Microsoft's Cloud Juggernaut Delivers Profits In Q4

Microsoft closed its fiscal year by reporting strong earnings Tuesday, powered by its juggernaut of a cloud business.

The world’s largest software company is leading every customer conversation with cloud, shifting transactional sales into annuities while improving margins on those cloud services, CFO Amy Hood said during the fourth-quarter earnings call with financial analysts.

Microsoft sees its differentiator in the cloud arena as "hyper-scale plus hybrid" delivered from a large number of separate facilities around the world—enabling architectures that global enterprise customers are looking for, said CEO Satya Nadella.

[Related: Microsoft Dynamics Partners Can’t Wait To Add LinkedIn To Arsenal Against Salesforce]

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"We meet [enterprises] where the realities are today, as well as their needs for digital transformation going forward," Nadella said.

Microsoft once again saw revenue and usage for its Azure offerings—Infrastructure-as-a-Service and Platform-as-a-Service—more than double, posting impressive 102 percent growth over the fourth quarter of 2015.

Commercial cloud services increased their share of the overall business in the quarter, helping drive $20.6 billion in total quarterly revenue—growth of 2 percent, or 5 percent in constant currency.

The company’s net income was $3.12 billion, or 39 cents per share, compared to a loss of $3.2 billion, or 40 cents per share, in the year-ago quarter. The year-ago results included an $8.4 billion charge related to its mobile phone business.

Microsoft’s commercial cloud business is on a $12.1 billion run rate delivering 42 percent margins, Nadella said. That business, maintaining its head of steam, is on track to realize $20 billion in revenue by 2018.

And what the company calls its "intelligent cloud"—back-end infrastructure enabling hybrid architectures and mobile capabilities—is "an area of massive opportunity as we are clearly one of the two enterprise cloud leaders."

It was a busy fourth quarter for the Redmond, Wash.-based tech giant, ended, June 30, in which the company moved ahead with plans for a $26.2 billion acquisition of professional social network leader LinkedIn and launched Office 365 Planner. The company got off the blocks fast in the first quarter of 2017 earlier this month with the launch of Dynamics 365, and it greeted thousands of global partners in Toronto last week at its Worldwide Partner Conference.

The focus in the fourth quarter was certainly on strategic applications, Nadella said, confirming the new Software-as-a-Service products and the LinkedIn acquisition—the most expensive in the company’s history— are part of a single overarching strategy.

LinkedIn will ultimately be integrated across the portfolio, he said, driving usage across multiple products, including industry-leading Office 365, which now has more than 23 million subscribers, Nadella said.

At the same time, Microsoft is offering a development environment allowing customers, such as Boeing, to convert their existing workloads to custom SaaS applications hosted on Azure, Nadella said, then distribute those applications through its channel.

’You’ll see us doing much more of this with other customers,’ Nadella said.

The Boeing engagement serves as an example of how "every customer is also an ISV," Nadella said—not only consuming Azure, but converting its unique IP into solutions that can be distributed through the Azure Marketplace.

And as those customers bring to market third-party software they created, "we want to be able to partner with them in unique ways," Nadella said.

On-premise server solutions "never did what these customers are now doing in the cloud," Nadella said. "So in a fundamental way, these are new workloads."

Hood, Microsoft's CFO, said the move to annuities revenue derived from cloud services is part of a "long-term structural transition in the market."

Tempering the buoyant fourth-quarter earnings was an expected 4 percent decline in personal computing-related sales that notched $8.9 billion in revenue, Hood told analysts. Total revenue for the quarter declined 7 percent to $20.61 billion.

Microsoft spent in the quarter $3.1 billion in capital expenditures—an accelerating investment intended to add cloud capacity for near- and long-term customer demand.

Over the next fiscal year, Hood said, gross margins should improve on the commercial cloud business as it expands geographically and achieves more benefits of scale. At that point, the capital expenditure growth curve will slow, she said.

While Microsoft recently backed off its prediction of 1 billion devices running Windows 10 by mid-2017, Nadella touted adoption of the latest operating system.

Over 96 percent of enterprise customers are piloting Windows 10, he said.

Microsoft's goal for the new operating system: "moving people from needing Windows to choosing Windows to loving Windows," according to Nadella.

Going forward, Nadella said, Microsoft will report monthly progress on installs of Windows 10 devices.

Shares, which closed just above $53 on Tuesday, climbed to above $55.30 in after-hours trading.