Software King of the World Microsoft reported some mixed results with a 3.6 percent rise in fiscal second-quarter profit but a decline in margins in its cloud operations.
The cloud was Microsoft’s shining star in the results, but it seems that was due to reduced margins in in the unit that includes its flagship cloud platform Azure.
Chris Suh, head of Microsoft’s investor relations said that gross margins for Microsoft’s so-called “commercial cloud” business, which includes Azure and versions of its online Office 365 product sold to businesses, were 48 percent.
That is down from last quarter’s 49 percent but up from 46 percent a year ago. The figure is important because it is a sign of the actual profit made of Microsoft’s cloud products, which the company does not publish.
Vole’s Azure competes with cloudy products from Amazon.com, Google, IBM and Oracle Corp.
Suh admitted that Vole was no longer at Amazon’s margin.
“Their infrastructure business is much larger. They have the benefit of scale. We track more like what Amazon was when they were closer to our size.”
Chief Financial Officer Amy Hood said there was a “material improvement” in Azure margins since last quarter.
Nadella said the company thinks of its cloud offerings as comprehensive lineup of software and infrastructure, as it did with its historical business as a combination of products with different margins, like Office and Windows Server.
“We have a cloud strategy that is not just about infrastructure,” Nadella said, pointing out differences with Amazon Web Services.
Revenue from Microsoft’s ‘Intelligent Cloud’ business, which includes Azure, along with other data center software, rose 8.0 percent to $6.9 billion in the quarter. That beat analysts’ average estimate of $6.73 billion. Microsoft’s estimates for next quarter were $6.45 billion to $6.65 billion, only slightly higher than FactSet’s $6.61 billion estimate.
Azure’s revenue grew 94 percent year over year which is the lowest growth rate since Microsoft began disclosing the number in 2015, and down from 121 percent the previous quarter.
Sales of Office 365 to businesses rose 49 percent, down from 54 percent in the previous quarter.
Sales in Microsoft’s personal computing business, which includes its Windows software, once the bedrock of the company, fell 5.0 percent to $11.8 billion, slightly beating the rate at which personal computer sales fell in the quarter.
The company’s net income rose to $5.20 billion in the quarter ended Dec. 31, from $5.02 billion a year earlier. Its adjusted revenue was $25.838 billion, ahead of analysts’ average estimate of $25.298 billion.