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MICROSOFT CORPORATION

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Microsoft : Cloud Business Continues to Boom as Windows Sales Rebound -- 2nd Update

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04/24/2019 | 05:38pm EDT

By Asa Fitch

Microsoft Corp. rode its cloud-computing business to another strong quarter, while sales of its Windows operating system rebounded from recent weakness caused by a scarcity of computer chips that has hurt PC sales.

Revenue rose 14% from a year earlier to $30.57 billion for the fiscal third quarter ended March 31, Microsoft said Wednesday, with growth of 41% in its cloud-computing businesses, which now account for almost a third of its sales.

Sales of Windows to PC makers rose by 9% in the latest quarter from a year earlier, reversing a 5% decline in the previous quarter. The fall had been driven by a capacity shortage at Intel Corp., the largest U.S. chip maker, that has constrained PC sales despite an unexpected spike in demand last year.

Amy Hood, chief financial officer, added that Microsoft had seen unexpectedly good performance in Japan, pointing to high sales there of its Office productivity suite. She predicted the company would record double-digit revenue growth again in its next fiscal year.

Microsoft's stock, which has been on a tear lately, gained more than 4% in after-hours trading following news of the results. Shares closed slightly lower in regular trading Wednesday, after hitting a record closing high of $125.44 a day earlier.

Microsoft Chief Executive Satya Nadella has led a resurgence at Microsoft since taking the helm in February 2014 -- its shares have soared by about 2.5 times in that period. With a market value now of more than $960 billion, the software giant was the most-valuable U.S. company for much of this year, though Apple Inc. regained that crown this month.

Mr. Nadella's emphasis on cloud computing has been the centerpiece of the revitalization, as slowing sales of Windows pushed it to expand in other areas.

Brad Reback, an analyst at Stifel, Nicolaus & Co., said the latest results illustrated that Microsoft's strategic focus on moving customers to its cloud-based products was paying off "in spades."

"Given the momentum they have in the enterprise, it's hard to see that abating anytime soon," he said.

The biggest driver of Microsoft's cloud business has been its Azure arm, which rents out computing power to business clients. Azure has helped Microsoft to compete with Amazon.com Inc., the global leader in cloud computing, and offer cloud services in tandem with online versions of software.

Microsoft said revenue at Azure grew by 73% from a year earlier in the latest period. It doesn't disclose a dollar figure for Azure sales, but Mr. Reback estimated they were about $3.25 billion for the quarter.

That growth was slightly slower than the 76% pace Azure registered in Microsoft's fiscal second quarter, but it remains rapid for a business of its size.

Microsoft's results for the latest quarter beat estimates of $29.88 billion for revenue, according to a FactSet survey of analysts. The company said profit rose nearly 19% to $8.81 billion, or $1.14 a share, beating estimates of $1.00 a share, according to FactSet.

Microsoft's cloud business also includes online versions of software such as its Office 365 suite of word-processing and other productivity applications. Office 365 commercial products grew by 30% in the quarter, Microsoft said, as many customers move from buying software licenses to subscribing to applications in the cloud. The division that contains those products grew 14% to $10.2 billion in revenue in the third quarter.

The chip-supply issues that hurt Windows sales, meanwhile, appear to have abated sooner than expected.

Microsoft had said it anticipated the shortage in PC chips would continue for the first half of the year. Intel Chief Executive Bob Swan said in January that he expected the capacity shortage to improve by the middle of the year. Intel is scheduled to report its quarterly results Thursday.

A Microsoft investor-relations official, however, said on Wednesday the company had seen enough chips on the market during the fiscal third quarter to meet prior unfulfilled demand, returning sales of Windows to PC makers to growth.

The company's More Personal Computing division, which contains Windows, the Xbox gaming-console business, Microsoft Surface devices and the Bing search engine, grew by a more modest 8% in the quarter to $10.7 billion in revenue.

Results for all three of Microsoft's main divisions -- Productivity and Business Processes, Intelligent Cloud and More Personal Computing -- beat guidance ranges management gave in January.

Write to Asa Fitch at asa.fitch@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
MICROSOFT CORPORATION 0.10% 132.45 Delayed Quote.30.27%
VALUE8 1.82% 5.6 Delayed Quote.18.14%
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Financials ($)
Sales 2019 125 B
EBIT 2019 41 756 M
Net income 2019 35 070 M
Finance 2019 63 241 M
Yield 2019 1,38%
P/E ratio 2019 28,98
P/E ratio 2020 25,73
EV / Sales 2019 7,56x
EV / Sales 2020 6,73x
Capitalization 1 007 B
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Number of Analysts 35
Average target price 143 $
Spread / Average Target 8,9%
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Managers
NameTitle
Satya Nadella Chief Executive Officer & Director
Bradford L. Smith President & Chief Legal Officer
John Wendell Thompson Independent Chairman
Jean-Philippe Courtois President-Global Sales, Marketing & Operations
Amy E. Hood Chief Financial Officer & Executive Vice President
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