Microsoft Cloud Drives Profit As Legacy Declines

Microsoft has revealed a stunning performance for its fourth quarter and year-end financial results, as CEO Satya Nadella’s laser-like focus on cloud continues to reap benefits.

The hugely impressive financial results at the software giant will come as bitter news to the thousands of Microsoft employees who are in the process of being made redundant, as Nadella pushes ahead with major reorganisation designed to push its cloud services.

And the results confirmed that Microsoft’s legacy business continues to decline, not helped by the fact that Microsoft sold significantly fewer Surface devices than in previous quarters. The new models had not gone on sale until this quarter.

Strong Performance

It is clear that Microsoft’s results have pleased Wall Street with a strong fourth quarter, and its share price surged as a result.

For the fourth quarter ending 30 June Microsoft post a net profit of $6.5 billion (£5bn), up from $3.1bn (£2.4bn) a year earlier.

Sales for the quarter likewise rose to $23.3bn (£17.9bn) from $20.6bn (£15.8bn) in the same year ago quarter.

For the full year Microsoft posted a net profit $21.2bn (£16.3bn) up from $16.8bn (£12.9bn). Revenue rose to $89.9bn (£69.1bn) from $85.3bn (£65.6bn) a year earlier.

“Innovation across our cloud platforms drove strong results this quarter,” said Nadella. “Customers are looking to Microsoft and our thriving partner ecosystem to accelerate their own digital transformations and to unlock new opportunity in this era of intelligent cloud and intelligent edge.”

It is clear that Microsoft is reaping the benefits from its cloud drive and turning its Office products into subscription-based software. Office commercial products and cloud services revenue increased 5 percent for example, helped by Office 365 commercial revenue growth of 43 percent.

Office consumer products and cloud services revenue also increased 13 percent.

And dynamics products and cloud services revenue increased 7 percent, while LinkedIn contributed revenue of $1.1bn during the quarter.

Sales from Intelligent Cloud was $7.4 billion and rose 11 percent.

Revenue however dropped 2 percent to $8.8bn in the personal computer division, which includes Windows 10 and Microsoft’s line of Surface hardware. This was mostly down to lower phone revenue (Microsoft officially killed Windows Phone this month), but Surface revenue decreased 2 percent due to the sales pause between old and new models.

Portfolio Breadth

“As expected, Microsoft posted solid results and continues to fly on all cylinders, especially across its cloud business, said Nick McQuire, VP of Enterprise Research at CCS Insight. “Azure’s meteoric rise in particular has been key to Microsoft’s success in 2017 and notably, the grounds for the firm’s recent restructuring. Azure is on track to become the dominant enterprise cloud platform in the industry over the next several years.”

“Few have the reinforcing breadth of a portfolio as vast as Microsoft’s which has been combining over the past few quarters to improve its gross margins,” said McQuire. “This bodes ominously for rivals such as Amazon Web Services, Google Cloud and IBM who are desperately trying to buck the trend towards commoditisation and falling prices in cloud services.”

“Artificial intelligence has emerged a critical strategic focus for Microsoft,” he added. “Despite the hype and heavy implications around the technology, CEO Satya Nadella continues to reinforce Microsoft’s cloud attributes that are helping it establish early leadership in this field. This is a major area as the battle for cloud supremacy escalates.”

All of this however will come as no comfort whatever to the thousands of Microsoft sales staff currently being made redundant, or the millions of Windows Phone users who have been abandoned.

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