On Thursday 18 July, Satya Nadella – Microsoft’s Chief Executive – said the company had ‘a record fiscal year’ due to its partnerships with leading companies. The company’s quarterly sales and profit beat all estimates. The success was attributed to the growth of cloud computing activity, causing stock prices to soar.
Bloomberg forecasted $1.22 profit per share for the end of Microsoft’s final quarter, ending 30 June. In fact, the result was $1.37 per share. The Washington-based company said that revenue increased by 12% to a whopping $33.7 billion – nearly 3% more than forecast. Nadella aims to keep up a steady flow of cloud contracts, focusing on web-based services, narrowing the gap with the current market leader, Amazon.
Soaring Financials
The company’s shares increased by 1.2% in extended trading following the news. Net income for the quarter was $13.2 billion or $1.71 a share. Microsoft saw a rise of 15% during the quarter, compared with a mere 3.8% increase in the S&P 500 Index. The stock climbed due to optimism surrounding the company’s cloud sales.
These gains mean that Microsoft is the most valuable listed company, with a market capitalization of greater than $1 trillion.
Key Successes
Commercial cloud revenues rose by 39%, compared to $11 bn in the prior year. Profit margins improved by 6 points to 65%. Income from sales rose by 31% for Office 365 products. The revenue of the company’s productivity and business division – which includes Office – increased by 14% in Q4 to $11 bn.
While Azure cloud sales rose by 64%, bear in mind that the results of the previous quarter were 73% growth and before that 76% growth. This growth deceleration is a growing concern to some investors. Going back two years, Azure growth was more than doubling. However, booming profit margins in the cloud services have alleviated some worries. The Intelligent Cloud division sales consist of Azure and server software. This is the first quarter where this division has yielded Microsoft’s most substantial revenue.
The “More Personal Computing” division includes Windows software, Xbox gaming products, and Surface hardware. They experienced a climb in revenue of 4% to $11.3 bn.
In Q2 global personal computers sales increased by 1.5%. Gartner Inc believed that this increase was fueled by companies upgrading to the latest version of Windows. The expiration of Windows 7 also boosted sales of the Microsoft 365 bundle; companies switched to this internet-based subscription method available in Windows 10, instead of one-time licenses.
Microsoft’s moved its intellectual property to the US to comply with the 2017 Tax Cuts and Jobs Act. This boosted profits by a tax gain of $2.6 billion. The benefit is fully recognized in this quarter’s financials, which means the tax rates will be higher in the quarters that follow.
Future Success
Post Q4, Microsoft contracted to new cloud projects with Providence St. Joseph Health and ServiceNow. They will use Azure to deliver cloud products to government customers. This is the only time that the business has adopted third-party data centers. Gartner Inc believes that global public-cloud sales will to grow 17.5% in the coming year, reaching an astounding $214.3 billion!
Both Microsoft and Amazon are defining themselves as leaders of the infrastructure market segment. Right now, however, Azure is significantly smaller than Amazon web services. But in terms of the best cloud-based applications, MS Office’s cloud business is in the lead.
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