Cloud push continues to power Microsoft’s growth, Surface revenue up by 21%

The fiscal third quarter featured a flurry of large brands, particularly in retail, signing agreements to use Microsoft’s Azure cloud software. Microsoft said revenue for the Surface line of devices rose 21 % from a year earlier to $1.3 billion.

Microsoft sees its productivity and business processes unit, mostly Office software, reaching revenue of $10.6 billion to $10.8 billion in the fiscal fourth quarter (REUTERS)

Microsoft Corp.'s cloud computing business fuelled quarterly sales and profit that topped analysts' estimates, boosted by several new deals with large corporate clients.

Revenue rose 14 % from a year earlier to $30.6 billion in the quarter ended March 31, the Redmond, Washington-based company said Wednesday in a statement. Analysts on average projected $29.9 billion. Net income was $8.8 billion, or $1.14 a share, compared with an average analyst estimate of $1 a share, according to data compiled by Bloomberg.

The fiscal third quarter featured a flurry of large brands, particularly in retail, signing agreements to use Microsoft's Azure cloud software. Clients included grocer Kroger Co., Walgreens Boots Alliance Inc. and oil company Exxon Mobile Corp. Some, such as Walgreens, also committed to using cloud-based Office and security software. The deals reflect Chief Executive Officer Satya Nadella's efforts to draw some customers away from cloud market leader Amazon.com Inc. and ink more significant clients. Microsoft also is benefiting as more traditional companies that are longtime customers move to the cloud.

Azure cloud-services revenue rose 73 %, slower than the 76 % Microsoft posted in the fiscal second quarter. Some investors have been concerned that while Azure is still growing rapidly, those increases have slowed from the past when doubling was a regular occurrence. Sales of Office cloud software to business customers rose 30 %.

"The Azure growth blew away Street expectations," said Dan Ives, an analyst at Wedbush Securities. "This was an A+ quarter across the board for Redmond."

The company's shares rose about 4 % in extended trading on the results, after closing at $125.01 in New York. Microsoft shares have gained 23 % this year, topping the 17 % increase in the S&P 500 Index. The software maker, for a time, leapfrogged Apple Inc. to become the most valuable publicly traded U.S. company by market capitalization.

Commercial cloud revenue, a measure of sales from Azure, internet-based versions of Office software and some smaller products, rose 41 % in the period from a year earlier to $9.6 billion. Profit margins for the business widened to 63 %.

"The strength of our commercial clouds continued to boost'' the company overall, Microsoft Chief Financial Officer Amy Hood said in an interview. "We saw demand for Azure across all of our geographic regions and among companies of all sizes,'' including BMW AG and Renault-Nissan, she said.

Worldwide public-cloud services sales are expected to grow 17.5 % this year to $214.3 billion, according to Gartner Inc. Software and cloud company stocks recovered in the first four months of 2019, with Facebook Inc., Apple, Alphabet Inc. and Amazon all up this year, after a roller coaster end to 2018 that saw shares drop amid concerns spending might be declining.

While the PC market declined in the first quarter, corporate machines were a "bright spot," Gartner said. That helps Microsoft, which generally sells business customers a pricier version of Windows and has many of its corporate clients on a regular license for updates.

Microsoft said revenue for the Surface line of devices rose 21 % from a year earlier to $1.3 billion.

Sales of Intelligent Cloud products, comprised of Azure and server software, will be $10.9 billion to $11.1 billion in the current quarter, Hood said on a conference call. The division's revenue rose 22 % to $9.65 billion in the fiscal third quarter, above the $9.3 billion average estimate of seven analysts polled by Bloomberg.

Microsoft sees its productivity and business processes unit, mostly Office software, reaching revenue of $10.6 billion to $10.8 billion in the fiscal fourth quarter, Hood said. The division's sales rose 14 % from a year earlier to $10.2 billion in the period ended March 31. That compared with an analyst average estimate of $10 billion.

Hood said Microsoft expects to spend $10.7 billion to $10.8 billion on operating expenses in the current period, and it will increase capital expenditures to continue expanding its cloud presence.