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Microsoft Azure doubles up to $800m a quarter – and is wiped out by dying phone sales

Win some, you lose some: profit up, revenue down

Microsoft CEO Satya Nadella
Feel the cloud love ... CEO Satya Nadella

Analysis All eyes were on Microsoft's cloud business today as it published its fourth-quarter and full-year financial results.

Amid the numbers, Redmond boasted that its Azure revenues from the quarter were up 102 per cent year-on-year – we estimate the cloud service's revenue to be about $800m in total for the period. Meanwhile, Microsoft's phone revenue fell by 71 per cent or $870m. And search advertising increased by $514m. Easy come, easy go.

Overall for the US giant, total revenues were down, and profits were up. Microsoft took a big hit from currency fluctuation but paid a pittance in tax, thanks to "benefits associated with distributions from foreign affiliates." Wall Street liked Microsoft's numbers, bumping up the stock price over four per cent in after-hours trading to $55.32.

"This past year was pivotal in both our own transformation and in partnering with our customers who are navigating their own digital transformations," said Microsoft's CEO Satya Nadella.

"The Microsoft Cloud is seeing significant customer momentum and we're well positioned to reach new opportunities in the year ahead."

Here's a rundown of Microsoft's financial stats for the three months and full year to June 30, 2016:

  • Total revenue: Redmond received $20.6bn in revenues in the past quarter, down seven per cent from $22.2bn this time last year. For the fiscal year, the company reported total revenues of $85.3bn, down nine per cent from last year's $93bn.
  • Net income: Microsoft made $3.1bn in the fourth quarter of the year, much better than this time last year when it showed a $3.2bn loss due to the botched Nokia merger. For the year, the company cleared $16.8bn in net income, up 38 per cent on last year's $12bn.
  • Earnings per share: Microsoft's EPS of $0.39 for Q4 beat analysts' estimates slightly, but is still a big drop from last year's $0.62. For the year Microsoft's shareholders pulled in $2.10 per share, up 42 per cent from $1.48 a year ago.
  • Dividends and taxes: Over the past three months, Microsoft has returned $2.8bn in dividends to shareholders and spent $3.6bn buying its own shares to keep prices high. The company paid a tax rate of seven per cent on the past quarter's results; worth remembering the next time Microsoft whines about the US not investing enough in STEM education.
  • Productivity and Business Processes: This section covers commercial and consumer Office products and Dynamics products and cloud services. Revenues for the quarter were up five per cent to $7bn, but operating income fell by five per cent to $3bn. For the full year, revenues were $26bn – that's no change on last year – and operating income was $12.5bn, down a touch on last year's $13.5bn.

    Office 365 Commercial bookings grew 54 per cent in the quarter, and the consumer flavor rose 19 per cent. Fifty million people now use Office on their Android and iOS smartphones, we're told.

    On the Dynamics side, revenues grew six per cent over the quarter on the year-ago period and billings were up 20 per cent year-on-year. The number of Dynamics CRM Online seats doubled, and 80 per cent of new bookings opted for Microsoft's cloudy build.

  • Intelligent Cloud: This section includes on-premises server software, Azure cloud services and enterprise services. In the past quarter, revenues grew $415m or seven per cent to $6.7bn, but so too did its costs. Microsoft's expenses grew $471m or 22 per cent as it continues to build out more data centers. Thus, operating income for the division fell 17 per cent to $2.1bn from $2.6bn. For the whole year, operating income stumbled to $9.3bn from $9.8bn, while revenue was up slightly to $25bn from $23bn.

    The star performer here was Azure, with revenues in the fourth quarter up 102 per cent year-on-year. Microsoft said:

    Server products and cloud services revenue grew $253m or 5 per cent, driven by Azure revenue growth of 102 per cent ... Enterprise Services revenue grew $159m or 12 per cent, driven by growth in Premier Support Services.

    So that doubling of Azure revenue equated to just a $253m increase in its accounting section within Intelligent Cloud. Microsoft is either sliding its Azure numbers around its spreadsheet, or shifting more and more of its on-premises customers onto its public cloud, where subscription margins are slimmer compared to full-fat sales. From public documents, Bloomberg previously calculated that Azure's revenues were about $400m in the year-ago quarter, which is in line with analysts' estimates. So we're looking at roughly $800m in Azure revenues for the fourth quarter of fiscal 2016. Meanwhile, Amazon's AWS is clocking in at about $2.5bn a quarter – a long way ahead.

    Azure compute loads doubled year-on-year, we're told; Nadella said 30 per cent of the machines on the service ran Linux.

  • More Personal Computing: This includes Windows desktop editions, Surface tablets, the Xbox wing, Windows phones and Bing. The fourth quarter's revenues of $8.9bn were down four per cent on the year-ago period. Revenues for the full year fell seven per cent to $40bn. Operating income for the quarter was $964m, up more than half from $605m a year ago. For the full year, the operating income was $6.1bn, up about a third from 2015's $4.6bn.

    The reason for this operating income leap is less spending:

    Operating expenses decreased $508m or 13 per cent, mainly due to lower sales and marketing expenses and research and development expenses, driven by a reduction in phone expenses and the transition of our display sales responsibility.

    Device revenues during the quarter fell $782m or 35 per cent, with the phone segment dropping a whopping 71 per cent or $870m as Windows 10 mobile shrivels and dies, and Surface revenue increasing by $76m or nine per cent.

    Revenues from non-pro Windows OEM software grew 27 per cent during the quarter, year-on-year, while Windows OEM pro revenues rose just two per cent. Volume licensing was up three per cent. Overall, Windows sales were up, offset by a 21 per cent fall in patent licensing, we're told. Nadella said people need to move from "needing Windows, to wanting Windows, to loving Windows."

    Meanwhile, Bing to the rescue. Microsoft noted: "Search advertising revenue increased $514 million or 54 per cent. Search advertising revenue, excluding traffic acquisition costs, increased 16 per cent, primarily driven by growth in Bing, due to higher revenue per search and higher search volume."

    Microsoft's CFO Amy Hood said the guidance for 2017 in this division was for revenues of $8.7 to $9bn, so essentially flat.

"This fiscal year we invested in innovation and expanded our market presence in key product areas and geographies," she said. "I am pleased with the execution from our sales teams and partners this quarter who delivered a strong finish to the fiscal year."

In other news, Hood said that the LinkedIn acquisition was expected to be completed by the second quarter of the coming year, but that it wasn't including the purchased company in its 2017 guidance.

Gartner analyst Merv Adrian told The Reg that he was impressed with the figures. Like any big software house Microsoft has had to transition into a cloud model and the company had managed its restructuring well and has largely finished that process.

"The business is pretty sound and is navigating through these transitional models without cratering – it is still profitable and has stopped the bleeding," he said.

The subscription figures for Office 365 and Azure were particularly good, he said, and Microsoft is now up there with AWS and Google in the sector. Redmond is popular with the retail sector – which won’t touch AWS because Amazon is a competitor – and Microsoft's strong enterprise focus remains a real selling point for some businesses. ®

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