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Cloud Services Gave Microsoft a Significant Boost in Q4

Growth in Microsoft’s cloud services continued to help the company in its fourth quarter (ended June 30) as commercial cloud annualized revenue achieved a new milestone, exceeding $18.9 billion, according to CEO Satya Nadella.

Microsoft shares jumped in after-hours trading, after the company reported July 20 that total revenue grew to $23.3 billion in the fourth quarter from $20.6 billion a year earlier, while profit increased to $6.5 billion from $3.1 billion. But Microsoft shares were trading 0.67% lower at $73.72 by mid-morning July 21. Product revenue dipped to $13.8 billion from $14 billion, despite service and other revenue growing to $9.5 billion from $6.6 billion.

“I’m proud of the progress” that Microsoft saw in the quarter and fiscal 2017, “particularly the strength of our commercial cloud results,” Nadella told analysts on an earnings call July 20, calling it a “tremendous year of customer momentum with cloud” that also included artificial intelligence (AI) progress and “digital transformation” for the company.

The fourth quarter’s cloud growth “puts us squarely on track to reach the goal we set a little over two years ago,” of $20 billion in commercial cloud annualized recurring revenue in the fiscal year that started July 1, he said.

Microsoft’s intelligent cloud segment delivered $7.4 billion in revenue, growing 11% in the quarter, CFO Amy Hood said on the call, noting Microsoft’s server products and cloud services revenue grew 15% and 16%, respectively, in constant currency with double digit annuity revenue growth.

“Azure revenue growth accelerated” to 97% and was up 98% in constant currency, while Azure Premium revenue grew in “triple digits for the twelfth consecutive quarter,” she said.
“We remain focused on improving our commercial cloud gross margin percentage in each of our cloud services,” she said, adding: “Cloud migrations, deployments and new scenarios are driving greater customer usage.”

In intelligent cloud, Microsoft expects to report revenue between $6.9 and $7.1 billion in the first quarter, she told analysts, adding: “Customer demand for Azure and our hybrid cloud offerings remains strong, and we anticipate another quarter of double-digit revenue growth across server products and cloud services.” Enterprise services revenue, however, “should decline, given lower volumes of custom support agreements” expected for the first quarter, she said.

Nadella cited a few recent client wins, noting Box announced it will bring its content and collaboration services to Azure and plans to use Microsoft’s AI to “simplify discovery and use of all types of content across the enterprise.” Baidu will also be using Azure to “take its autonomous driving platform worldwide,” he said.

Nadella went on to say: “Customers are infusing AI into their products and services using Azure AI infrastructure and services such as Bot Framework and Cognitive Services.” Sabre, a technology provider for the global travel industry, is piloting AI-powered solutions for travel agencies to serve customers better, while. Dixons Carphone is using Azure and Microsoft’s Cognitive Services to “boost customer engagement and provide a more consistent, seamless experience across online and in their stores,” he said.

Microsoft’s Xbox game business, meanwhile, is now more than $9 billion and growing profitably, he said, adding: “The gaming world is evolving faster than ever before – from game play across multiple devices, to the explosive growth in streaming and eSports, to new subscription services and mixed reality scenarios.” Microsoft is “uniquely positioned to capture a larger share of this opportunity because of our ability to unite the global community of gamers through Xbox Live — now 53 million strong and growing — and to enable new experiences across PC, console and mobile,” he said.

Microsoft’s gaming revenue grew 3% in the fourth quarter (up 4% in constant currency) as strong Xbox software and services performance offset weaker hardware revenue than a year earlier, the company said.