Microsoft (NASDAQ:MSFT) proved itself as King of the Cloud with earnings that surprised Wall Street.
Non-GAAP net income of $10.6 billion, $1.37 per share, on revenue of $33.7 billion, blew past analyst earnings estimates of $1.18 per share.
After looking more deeply into the numbers, Windows got credit for the surprise. Microsoft is ending support for disk-based Windows 7 and thus pushed a lot of companies to the cloud-based Windows 10. Windows OEM revenue was up 18% year over year.
Microsoft was already the most valuable company in the world before the earnings came out, at $1.045 trillion. The earnings bumped it up another 3%. It was due to open July 19 at over $140 per share. Those who hedged their bets in Microsoft going into earnings wound up looking foolish.
MSFT Cloud Power
How did Microsoft overtake Amazon (NASDAQ:AMZN), which had nearly a decade-long head start, in cloud revenue and profitability?
While Amazon was re-selling its infrastructure, Microsoft devoted itself to building a cloud platform and to use cloud to sell its software. It didn’t give cloud away. It sold what cloud could do, directly and indirectly.
The morning before the earnings came out, for example, Office 365 users were offered three months of free Adobe (NASDAQ:ADBE) “Creative Cloud” membership, the e-mail promising “more ways to say thanks for subscribing in the works.”
Adobe and Microsoft have been partnering since 2016, their combined efforts aimed at building “a new category” of software combining Microsoft’s back-office tools with Adobe’s marketing cloud. Its competitive target is Salesforce (NASDAQ:CRM).
It’s a game where so far there are no losers. Since the Microsoft-Adobe effort was launched in September 2016, MSFT shares have risen nearly 140%, Adobe’s 185%. Salesforce is up 121%. The average S&P stock is up less than 40% in that time.
Increased marketing automation, which lets companies combine online and offline efforts without increasing staff, is powering the whole economy.
Don’t Break Me Up
Azure, which Microsoft calls its “intelligent cloud” segment, now brings in more revenue than the former Microsoft Windows monopoly, or the old Microsoft Office. It grew 64% in Microsoft’s 2019 fiscal year. Microsoft executives call their cloud “battle hardened” and it continues to win deals.
An example is a recent $2 billion contract with AT&T (NYSE:T). AT&T spun this outsourcing as making its own operations more technologically-adept. Maybe it does.
More good news could be coming soon, as President Donald Trump leans-in to make Microsoft the favorite over Amazon on the $10 billion JEDI contract to create a Pentagon Cloud.
Microsoft is selling the concept of “citizen developers” for its Power Platform, which includes data visualization, workflow automation, and app creation tools. Critics say using a proprietary platform to build apps makes companies dependent on that platform, but that’s an argument for another day. Today, Microsoft profits and customers become more efficient.
The Bottom Line for MSFT Stock
Microsoft’s success in tying cloud customers to its software is working like nothing else in the history of American business. It even sells Surface laptops.
Cloud success gives Microsoft the cash to work on whiz-bang applications like “holoportation,” in which executives can beam a hologram of themselves over a network and do a sales presentation in another language, all in real time.
It’s a little bit crazy, but who thought five years ago that an Indian immigrant would make investors forget Bill Gates while keeping the antitrust police quiet?
In the era of cloud, a hundred million miracles are happening every day.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
