 — is that cloud computing is not the star of the outlook.Instead, the cloud forecast is actually a little soft, relative to FactSet consensus, while the biggest source of upside in the outlook, relative to consensus, comes in the areas of productivity and PC software. However, results are also affected by the inclusion of LinkedIn revenue following the acquisition of the social networker, which may not have been fully factored by analysts:

• Microsoft sees its “productivity and business processes revenue” at $7.65 billion to $7.85 billion, which is ahead of consensus for $7.072 billion. That includes $950 million of LinkedIn revenue, Microsoft said.
• The company’s “More Personal Computing” division may have revenue of $9.05 billion to $9.35 billion, above consensus of $9.073 billion;
• and “Intelligent Cloud” is expected to come in at $6.45 billion to $6.65 billion, slightly below consensus for $6.613 billion.

Microsoft shares have added to after-hours gains following the report, now up 73 cents, or 1%, at $65.01.

Microsoft reported earnings that beat expectations on Thursday, but revenue missed.

Here's how the company did compared to what the Street expected:

• EPS: 73 cents vs. 70 cents expected, according to Thomson Reuters consensus
• Revenue: $23.56 billion vs. $23.62 billion expected, according to Thomson Reuters consensus
• Intelligent cloud revenue: $6.76 billion vs. $6.60 billion expected, according to StreetAccount consensus

The company said its "more personal computing" segment saw $8.84 billion in revenue, well below StreetAccount's consensus estimate of $9.22 billion.

Azure, which competes with Amazon Web Services, nearly doubled its revenue growth again this quarter. Microsoft said the product saw sales growth of 93 percent.

Growth in cloud revenue is seen as a key indicator of Microsoft's progress as the company transitions away from legacy businesses. In October, the stock broke through its 1999 highs after the company said Azure saw revenue growth of 116 percent.

Microsoft's cloud business brought in $6.76 billion in revenue during the quarter. The Street had expected the segment to bring in $6.60 billion in revenue, according to a StreetAccount consensus estimate.

As these younger segments continue to grow rapidly, Wall Street has also kept a steady eye on Microsoft's ability to control costs for their cloud offerings.





Last month, Microsoft unveiled an enterprise-ready version of Sales Navigator, LinkedIn's product for sales professionals. The move ramped up competition with rival Salesforce, which Microsoft beat in a bidding contest in June to acquire LinkedIn.

Before the announcement, the product already had plenty of top bracket customers including Ernst & Young, Symantec and Paypal. During the second fiscal quarter, Microsoft said the service saw subscriptions increase 20 percent year over year.

Microsoft Earnings: What to Watch

Microsoft Corp. is scheduled to report fiscal fourth-quarter earnings after the market closes Thursday.

EARNINGS FORECAST:

Analysts surveyed by S&P Global Market Intelligence expect Microsoft to report adjusted per-share earnings of 71 cents, up from 69 cents a year earlier. Adjusted results exclude items such as deferred revenue and restructuring charges. A year ago, the company reported net of 39 cents a share.

REVENUE FORECAST:

Analysts expect Microsoft to post adjusted revenue of $24.29 billion, up from $22.64 billion a year earlier. The adjusted number reflects Windows 10 revenue deferrals.


WHAT TO WATCH:

—CLOUDY CONDITIONS:

Microsoft continues to ramp up its business of selling web-based, on-demand computing processing and storage. Stifel Nicolaus & Co. analyst Brad Reback estimated in a recent research note that Microsoft’s Azure cloud-computing business grew about 87% in the quarter to $1.1 billion, continuing “to close the gap” with market pioneer and leader Amazon.com Inc. In the fiscal third quarter, Azure revenue grew 93%. He credited Microsoft’s “maturing product offering” as well as its ability to sell hybrid offerings that combine cloud services with software that runs in customers’ own data centers. Microsoft’s commercial-cloud run-rate—the last month of sales of its Azure and Office 365 products, multiplied by 12—should hit $18 billion, up 49% year-over-year, Mr. Reback estimated.

