Microsoft Rides Cloud to a 21% Increase in Profits

SEATTLE — Microsoft doesn’t have an iPhone. It isn’t the Everything Store. It isn’t a verb for “search.”

But it sure is good at making money.

The company reported earnings Wednesday afternoon, and results show that it continued to reel in huge profits. Sales for the latest quarter were $33.1 billion, up 14 percent from a year earlier, and profits rose 21 percent to $10.7 billion. The results easily beat analyst expectations.

Shares in Microsoft, one of the world’s most valuable public companies, were mostly flat in after-hours trading.

While Microsoft’s past was built largely on the back of its Windows operating system, its future firmly rests in the cloud. It has steadily risen to be the No. 2 provider of cloud computing services, behind Amazon’s AWS, which all but created the market. And Microsoft is closing in on Amazon’s lead, analysts say.

Here are three major reasons.

Microsoft’s cloud products are getting better

Microsoft’s offerings used to lag far behind Amazon’s. But as Satya Nadella, Microsoft’s chief executive, has thrown its weight behind a transition to cloud computing, the company has been catching up on the product front. Microsoft is just a year behind Amazon now, and it has some advantages with large customers, said Keith Weiss, an analyst at Morgan Stanley.

In a Morgan Stanley survey of 100 chief information officers, almost 40 percent said Amazon was best positioned among tech providers to gain share as companies moved to the cloud in 2019, with more than 30 percent saying Microsoft was best positioned. In three years, though, they said they expected the advantages to Amazon and Microsoft to be about equal. They saw Microsoft catching up in key areas including security as well as artificial intelligence and machine learning.

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In the most recent quarter, Microsoft’s core cloud-computing product, Azure, grew 63 percent from a year earlier excluding currency fluctuations, a touch below analyst expectations.

One area where Microsoft is gaining ground is with software developers, who typically favored AWS, which provided many self-service tools.

“What has always been a really easy task at AWS used to be really difficult within Microsoft,” Mr. Weiss said. That perception has finally been changing over the past year, he said, as Microsoft bought GitHub, which lets developers collaborate on code, and as it has rolled out more developer-focused tools.

Cloud growth is shifting to ‘Microsoft country’

As Microsoft’s cloud products approach parity with Amazon, more focus is expected to be placed on how businesses buy and use those products.

Increasingly, the adoption of cloud services will be driven not by early adopters like start-ups or tech companies that have helped propel Amazon into its lead, but by large traditional businesses.

“If that is the next phase of growth, that is Microsoft country,” said Karl Keirstead, an analyst at Deutsche Bank.

Amazon and Google don’t have as many existing relationships with large companies as Microsoft, Mr. Keirstead said. Amazon has been furiously hiring sales and marketing staff for AWS, investments that Amazon told investors was a drag on profit last quarter.

“They are in the process of building relationships with the Fortune 500, and Microsoft is one of the largest suppliers of tech to the Fortune 500 already and has been for 20 years,” Mr. Keirstead said. “That is powerful.”

In the Morgan Stanley survey, Microsoft was seen as the top vendor for an approach called “hybrid” cloud, which is popular with large organizations and lets companies use a single set of tools to manage their information across their own servers as well as remote data centers.

A measure of Microsoft’s sales for traditional data centers and cloud services was up 33 percent excluding currency fluctuations, indicating the approach continued to gain traction.

Microsoft is leveraging Office 365

Microsoft has continued to move customers from its traditional Office suite of products like Outlook and Excel to its cloud-based Office 365 service. In the quarter, Office 365’s commercial sales rose 28 percent excluding currency fluctuations.

Microsoft says productivity tools are the hub of where office workers spend their time, and by moving them to the cloud, it can give companies more up-to-date tools and data to analyze, like improved security.

The power of that suite is clear in the fast adoption of Teams, a chat and collaboration tool that competes with Slack and Google Hangouts. While Slack has more functionality, analysts say, Teams has become good enough for companies to adopt. Also, because Microsoft bundles it with other Office 365 products, it is available at a very low cost.

“That is the new user interface,” Mr. Weiss said. “That is why Slack is so threatening to Microsoft, and why they are competing so aggressively against it. Microsoft doesn’t want you to take that nexus of where you spend your time away from them.”

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