Microsoft sales beat Street hopes, cloud profits up

Thu Oct 23, 2014 7:17pm EDT
 
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By Bill Rigby

SEATTLE (Reuters) - Microsoft Corp (MSFT.O: Quote) reported higher-than-expected quarterly revenue, helped by stronger sales of its phones, Surface tablets and cloud-computing products for companies, while keeping its profit margins largely intact.

The results on Thursday allayed fears of investors in recent days that the industry shift toward lower-margin cloud services was proving hard for established technology leaders to master.

Microsoft shares, which have climbed 33 percent over the past year, rose another 3 percent in after-hours trading to $46.36.

"In light of recent negative earnings results from tech bellwethers Oracle, IBM, SAP, VMware, and EMC, Microsoft is bucking the trend and we would label these September results as a solid accomplishment," said Daniel Ives, an analyst at FBR Capital Markets. 

Investors were keenly watching Microsoft after harsh warnings from International Business Machines Corp (IBM.N: Quote) and SAP SAPG.DE about operating profits as they make tentative inroads into the cloud, which generally yields thinner margins than technology companies are used to.

Microsoft did not disclose its cloud-based revenue for the fiscal first quarter, but said commercial cloud sales rose 128 percent, while sales of services based on its Azure cloud platform rose 121 percent.

Perhaps more importantly, it said gross profit margin in the unit that includes Azure rose 194 percent, despite rising infrastructure costs, which includes the huge expense of building and operating datacenters.

In the last four years, Microsoft's gross profit margin has drifted down to about 65 percent from above 80 percent, largely due to its move into the less profitable business of making tablets and phones, but accelerated by the move to the cloud.   Continued...

 
Microsoft CEO Satya Nadella speaks during a Microsoft cloud briefing event in San Francisco, California October 20, 2014. REUTERS/Robert Galbraith