Microsoft Sales Beat Wall Street Expectations, Cloud Profits Increase

Oct 24, 2014 09:06 AM EDT | Matt Mercuro

Microsoft reported higher-than-expected quarterly revenue on Thursday, helped by stronger sales of its phones, Surface tablets and cloud-computing products for companies, while maintaining its profit margins.

The results allayed investor's fears in recent days that the industry shift toward lower-margin cloud services was proving hard for established technology companies to control.

Microsoft shares, which increased 33 percent over the last year, rose another 3 percent in after-hours trading to $46.36, according to Reuters.

"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, according to Reuters.

Investors were keeping a close watch on Microsoft after harsh warnings from International Business Machines Corp and SAP about operating profits as they make tentative inroads into the cloud, which yields thinner margins than technology companies are used to.

Microsoft didn't announce it cloud-based revenue for the fiscal first quarter, but did say commercial cloud sales rose 128 percent, while sales of services based on its Azure cloud platform rose 121 percent.

More importantly, the company said gross profit margin in the unit that includes Azure rose 194 percent, despite rising infrastructure cost, according to Reuters.

Since 2011, Microsoft's gross profit margin has dropped to about 65 percent from above 80 percent, mainly due to its move into the business of making tablets and phones.

Nomura analyst Rick Sherlund believes that Microsoft is on track to hit $6 billion a year in cloud revenue soon.

"We're the only company with cloud revenue at our scale that is growing at triple digit rates," said Satya Nadella, on a conference call with analysts, according to Reuters. "Our premium services on Azure create new monetization opportunities in media, data, machine learning, fast analytics, and enterprise mobility."

Microsoft's fiscal first-quarter profit fell 13 percent, due to an expected $1.1 billion charge related to mass layoffs announced in July.

The world's largest software company reported profit of $4.5 billion, or 54 cents per share, compared with $5.2 billion, or 62 cents per share, during the same quarter in 2013.

It still easily beat Wall Street's forecast of 49 cents per share, including the charge, according to Reuters.

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