Microsoft’s Q4 earnings surpassed expectations thanks to the cloud

By:  Rayna Hollander

Microsoft surpassed expectations across all segments for its fiscal Q4 (that ended June 30), according to earnings released Thursday.

The company reported $25 billion in non-GAAP revenue in the quarter, over the expected $24 billion and up 10% year-over-year (YoY) from $23 billion. The solid earnings were primarily driven by Microsoft’s could offerings, according to Microsoft CEO Satya Nadella. The cloud division has been an ongoing bright spot in the company’s efforts to find its footing in the increasingly mobile-first landscape.

Microsoft’s cloud businesses are housed within two segments: Productivity and Business Processes, and Intelligent Cloud.

  • Revenue for Productivity and Business Processes, which includes Office 365 and LinkedIn services, grew 21% YoY to more than $8 billion in fiscal Q4. LinkedIn added 15 points of growth, according to Microsoft CFO Amy Hood, while Office 365’s commercial revenue grew 44% YoY.
  • Microsoft’s Intelligent Cloud segment, which houses Azure, increased 11% to reach $7.4 billion, and accounted for 30% of total revenue. Azure revenue, in particular, accelerated during the quarter, growing 97% YoY. Microsoft’s commercial cloud revenue run rate surpassed $18.9 billion, putting the company well on track to reach its goal of $20 billion by 2018, Nadella said.

Microsoft’s growing success in the cloud is softening the blow of its shrinking Windows operating system business. Revenue for Microsoft’s More Personal Computing segment, which includes its Windows, mobile-phone, and gaming businesses, fell 2% to $8.8 billion. Surface revenue decreased 2% due to product life cycle transitions. Microsoft’s cloud computing is helping to cushion the negative impact on revenue from the downward spiral of device sales.

Microsoft Azure’s hybrid cloud approach and wide reach likely set it apart from other cloud service providers. Enterprises can use Microsoft’s public cloud while also running some applications in their own data centers — Microsoft says 80% of companies they talk to prefer a hybrid cloud approach, according to TechCrunch. Microsoft also has an enormous footprint in the enterprise as the company leverages its customer base by getting as many clients as possible to use at least some of Azure’s services.

The cloud segment will become increasingly important as the digital ecosystem moves away from being device-centric and toward cloud-oriented solutions. This shift will be more pronounced in the years ahead, as businesses and consumers seek greater mobility, and the IoT brings more devices into the digital fray. Microsoft is already taking advantage of this by launching Azure IoT Edge, a new service that enables businesses deploying the IoT to use all of the capabilities of the Azure IoT cloud. By moving further into a space that’s set to grow in the coming years, Microsoft could attract even more clients that otherwise couldn’t have deployed IoT solutions.