Microsoft Reports Q4 Earnings Growth on Cloud Strength

Microsoft on Thursday reported earnings per share of $1.37 and a 12% gain in revenues to $33.72 billion for the fourth quarter.

The company's stock rose by more than 1% in after-hours trading on the results, which beat financial analysts' expectations. The earnings number was non-GAAP; the GAAP figure was higher due to a net income tax benefit of $2.6 billion for the quarter.

The most closely watched number for Wall Street this quarter was Microsoft's Azure growth metric. Microsoft reported that Azure was up by 64% compared to the year-ago period. Microsoft doesn't report Azure revenues, but the company's rate of growth has been slowing over the last few years as the company's total Azure revenues increase. For example, in the fourth quarter of 2018, Microsoft reported an Azure growth rate of 89%, and in the fourth quarter of 2017 it was 97%.

Combining Microsoft's commercial clouds by revenue did, in fact, yield a big number. "Q4 commercial cloud revenue increased 39% year-over-year to $11.0 billion, driving our strongest commercial quarter ever," Microsoft CFO Amy Hood said in a statement in Microsoft's earnings release.

For the full year, Microsoft revenues hit $125.8 billion, an increase of 14% over fiscal year 2018.

By business unit for the quarter, the Intelligent Cloud unit had the fastest growth, up 19% to $11.4 billion in revenues. That unit comprises server products and cloud services, which includes Azure, and Enterprise Services.

The Productivity and Business Processes unit grew 14% to $11 billion. That unit includes Office Commercial, Office Consumer, LinkedIn and Dynamics. Among the highlights for the unit were Office 365 Commercial revenue growth of 31%, an increase in Office 365 Consumer subscribers to 34.8 million, a 25% bump in LinkedIn revenues and a 45% gain in Dynamics 365 revenues.

The slowest-growing business unit was More Personal Computing, which reached $11.3 billion on 4% growth. Windows OEM revenue was a positive for the unit, with a 9% increase, and Surface revenues were up 14%. Gaming revenue, however, was a drag with a 10% drop.

Meanwhile, Microsoft CEO Satya Nadella took up a theme he's expressed in previous earnings calls this year -- that major customers are becoming more like partners, with roles as crucial to Microsoft as the historic OEM relationships.

Describing "deep partnerships with leading companies in every industry," Nadella said, "Every day we work alongside our customers to help them build their own digital capability -- innovating with them, creating new businesses with them, and earning their trust. This commitment to our customers' success is resulting in larger, multi-year commercial cloud agreements and growing momentum across every layer of our technology stack."

In a statement released just before Microsoft's earnings, John Dinsdale, chief analyst and research director for Synergy Research Group, called Microsoft the clear No. 2 (after Amazon Web Services) in cloud infrastructure services and a very clear market leader in the fragmented Software as a Service (SaaS) market.

For cloud infrastructure, Dinsdale noted, "[Microsoft's] revenue growth rate is way above the overall market growth rate, so it is gradually gaining market share -- 9% in 2016, 11% in 2017, 14% in 2018 and 16% in the first quarter of 2019."

Posted by Scott Bekker on July 18, 2019