—DATA-CENTER SPENDING:

To handle its growing cloud business, Microsoft needs to build costly data centers around the globe. The company, along with Amazon and Alphabet Inc.’s Google, spent a combined $31.54 billion in 2016 in capital expenditures and capital leases, up 22% from 2015, according to company filings. That rate of spending is likely to continue as Microsoft works to keep pace with its rivals, in turn making it more costly for would-be competitors to catch up. Mr. Reback estimated Microsoft will post $3 billion in capital expenses in the quarter, bringing the company’s fiscal year total to $8.9 billion. He expects the annual number to climb to $11.4 billion in the current fiscal year.

—SURFACING SALES:

Three months ago, the biggest blemish on Microsoft’s results was a 26% decline in revenue from the company’s Surface line of computers. At the time, Microsoft attributed the slide to older Surface computers in the market, as well as increased price competition. Since then, Microsoft has rolled out a new Surface laptop for the education market, and an update to its Surface Pro tablet-laptop hybrid device. Those products, though, became available toward the end of the quarter and aren’t likely to have factored much into the company’s top line.

—SHRINKING WINDOWS:

Sales of personal computers, the vast majority of which run Microsoft’s Windows operating system, continue to decline. 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%. Since More Personal Computing, comprised largely of Windows revenue, remains Microsoft’s largest segment, PC declines continue to dog the company’s results. Morgan Stanley analyst Keith Weiss estimated in a research report that revenue for the segment slid 4.3% to $8.52 billion, as sales of Windows to computer makers fell 2% to $2.67 billion.

Microsoft Profit Jumps, Fueled by Cloud Computing

The software giant’s results beat expectations, with strong gains in selling web-based services to corporate customers

July 20, 2017

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.”

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.

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.

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.

Microsoft earnings: Cloud may maintain $600 billion market cap

Oct 25, 2017

Microsoft’s cloud business comprises products such as Office 365, Dynamics 365 — its enterprise resource planning and customer relationship management tool — and Azure, and it has been seen as the main driver for Microsoft’s rise under Chief Executive Satya Nadella. Sales in that area may increase as much as 45% in the first fiscal quarter, pushing the company closer to or higher than the $20 billion annualized run-rate goal Microsoft set in 2015, KeyBanc Capital Markets wrote in a research note this week.

Microsoft executives have said they aim to meet that $20 billion goal some time in the 2018 fiscal year, and that the company hit an annualized revenue run rate of $18.9 billion in the fourth quarter.

“We have been impressed by solid execution and strong customer adoption of Microsoft’s cloud applications and platforms,” KeyBanc analyst Brent Bracelin wrote. “Reaching $20 billion would imply the commercial cloud mix could cross over 20% of revenue for the first time in the first quarter of fiscal 2018, up from 5% in early 2015."

Commercial cloud gross margins will likely remain above 50%, according to a Stifel research note, and investors should expect margins to fluctuate depending on data-center build-outs.

For its part, Microsoft says that its fast-growing cloud division is in part due to its client mix. A company spokesman highlighted the diversity of its commercial cloud customer base and how the company has made inroads into industries ranging from oil and gas — claiming Haliburton Co. as a client — to financial-services firms and cybersecurity companies.

And like many of its competitors, the Redmond, Wash.–based company is adding artificial-intelligence functionality into its cloud-computing applications. “Artificial intelligence is the killer app for cloud,” Microsoft spokesman Joel Snider said.

Despite Microsoft’s gains in cloud infrastructure services, the company reportedly lags far behind rival Amazon.com Inc and its Amazon Web Services unit, which has taken 34% of the market as of the second quarter, according to Synergy Research Group. Microsoft commands 11% of the market, and Alphabet Inc. unit Google holds 5% of the market, Synergy reported.

Earnings: On average, analysts model Microsoft to report GAAP earnings of 71 cents a share and adjusted earnings of 72 cents a share, according to FactSet. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict adjusted earnings of 78 cents a share, on average.

Revenue: Analysts polled by FactSet on average estimate that Microsoft’s first-quarter sales will be $23.51 billion, with a fairly even split among its business lines. Productivity and Business Processes will account for $7.98 billion, Intelligent Cloud will haul in $7.43 billion and More Personal Computing will account for $8.82 billion, they predict, while modeling $1.07 billion in LinkedIn revenue. Estimize contributors forecast $23.76 billion in revenue.

