Despite a second-quarter net loss tied to a tax charge, Microsoft Corp. scored a 12% increase in sales for the fiscal second quarter ended Dec. 31 to nearly $30 billion, amid increased demand for its Azure cloud-computing services, LinkedIn social media network and online subscriptions of software products.
Microsoft, No. 9 in the B2B E-Commerce 300, topped analysts’ estimates for second-quarter revenue, helped by brisk quarterly growth in its cloud and corporate-software businesses, while a tax charge caused the company to report a net loss.
The software maker took a $13.8 billion charge related to taxes owed on overseas cash, a result of recent changes to U.S. tax law. The net loss in the second quarter was $6.27 billion, or 82 cents a share, Microsoft said.
Sales of Azure cloud-computing services almost doubled as businesses increasingly seek to run applications and store data in Microsoft’s data centers. CEO Satya Nadella is adding machine learning and data-analysis features to Azure, seeking to woo customers from market leader Amazon.com Inc.
The company is also switching more customers to online subscription versions of productivity programs like Word and Excel, helping buoy Office 365 revenue by 41%. “Office is continuing on its merry way, moving customers to Office 365,” says Mark Moerdler, an analyst at Sanford C. Bernstein & Co. “And Azure is continuing to chug along.”
Microsoft said on a conference call with stock analysts last week that the social media network LinkedIn, which it acquired in late 2016 for about $26 billion, contributed “better-than-expected” revenue in the quarter of $1.3 billion and contributed $111 million in operating income, according to a transcript of the call from Seeking Alpha.
Excluding the tax charge, second-quarter profit was 96 cents, compared with an average analyst projection of 86 cents, according to data compiled by Bloomberg. Sales in the quarter climbed 12 percent to $28.92 billion, exceeding the average analyst estimate of $28.40 billion.
The company’s shares slipped about 1% in extended trading following the report, after closing at a record $95.01 in New York. Microsoft stock jumped 15% in the December quarter, outpacing the 6.1% gain in the Standard & Poor’s 500 Index.
The Redmond, Wash.-based company has rolled out services that add artificial intelligence conversations and language understanding into its cloud programs. It also started offering customers the ability to host their workloads in France, bringing the number of regional options for data-center services to 42, and signed a seven-year deal to be the primary cloud provider for Chevron Corp.
At the same time, as Microsoft’s new data centers come online and become more efficient, their profitability increases. Bernstein’s Moerdler expects Azure’s expansion to continue for the next few years and provide a significant source of revenue and earnings growth for Microsoft.
Growth in Azure was slightly faster than in both the previous quarter and the year-earlier period. Analysts and investors following Microsoft have wondered if Azure’s growth would begin to trail off as the overall revenue number gets larger. “I do, in general, expect our strong performance in Azure to continue,” Amy Hood, chief financial officer, said in an interview.
Microsoft in the fiscal first quarter said commercial cloud revenue had already exceeded its target of $20 billion in annualized revenue, and KeyBanc analysts wrote in a note earlier this month that Microsoft will reach $40 billion in total cloud revenue in 2019. The bank estimated Microsoft’s Azure gained market share from Amazon Web Services in the most recent quarter. Amazon still leads by a margin of more than 3 to 1, KeyBanc said, but that’s an improvement over the 4-to-1 ratio of the same period a year earlier.
As of June 30, almost $128 billion of the Microsoft’s cash and short-term investments were held overseas. In December, Congress passed a sweeping tax overhaul that scrapped a previous system that let companies defer U.S. income taxes on foreign earnings until they returned that income to the U.S. Now companies will have to pay taxes on accumulated foreign income— cash at a tax rate of 15.5% and less liquid assets at a rate of 8%. While Microsoft is accounting for the entire tax charge in the recent period, it will pay the bill over time—companies have eight years to do so. Hood declined to say how much cash Microsoft would bring back to the U.S., or when, or what the company might do with it.
In the second quarter, commercial cloud sales rose to $5.3 billion, a gain of 56% from $3.4 billion in the year-earlier quarter. Gross margin for that business widened to 55%, up 7 points compared with a year earlier. Revenue from Surface hardware was little changed from a year ago, and gaming revenue rose 8%, fueled by the release of the high-end Xbox One X console.
On the conference call with stock analysts, Nadella said Microsoft was able to address the Spectre and Meltdown chip security threats revealed early last month. “Our investments to make Windows 10 the most secure, always up-to-date operating system enabled us to move quickly to protect customers in the face of these threats,” he said.
While Microsoft has said the fixes for those flaws aren’t significantly slowing Azure, there have been major impacts for some server tasks. Any slowdown could actually require some customers to purchase more servers to regain speed lost when the patches were applied. Meanwhile, Microsoft had to issue an emergency fix that disables the Intel fix because it was causing some machines to reboot or lose data.
The software fixes for the chip vulnerabilities are also slowing the performance of older PCs, a market that has been in decline for several years. Global PC shipments fell 2% in the last three months of the year, according to Gartner Inc., bringing the total drop for 2017 to 2.8%.
In the Intelligent Cloud unit, made up of Azure and server software deployed in customers’ own data centers, sales gained 15% to $7.8 billion, compared with the $7.54 billion average analyst projection. Productivity revenue, mainly Office software, climbed 25% to $8.95 billion. Analysts had estimated $8.86 billion.
For the quarter ended Dec. 31, Microsoft reported:
- Revenue of $28.92 billion, up 12.0% from $25.83 billion a year earlier;
- Gross profit of $17.85 billion, up 12.1% from $15.93 billion;
- Net loss of $6.30 billion, compared with year-ago net income of $6.27 billion.
For the six months ended Dec. 31, Microsoft reported:
- Revenue of $53.46 billion, up 11.9% from $33.24 billion a year earlier;
- Gross profit of $34.11 billion, up TK% from $30.01 billion;
- Net income of $274.0 million, compared with $11.93 billion.
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