Microsoft Corporation (NASDAQ:MSFT) easily beat Wall Street’s estimates on both the top and bottom lines in a quarter driven by cost cuts and revenue gains in critical areas like cloud computing and subscription services. In response, traders bid MSFT stock up 3% in Tuesday’s early after-market action.
Like Cisco Systems, Inc. (NASDAQ:CSCO) and Oracle Corporation (NYSE:ORCL) MSFT is transitioning away from software to cloud-based services and subscription products. There’s no question it’s the right strategy but it has been — and will continue to be — a long and expensive project. And although the cloud is driving Microsoft’s results, and in turn MSFT stock, it’s still a minority part of the business. Software aimed at PCs still accounts for a hefty chunk of the top line, and PC shipments are a slowly melting iceberg.
But at least it has a plan. Subscription-based services like Office 365 can be run on any device and that takes away the threat of the PC in decline. The challenge, then, is to scale the cloud and subscription businesses faster than the legacy operations deteriorate.
The most recent quarter was a shot of confidence in that regard. Revenue from Office commercial products and cloud services grew by 5%, driven by Office 365 commercial revenue growth of 54%, Microsoft said. Office consumer products and cloud services revenue increased 19%. Perhaps most importantly, Azure revenue more than doubled.
Per CEO Satya Nadella:
“This past year was pivotal in both our own transformation and in partnering with our customers who are navigating their own digital transformations. The Microsoft Cloud is seeing significant customer momentum and we’re well positioned to reach new opportunities in the year ahead.”
MSFT Smashes Expectations
For its fiscal fourth quarter, Microsoft earnings came to 69 cents a share. Analysts on average were looking for profits to come to 58 cents a share, according to a survey by Thomson Reuters. Revenue was $22.6 billion to beat the Street’s top-line forecast for $22.14 billion.
There were a few downsides to the report. For one, More Personal Computing revenues were off 4% to $8.9 billion, but that was thanks in large part to a 71% decline in revenues. Otherwise, the segment saw growth in Surface revenue (9%), Windows OEM non-Pro revenue (27%) and search advertising revenue excluding traffic acquisition costs (16%).
Sentiment on Microsoft hasn’t been this upbeat in a long time. It’s almost kind of a cool company again. Cleaning up after its disastrous foray into mobile and gaining investors’ trust with its cloud strategy means MSFT is trying to forge a new identity, which it desperately needs.
There was no mention of its recent $26.2 billion acquisition of professional social media site LinkedIn Corporation (NYSE:LNKD). Long-term, analysts believe the deal is meant to help the company push not just revenues, but engagement in Microsoft’s other services.
MSFT stock jumped more than 3% in extended trading. Prior to the after-hours earnings report, Microsoft shares were up more than 12% for the last 52 weeks.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
