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Microsoft's Cloud Growth Continues to Remain Strong

July 25, 2014 | About:

Microsoft Corporation (NASDAQ:MSFT) reported its 2014 earnings on July 22. Earnings for the year were basically on track with analysts’ estimates. Earnings per share for the fiscal year were slightly lower at $2.63 versus an average estimate of $2.69. Revenue for 2014 was $86.8 billion up 12% from 2013. Net income was $22.1 billion up 1% from 2013. EPS for the year was $2.63 versus $2.58 for 2013.

Commercial cloud products were the company’s greatest growth driver in 2014. In the Commercial Other segment, which includes Enterprise Services, Office 365, Azure Dynamics and CRM Online, the company grew revenue 33% year-over-year with a gross margin increase of 102%.

Microsoft’s Commercial business revenue overall was up 9% in 2014 and accounted for 57% of revenue. In a July 10 memo from Satya Nadella prior to the earnings announcement the CEO gave his outlook for the business which included a focus on cloud. In cloud computing the company will focus on capturing the massive opportunity that exists due to network connectivity opportunities. Microsoft has a core infrastructure that can capture this opportunity. It also has a defined growth strategy focused on productivity and platforms.

In the Commercial business, momentum does not appear short-lived as the opportunity for productivity and platforms is massive. With a strong lead in marketplace positioning, substantial growth in the category appears likely. In Commercial Other, where a large portion of Microsoft’s cloud services are found, revenue increased 44% from the fourth quarter of 2013 with growth mainly from Commercial Office 365 and Microsoft Azure for the cloud. Bookings not yet reported as revenue further exemplify the continued demand for Microsoft’s commercial cloud products. In Commercial Other, bookings increased 73%.

Meanwhile, in the fourth quarter Microsoft also completed its acquisition of the Nokia Devices and Services business. An immediate impact can be seen in the third to fourth quarter comparison which shows an increase of $1.99 billion in Devices and Consumer revenue. However, while revenue increased operating income did not. The Nokia business had an operating income effect of negative $692 million and in terms of EPS its effect was -$0.08. In the fourth quarter Microsoft’s integration focus was a decrease in employees with the elimination of 18,000 jobs announced on July 17. As the business is integrated, further cost reductions are likely.

One additional segment reporting change was also made in the fourth quarter following the completion of the Nokia acquisition. Within Microsoft’s Devices and Consumer segments it will now include a new segment called Devices and Consumer Phone Hardware. The new Nokia segment was included in the fourth quarter 2014 earnings results which showed the segment accounting for 8% of fourth quarter total revenue. Going forward, integration and streamlining will be a key factor for the business segment.

Devices and Consumer overall also continued posting strong results across its segments. Total revenue was up 17% for the year with the greatest growth seen in Computing and Gaming Hardware. In Microsoft’s core Devices and Consumer Licensing business, sales were steady at $18.8 billion for 2014 compared to $19.0 billion in 2013.

Now that the Nokia acquisition is complete Microsoft appears clear to focus on its growth in the cloud business. With strong bookings and revenue, cloud momentum appears likely to continue. The company’s innovation and infrastructure for cloud service capabilities appear solid as limitless possibilities abound in the massive cloud market. Microsoft appears poised to lead in cloud services helping it to attain market share for greater growth in the future. A strong revenue growth trajectory appears likely for the technology company given its cloud service opportunities paired with its core licensing software offerings.

It currently has a basic discounted cash flow value of $49.83. Analysts have a high target for the stock of $54. In the trading day following its announcement it closed at $44.87 up 0.09%. Year-to-date it has a one-year gain of 19.94%.

About the author:

Julie Young is a financial journalist with comprehensive experience in the financial services industry. She primarily writes about financial market news and economic trends. Julie holds a Master of Science degree in finance from Boston College and a Bachelor of Science degree in finance from the University of Arkansas.

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