Thursday 27 April 2017

Microsoft profit up as demand for cloud service soars

Photo: Bloomberg
Photo: Bloomberg

Narottam Medhora and Stephen Nellis

Microsoft reported a 3.6pc rise in fiscal second-quarter profit on Thursday, helped by growth in its fast-growing cloud computing business, but it saw a slight decline in margins in the unit that includes its flagship cloud platform Azure.

Shares of the world's biggest software company were up about 1.1pc in after-hours trading.

Since taking charge in 2014, ceo Satya Nadella has steered the company toward cloud services and mobile applications and away from its slowing traditional software business.

Gross margins for Microsoft's so-called "commercial cloud" business, which includes Azure and versions of its online Office 365 product sold to businesses, were 48pc, said Chris Suh, head of Microsoft's investor relations.

That is down from last quarter's 49pc but up from 46pc a year ago, Suh said. The figure is watched closely by investors as a sign of the actual profit made of Microsoft's cloud products, which the company does not publish.

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The Azure platform competes with cloud infrastructure offerings from market leader Amazon.com, Alphabet’s Google, IBM and Oracle.

"We're not at Amazon's margin today," said Suh. "Their infrastructure business is much larger. They have the benefit of scale. We track more like what Amazon was when they were closer to our size."

On the company's earnings conference call, Chief Financial Officer Amy Hood fielded questions from analysts about Azure-specific gross margins. She did not disclose a number but said there was a "material improvement" since last quarter.

Analysts also questioned Microsoft's practice of providing a combined gross margin for cloud infrastructure, which at other firms tends to have gross margins around 30 percent, and cloud software, which at other firms has higher margins of 70pc or 75pc. "I do think it will be a blend of those," Hood said.

But ceo Nadella emphasized that the company thinks of its cloud offerings as comprehensive lineup of both software and infrastructure, as it did with its historical business as a combination of products with different margins, like Office and Windows Server.

"We have a cloud strategy that is not just about infrastructure," Nadella said, pointing out differences with Amazon Web Services.

Reuters

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