Microsoft Cloud Gains Fuel Growth; Forecast Signals Optimism

(Bloomberg) — Microsoft Corp. topped quarterly sales and profit projections, fueled by steady demand for cloud-computing services and a surprisingly strong Windows business. The company’s forecast promised robust growth will continue into next year.

The software maker pledged “double-digit” percentage gains in sales and operating income for the year that started July 1. Results are getting a boost from larger deals for its Azure web services and brisk adoption of internet-based Office programs. Given Microsoft’s “strong ambition,” it plans to increase operating expenses by 11% to 12% for the fiscal year, and will raise capital spending to build out data centers, Chief Financial Officer Amy Hood said.

Chief Executive Officer Satya Nadella has centered Microsoft’s strategy on cloud services, seeking to narrow the gap with market leader Amazon.com Inc. As more customers move storage and computing tasks to remote servers owned by Microsoft and upgrade their aging business software, the company has been leveraging its broad product line by getting them to sign up for both Azure and newer products like Microsoft 365 — a subscription package of Office 365 cloud software, Windows 10 and security programs.

“Everything has been going well for them,” said Sid Parakh, a portfolio manager at Becker Capital Management, which counts Microsoft as its biggest holding. “It’s the structural winner right now — as more and more companies move to the cloud, it’s largely Amazon and Microsoft in the running for those deals.”

Profit before certain items in the fourth quarter, which ended June 30, rose to $1.37 a share, compared with the $1.22 average forecast of analysts polled by Bloomberg. Revenue increased 12% to $33.7 billion, the Redmond, Washington-based company said Thursday in a statement, compared with the $32.8 billion projection. Net income in the quarter was $13.2 billion, or $1.71 a share.

The company’s shares rose 2.3% in extended trading following the report and upbeat forecast. Microsoft climbed 15% in the quarter, compared with a 3.8% increase in the S&P 500 Index. The stock has jumped this year on optimism about the company’s cloud business, and on some investors’ belief that Microsoft is a safe haven as U.S. and European regulators sharpen their scrutiny of other large technology firms. The gains have made Microsoft the most-valuable public company, with a market capitalization of more than $1 trillion.

“Microsoft is brimming with confidence in cloud growth on the heels of Azure and Office 365 success,” said Dan Ives, an analyst at Wedbush Securities. “The Street will be loudly applauding this forecast.”

In the fourth quarter, commercial cloud revenue — a measure of sales from Azure, internet-based versions of Office software and some smaller products — rose 39% from a year earlier to $11 billion. Profit margins in the business widened by 6 points to 65%.

Sales of Office 365 software to businesses jumped 31%. Azure cloud sales rose 64%, compared with 73% growth in the previous quarter and 76% in the one before that. That continued deceleration has caused some concern among investors — Azure revenue was routinely more than doubling as recently as two years ago. Still, swelling profit margins in cloud have helped to offset those worries. Margins will continue to widen in the new fiscal year, Hood said on a conference call.

Since the close of the quarter, Microsoft signed new cloud deals with Providence St. Joseph Health and ServiceNow Inc., which said it will use Azure to deliver cloud products to some government customers — the first time that company has used third-party data centers for its business.

Worldwide public-cloud services sales are expected to grow 17.5% this year to $214.3 billion, according to Gartner Inc. In the infrastructure part of the market, Amazon and Microsoft are increasingly pulling away from other competitors — although Azure remains several times smaller than Amazon Web Services. Meanwhile, Microsoft’s Office cloud business puts it in the lead in area of web-based applications.

Revenue in the company’s productivity and business unit, which includes the Office suite of programs like Word, Excel and PowerPoint, rose 14% in the quarter to $11 billion, exceeding analysts’ average estimate of $10.7 billion. Sales from the Intelligent Cloud division, made up of Azure and server software, jumped 19% to $11.4 billion — the first quarter the unit has been Microsoft’s biggest by revenue.