Analysts on average rate the stock the equivalent of a buy, with 24 of 33 analysts tracked by FactSet rating it favorably and only one placing a sell rating on the stock. Eight have hold ratings on Microsoft. The average price target was $81.25, reflecting potential upside of 3% from Wednesday’s closing price.

Microsoft’s Services Revenue Lifts Quarterly Results

Oct. 26, 2017

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

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.

“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.

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 Microsoft to report per-share earnings of 72 cents on $23.56 billion in revenue.

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.

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.

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.

"It really doesn't get any better than this," he said Wednesday on CNBC's "Trading Nation."

According to the technician, the stock has just broken out of a 17-year base, which he says is a rare occurrence. But on top of that breakout, Microsoft has just recently become an outperformer relative to the market as a whole.

Amazon lost share in the public cloud business in the fourth quarter, while Microsoft continued to gain momentum, according to research from KeyBanc analysts.

Amazon Web Services had 62 percent market share in the quarter, down from 68 percent a year earlier, KeyBanc's Brent Bracelin and other analysts wrote in a note on Thursday. Microsoft Azure jumped from 16 percent to 20 percent, and Google's share increased from 10 percent to 12 percent, they said.

According to KeyBanc, Azure likely contributed $3.7 billion to Microsoft's 2017 revenue, which totaled an estimated $96.6 billion. That suggests Azure almost doubled, which is consistent with Microsoft's disclosures about Azure's revenue growth in recent quarters.

Amazon, meanwhile, said that AWS grew 42 percent in the third quarter.

The analysts expect Azure's revenue growth to slow in 2018 to 88 percent.

Microsoft earnings: Turning AI-backed cloud computing into more cash

Jan 28, 2018

Microsoft Corp. hit a $600 billion valuation in October for the first time since 2000, and crossed the $700 billion market cap threshold in January, as investors continued to bank growth off the massive, global shift to cloud computing. Now, Microsoft will have to prove its cloud growth is worth that much.

Ahead of the Redmond, Washington-based company’s fiscal second-quarter earnings Jan. 31, investors should expect cloud to continue to drive its top line. Microsoft gained the most market share for the year among the top 60 vendors, including rivals Alphabet Inc. and Amazon.com Inc. according to a January research note from KeyBanc Capital Markets analyst Brent Bracelin.

Bracelin and his team estimate the total addressable public cloud market at about $106 billion, which could triple to $314 billion by 2022. Microsoft has now captured about 20% of the market, Bracelin says.

Earnings: On average, analysts polled by FactSet project earnings of 86 cents a share. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict adjusted earnings of 89 cents a share, on average.

Revenue: For the fiscal second quarter, analysts polled by FactSet forecast sales of $28.38 billion, with “More Personal Computing” accounting for $12.02 billion, “Intelligent Cloud” modeled at $7.51 billion and “Productivity and Business Processes” $8.87 billion. Microsoft projected sales of $8.75 billion to $8.95B for Productivity and Business Solutions, $7.35 billion to $7.55 billion in Intelligent Cloud, and $11.7 billion to $12.1 billion in More Personal Computing. Estimize contributors predict sales of $28.49 billion on average.

What analysts are saying

PiperJaffray analyst Alex Zukin calls Microsoft stock one of the “top two ideas heading into 2018” and rates the name the equivalent of a buy with a $115 price target. Having initiated coverage on the strength of Microsoft’s cloud business, Zukin wrote in a January note to clients that Microsoft’s Azure remains the largest chance for growth and cites “as many as three nine-figure deals” that are in talks as of the note.

Zukin also noted that Microsoft Chief Financial Officer Amy Hood has said that Azure margins will likely begin to grow as the company has largely completed its data center building across the world, and capital expenditures will “flatten out.”

“Thinking longer term, we believe Microsoft’s growth opportunities support a high single digit growth rate over the next five years while margin expanding growth products combined with more favorable changes to the federal tax policy could allow Microsoft to return to a more aggressive share buyback,” he wrote.

Microsoft's revenue was up 12 percent year over year, according to Wednesday's earnings statement. Microsoft's biggest business segment, More Personal Computing, which includes Windows, devices, gaming and search advertising, grew 2 percent, with $12.17 billion in revenue. That's above the FactSet consensus estimate of $12.02 billion in revenue for More Personal Computing. Gaming revenue for the quarter was up 8 percent, thanks to the new availability of Microsoft's Xbox One X gaming console.

