Microsoft Corp. (MSFT, Financial) reported fourth-quarter earnings that were much better than what was expected. The company’s annualized commercial cloud revenue soared past $18 billion and looks all set to breach the goal of $20 billion in annual cloud revenue by 2018 that it set a few years ago.
Earnings per share of 98 cents beat estimates of 71 cents. Revenue of $24.7 billion surpassed estimates of $24.27 billion.
Microsoft’s annualized commercial cloud run rate was over $12.1 billion at the end of fourth quarter of 2016, and the company ended this year with a run rate of more than $18.9 billion. That means the company's cloud revenues increased from a little over a billion dollars during the month of June 2016 to a little over $1.5 billion in June 2017. The growth is indeed stunning considering how competitive the cloud segment was this year with Amazon (AMZN, Financial), Alphabet (GOOG, Financial) (GOOGL, Financial), Oracle (ORCL, Financial) and IBM (IBM, Financial) all fighting for market share.
Microsoft continues to outperform its peers on the cloud front as its productivity and business processes segment, which includes revenues from its software as a service (SaaS) products Office 365 and Dynamics 365, posted 21% revenue growth during the quarter. This segment has now reached $8.4 billion in quarterly revenues and grew by more than 20% for two quarters in a row.
The company’s infrastructure as a service (IaaS) offering, Azure, continued its strong growth rate, posting 97% revenue growth during the quarter. With SaaS and IaaS revenues accelerating, Microsoft’s cloud revenue continues to grow at a much faster rate than the company’s other business lines. The more personal computing segment, which includes Windows, Games, Devices and Search revenues, remained a disappointment to the company, posting $8.8 billion in revenues, a decline of 2% compared to prior quarter.
Despite the size of its productivity unit, which was worth $30.44 billion in 2017, it continues to grow at double-digit rates. We can expect this trend to continue in 2018 as well. Microsoft has already taken the leadership position in the office productivity software market through Office 365, while Dynamics 365, Microsoft’s product to address the multibillion-dollar CRM and ERP market, is slowly starting to find its feet as commercial revenue grew 74% during the fourth quarter.
For fiscal 2017, more personal computing reported $38.773 billion in revenues, a drop of nearly $2 billion compared to the $40.434 billion the company made last year. Growth in the productivity and intelligent cloud segments was more than enough to offset this loss, allowing Microsoft revenues to grow 5.4%, from $85.320 billion last year to $89.950 billion this year.
Although the growth in cloud revenues was impressive, more personal computing continues to weigh heavily on the company. Microsoft made $38.77 billion from this segment, accounting for more than 40% of its overall revenue for 2017. Productivity and business processes along with intelligent cloud posted revenues of $57.884 billion. Theses segments are growing while more personal computing is declining.
Even though the impact of more personal computing on Microsoft’s growth is waning, it still eats up a lot of the company's growth and will continue to do so in 2018. But compared to what other technology companies who are trying to reinvent their business are going through, Microsoft seems to be in a much better place.
Disclosure: I have no positions in the stock mentioned above and have no intention of initiating a position in the next 72 hours.
