Microsofts strong cloud surge drives its Q2 growth
Riding on a strong growth in its commercial cloud services, Microsoft logged a net income of $8.4 billion on revenues of $32.5 billion for the quarter ending on December 31.
Long known for its Windows software, Microsoft has shifted its focus to the fledgling cloud market where it is battling Amazon for dominance. The commercial cloud business registered $9 billion in sales for the quarter, for a $36 billion annual run rate.
Azure, Microsofts flagship cloud product, had revenue growth of 76% for the fiscal, down from a 98% surge a year earlier. Azure sales had increased 76% in the September quarter as well.
The company is rapidly picking up business from the retail industry in particular, which is aiming to keep pace with the e-commerce business of Amazon. This month alone, Microsoft announced deals with Walgreens Boots Alliance and Kroger, on top of a five-year agreement with Walmart it unveiled this summer.
"Our strong commercial Cloud results reflect our deep and growing partnerships with leading companies in every industry including retail, financial services, and healthcare," said Microsoft CEO Satya Nadella "We are delivering differentiated value across the cloud and edge as we work to earn customer trust every day."
But Wall Street has grown accustomed to blockbuster earnings beats as companies around the globe ditch their own data centers for the cloud.
"It wasnt a blowout quarter," said analyst Shannon Cross of Cross Research. "Thats probably playing a bit into" the stock decline.
The company also said a stronger U.S. dollar would hit growth of its intelligent cloud business segment, which includes Azure and other products, by 2 percentage points.
Microsoft has long courted customers outside the United States and has a 17 percent share of the global cloud market, research firm Canalys previously said. Amazon has 32 percent.
Microsoft is spending more on the latest cloud technologies to narrow the gap. Research and development expenses rose to $4.1 billion in the quarter from $3.5 billion a year earlier.
"Clearly the company is spending aggressively to double down on its cloud bet, a dynamic that is a smart move but caps margin upside in the quarter," said Daniel Ives, an analyst at Wedbush Securities.
Microsofts total revenue climbed 12.3 percent to $32.47 billion. The revenue from Surface laptops increased 39%. The company had released Surface Pro 6 and Surface Laptop 2 during the quarter, along with Surface Studio 2 and Surface Headphones.
Revenue in personal computing grew by 7% to $13 billion and Surface is now almost a $2 billion business for Microsoft.
"Our solid execution delivered another strong quarter, with commercial cloud revenue growing 48% year-over-year to $9 billion," said Amy Hood, Executive Vice President and Chief Financial Officer of Microsoft.
The revenue in productivity and business processes was $10.1 billion, registering a 13% growth, powered by double-digit revenue growth for LinkedIn and Office 365. LinkedIn revenue increased by 29% while Office Commercial products and cloud services revenue increased 11%, driven by 34% growth in Office 365 Commercial revenue. Office 365 consumer subscriber base has now hit 33.3 million.
Microsofts Dynamics products and Cloud services revenue also increased 17%, driven by 51% revenue growth in Dynamics 365.
Gaming revenue increased 8%, with Xbox software and services revenue growth of 31%.