The Productivity and Business Processes segment, including Office, Dynamics and LinkedIn, increased by 25 percent with revenue of $8.95 billion, above the $8.86 billion FactSet estimate. And the Intelligent Cloud business, which contains Azure, Windows Server and SQL Server, produced $7.80 billion in revenue, giving it a 15 percent growth rate. That's above FactSet's $7.51 billion estimate for the segment.

In Wednesday's statement Microsoft, as usual, didn't specify how much revenue Azure brought in, but it did provide a growth rate. Azure's revenue was up by 98 percent in the quarter. In the quarter Microsoft's Azure public cloud gained share from market leader Amazon Web Services, KeyBanc analysts estimated earlier this month.

Analysts are expecting Microsoft to give guidance of $25.51 billion in revenue for the fiscal third quarter, according to Thomson Reuters.

Meanwhile, many analysts are wondering how the changes will impact Microsoft going forward. The company's effective tax rate could change -- in its fiscal first quarter, the rate was 18 percent -- and some analysts believe that decreases could lead to gains in Microsoft's earnings per share. Additionally analysts are looking for information about what Microsoft might want to do with the billions of dollars that it can repatriate from overseas following the tax changes. "As of December 31, 2017, we have not completed our accounting for the tax effects of the TCJA," Microsoft said in Wednesday's filing.




In a Jan. 28 note the KeyBanc analysts said they're expecting Microsoft to report a $21.8 billion annualized revenue run rate for Commercial Cloud, which includes Azure, Office 365 and Dynamics 365, which would imply 50 percent growth. For the second quarter Microsoft did not report annualized revenue run rate for commercial cloud.

But Microsoft did say that in the fiscal second quarter it picked up commercial cloud revenue totaling $5.3 billion, which was up 56 percent year over year, and up sequentially from $5 billion in the fiscal first quarter.

Microsoft said its number of Office 365 consumer subscribers increased to 29.2 million, up from 28 million one quarter earlier.

Cloud Business Boosts Microsoft’s Earnings

Azure’s revenue jumps 93% in latest quarter

April 26, 2018

Microsoft Corp. extended its streak of wins in the latest quarter as the software giant moves into an era where its venerable Windows franchise plays a supporting role to its burgeoning cloud-computing operations.

The cloud business, called Azure, jumped 93% in the fiscal third quarter, Microsoft reported Thursday. The business has never grown slower than 90% since the company began reporting the metric in October 2015. The other big piece of the company’s cloud operations, the commercial version of its Office 365 online-productivity service, grew 42%.

Microsoft doesn’t disclose revenue for either business, but in the preceding second quarter it said Azure jumped 98% and commercial Office 365 grew 41%.

That growth has propelled Microsoft into the role chief cloud rival to Amazon.com Inc., which pioneered the business of renting out computing power and storage a decade ago.

“Two years ago, there was a clear No. 1 with no clear No. 2,” said Stifel Nicolaus & Co. analyst Brad Reback. “There is no doubt that Microsoft has put significant distance between themselves and all of the other” Amazon rivals.

The surging cloud business led Microsoft to post a profit increase of 35% to $7.42 billion, or 95 cents a share. Revenue rose 16% to $26.82 billion.

Microsoft no longer reports adjusted figures, reflecting accounting changes it adopted at the start of the fiscal year. The year-ago figure reflects that change.

Analysts surveyed by S&P Global Market Intelligence expected Microsoft to report per-share earnings of 85 cents on revenue of $25.78 billion.

Microsoft’s Azure business is part of its Intelligent Cloud segment. Revenue from that unit rose 17% to $7.9 billion. The Office franchise is part of Microsoft’s Productivity and Business Processes segment, where revenue climbed 17% to $9.01 billion.

Microsoft doesn’t break out revenue for its Windows business. Earlier this month, International Data Corp. reported world-wide PC shipments showed no growth in the most recent quarter.

Revenue in Microsoft’s More Personal Computing segment, which includes the company’s slow-growing Windows franchise as well as the mobile-phone and Xbox gaming businesses, gained 13% to $9.92 billion.