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Microsoft CEO Satya Nadella during a fireside chat in Berlin, Germany, 27 February 2019. Photo: EPA-EFE

Microsoft sales top estimates as its Azure cloud business signs up new customers

  • The fiscal third quarter featured a flurry of large brands, particularly in retail, signing agreements to use Microsoft’s Azure cloud software

Microsoft Corp.’s cloud computing business fuelled quarterly sales and profit that topped analysts’ estimates, boosted by several new deals with large corporate clients.

Revenue rose 14 per cent from a year earlier to US$30.6 billion in the quarter ended March 31, the Redmond, Washington-based company said Wednesday in a statement. Analysts on average projected US$29.9 billion. Net income was US$8.8 billion, or US$1.14 a share, compared with an average analyst estimate of US$1 a share, according to data compiled by Bloomberg.

The fiscal third quarter featured a flurry of large brands, particularly in retail, signing agreements to use Microsoft’s Azure cloud software. Clients included grocer Kroger Co., Walgreens Boots Alliance Inc. and oil company Exxon Mobile Corp. Some, such as Walgreens, also committed to using cloud-based Office and security software.

The deals reflect Chief Executive Officer Satya Nadella’s efforts to draw some customers away from cloud market leader Inc. and sign more significant clients. Microsoft also is benefiting as more traditional companies that are long-time customers move to the cloud.

Azure cloud-services revenue rose 73 per cent, slower than the 76 per cent Microsoft posted in the fiscal second quarter. Some investors have been concerned that while Azure is still growing rapidly, those increases have slowed from the past when doubling was a regular occurrence. Sales of Office cloud software to business customers rose 30 per cent.

“The Azure growth blew away Street expectations,” said Dan Ives, an analyst at Wedbush Securities. “This was an A+ quarter across the board for Redmond.”

The company’s shares rose about 4 per cent in extended trading on the results, after closing at US$125.01 in New York. Microsoft shares have gained 23 per cent this year, topping the 17 per cent increase in the S&P 500 Index. The software maker, for a time, leapfrogged Apple to become the most valuable publicly traded US company by market capitalisation.

Commercial cloud revenue, a measure of sales from Azure, internet-based versions of Office software and some smaller products, rose 41 per cent in the period from a year earlier to $9.6 billion. Profit margins for the business widened to 63 per cent.

“The strength of our commercial clouds continued to boost’’ the company overall, Microsoft Chief Financial Officer Amy Hood said in an interview. “We saw demand for Azure across all of our geographic regions and among companies of all sizes,’’ including BMW AG and Renault-Nissan, she said.

Worldwide public-cloud services sales are expected to grow 17.5 per cent this year to $214.3 billion, according to Gartner Inc. Software and cloud company stocks recovered in the first four months of 2019, with Facebook Inc., Apple, Alphabet Inc. and Amazon all up this year, after a roller coaster end to 2018 that saw shares drop amid concerns spending might be declining.

While the PC market declined in the first quarter, corporate machines were a “bright spot,” Gartner said. That helps Microsoft, which generally sells business customers a pricier version of Windows and has many of its corporate clients on a regular license for updates.

Microsoft said revenue for the Surface line of devices rose 21 per cent from a year earlier to $1.3 billion.

Sales of Intelligent Cloud products, comprised of Azure and server software, will be $10.9 billion to $11.1 billion in the current quarter, Hood said on a conference call. The division’s revenue rose 22 per cent to $9.65 billion in the fiscal third quarter, above the $9.3 billion average estimate of seven analysts polled by Bloomberg.

Microsoft sees its productivity and business processes unit, mostly Office software, reaching revenue of $10.6 billion to $10.8 billion in the fiscal fourth quarter, Hood said. The division’s sales rose 14 per cent from a year earlier to $10.2 billion in the period ended March 31. That compared with an analyst average estimate of $10 billion.

More Personal Computing unit sales, including Windows and Xbox products, will grow to $10.8 billion to $11.1 billion in the current quarter, Hood said. The unit rose 8 per cent to $10.7 billion in the fiscal third quarter. Analysts projected $10.5 billion on average.

Hood said Microsoft expects to spend $10.7 billion to $10.8 billion on operating expenses in the current period, and it will increase capital expenditures to continue expanding its cloud presence.