Microsoft’s cloud business bets pay off in Q1 as stock hits an all time high

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Microsoft today reported earnings for its first fiscal quarter of 2017 (because fiscal quarters don’t have to correlate with the all-governing force of time). Long story short: Azure and other office-based products are fueling revenue growth, as Microsoft mostly gives up on mobile. Also of note: Shares popped to above $60 in after-hour trading on news of strong growth in the cloud business, which is above its all-time high set in 1999.

The Numbers

  • The company’s earnings came in at a non-GAAP revenue of $22.3 billion ($20.5 billion GAAP) and $0.76 of non-GAAP per-share profit ($0.60 GAAP), coming in below expectations.
  • Wall Street expected the company to report earnings per share of $0.68 on revenue of $21.71 billion.
  • At the same time last year, Microsoft’s revenue was $21.7 billion, with earnings per share at $0.67, putting analyst estimates for this quarter almost flat with Microsoft’s actual figures from a year ago.
  • More recently, Redmond beat the Street for Q4 2016, reporting $22.6 billion in revenue and $0.69 EPS.

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Why They Matter

  • Microsoft is in the midst of a transition. The company cut down its mobile hardware business and has started to shift from reliance on Windows revenue, instead focusing on enterprise solutions like Office 365 and Azure. Investors and analysts are particularly focused in on Microsoft’s cloud business (Azure), which competes with Amazon’s significantly larger AWS, but has shown growth in recent quarters.
  • Azure revenue is up 116 percent, and the “Intelligent Cloud” segment (including other server products beyond Azure) is up 8 percent from last quarter. Meanwhile, Office commercial revenue grew 5 percent from last quarter, and Office consumer revenue went up 8 percent.
  • Otherwise, Microsoft’s abandoned mobile business is down a whopping 72 percent as the company transitions away from that service.
  • The Surface business is up 38 percent from last year.
  • Still, this is the first time shares have popped to a record high since 1999, as shareholders get more comfortable with Microsoft’s refreshed focus on enterprise solutions.

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What To Look For

  • Microsoft’s proposed acquisition of LinkedIn isn’t yet finalized, so that has little effect on today’s report. When the deal receives regulatory approval and closes officially, LinkedIn will start to make an impact on Microsoft’s earnings.
  • The company is having an event on September 26 to unveil something new, which we expect to be a new Surface tablet and perhaps new Windows software.
  • Microsoft is putting increased attention on AI, having formed a new AI research unit under Harry Shum. Satya Nadella calls AI “the intersection of our ambitions.”