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Microsoft's Cloud Business Can't Lift It Out of Fog

April 21, 2016
Growth in the company's cloud programs wasn’t enough to make up for a PC market that continues to plumb new depths.

Microsoft Corp. said earnings fell short of analysts’ estimates, as the company’s plan to restore growth by focusing on cloud software hit a speed bump with a weak personal-computer market pulling down results. The company was also hit by a higher tax rate in the period.

Profit excluding certain items was 62 cents a share, and sales adjusted for deferrals were $22.1 billion in the fiscal second quarter, which ended March 31, Microsoft said in a statement Thursday. Analysts on average estimated profit would be 64 cents on revenue of $22.1 billion, according to data compiled by Bloomberg. Analysts’ estimates didn’t include the one-time tax.

Chief Executive Officer Satya Nadella is leading Microsoft in a shift from a company tied to a declining PC market to one that sells cloud services, such as the Azure computing platform and the subscription-based Office 365. But even growth in the cloud programs wasn’t enough to make up for a PC market that continues to plumb new depths as the industry’s worst quarterly numbers since 2007 sunk Microsoft’s results.

"The PC weakness is a secular trend that they have to manage as well as they can," said Sid Parakh, a portfolio manager at Becker Capital Management, which has about $3 billion under management.

Microsoft shares fell 3.4% in extended trading following the report, after closing little changed at $55.78. The stock was unchanged during the three months that ended in March, compared with about a 1% increase in the Standard & Poor’s 500 Index.

Net income in the recent period declined to $3.76 billion, or 47 cents a share. The Redmond, Washington-based company in July announced it would cut as many as 7,800 jobs and take a massive writedown on its Nokia handset unit, plus take a restructuring charge as it scaled back its ambitions for making its own mobile phones.

Unearned revenue, a measure of future sales, was $25.9 billion. Two analysts polled by Bloomberg had expected an average of $24.8 billion.

The quarter was an abysmal one for worldwide personal-computer shipments, which slid to their lowest quarterly total since 2007 in the period, according to market researcher Gartner Inc.

Still Microsoft is touting its Windows 10 uptake. The company’s latest operating system software was released at the end of July and is now on running on more than 270 million devices, the company said last month. Windows Chief Terry Myerson noted that puts Microsoft on track to reach the 1 billion number it pledged within two to three years of Windows 10’s release. The uptake so far is four times the adoption pace of the much-maligned Windows 8 and 1.5 times that of the more popular Windows 7, he said.

But it’s commercial cloud revenue that Microsoft is looking to as its growth engine over the next few years. Microsoft has pledged to reach annualized revenue of $20 billion in its corporate cloud business by the fiscal year that ends in June 2018. As of the December quarter, that metric stood at $9.4 billion. The company has been adding customers and workloads for its Azure services, which let clients run and store applications in Microsoft’s cloud-data centers.

While the traditional Office business--the software suite that includes Word, Excel and PowerPoint--has been lackluster in recent quarters, the Office 365 cloud versions of those programs are growing in both consumer and corporate usage.

Still, the transition Nadella is overseeing is neither simple nor short. It will take Microsoft from a company with Windows as its flagship to one that relies more on Office, Azure and the SQL Server database products; from a company that sells software for clients to install on their own PCs and in their own offices and data-centers to one that sells more services delivered in the cloud. But so far the signs are good, Parakh said.

"There’s still a long ways to go in terms of the multiple-year transition in the company from a Windows and on-premise software company to a cloud, mobile and service-oriented company," Parakh said. "But everything we’ve seen for the past few quarters has been positive."

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Licensed content from Bloomberg, copyright 2016.

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