Microsoft profit beats expectations on strong cloud demand

SAN FRANCISCO (Reuters) – Microsoft Corp (MSFT.O) reported better-than-expected quarterly profit and revenue on Thursday, helped by strong performance in its fast-growing cloud business.

Shares of the world’s largest software company rose more than 3 percent in after-hours trading, after touching a record high of $ 74.30 during the regular session.

Microsoft said revenue from its cloud unit, which includes the flagship Azure platform and server products, rose about 11 percent to $ 7.43 billion in the fiscal fourth quarter ended June 30.

Analysts on average had expected revenue of $ 7.32 billion, according to data and analytics firm FactSet.

Revenue from Azure nearly doubled in the quarter. (bit.ly/2oQAzSJ)

The service competes with Amazon.com Inc’s (AMZN.O) Amazon Web Services as well as offerings from Alphabet Inc’s (GOOGL.O) Google, IBM (IBM.N) and Oracle Corp (ORCL.N).

Highlighting Azure’s growth were notable increases to Microsoft’s long-term unearned revenue, which rose by more than 61 percent year-to-year. The metric is used to indicate long-term commitments for services and products, said Kim Forrest, vice president and senior equity analyst at Fort Pitt Capital Group, a portfolio management firm.

“This isn’t just a one-quarter wonder,” Forrest said. “Amazon is going to be paying attention to this.”

The Redmond, Washington, company has sharpened its focus on the burgeoning cloud computing unit as part of Chief Executive Satya Nadella’s “mobile first, cloud first” strategy to offset weakness in the PC market.

“Across all three segments, cloud is leading the future,” said Stephanie Rodriguez, Microsoft’s director of investor relations.

Michael Turits, analyst at Raymond James & Associates, said Azure is smaller than Amazon’s service but that it is growing faster. “I think it is appealing well to existing enterprise customers who might not immediately be drawn to the Amazon platform,” he said.

The company said it recorded $ 306 million in restructuring charges following a reorganization of its sales and marketing teams that was announced earlier this month. The restructuring resulted in layoffs for thousands of Microsoft employees.

“These are primarily ‘rebalancing’ versus a permanent headcount reduction,” said Patrick Moorhead, president and principal analyst of Moor Insights & Strategy. Moorhead said the reorganization is intended to accelerate Microsoft’s cloud revenue.

Microsoft’s net income more than doubled to $ 6.51 billion or 83 cents per share in the quarter, from $ 3.12 billion or 39 cents per share in the year-earlier period.

Excluding one-time items, Microsoft earned 98 cents per share.

On an adjusted basis, revenue rose 9.1 percent to $ 24.7 billion.

Analysts on average had expected an adjusted profit of 71 cents per share and revenue of $ 24.27 billion, according to Thomson Reuters I/B/E/S.

Microsoft said it expects revenue for its three business segments to land between $ 23.6 billion and $ 24.3 billion in the first quarter, which would be up more than 5 percent year-to-year.

Additional reporting by Gayathree Ganesan and Rishika Sadam in Bengaluru; Editing by Anil D’Silva and Matthew Lewis