Microsoft Earnings: Tech’s Quiet Giant Keeps Its Focus on the Cloud – The New York Times

Microsoft Earnings: Tech’s Quiet Giant Keeps Its Focus on the Cloud – The New York Times

SEATTLE — If you followed Congress’s scrutiny of the technology industry this week, you would think that Amazon, Google and Facebook are the biggest tech companies around. But Microsoft is the sector’s quiet giant. It is not only the largest tech company, but it is the largest publicly traded company of any kind, with a market capitalization of more than $1 trillion.

The success continued in the most recent quarter, Microsoft said Thursday. The company reported that its sales grew 12 percent, to $33.7 billion, and it had $13.2 billion in profits during that period, aided by $2.6 billion in one-time tax benefits. The results beat analyst forecasts, which predicted the company would have $32.8 billion in sales and $9.4 billion in profit, according to FactSet.

The strong results indicate Microsoft is not seeing large companies shy away from investing in new technology out of concern for a downturn or trade war. Shares in the company rose more than 2 percent in aftermarket trading.

“The biggest debate is at $1 trillion, how can you get bigger from here?” said Jennifer Lowe, an analyst at the investment bank UBS.

At its core, Microsoft’s primary customers are other businesses and organizations, and the company is betting its future that they will keep moving their tech needs into the cloud.

Most investors keep a close eye on how quickly Microsoft’s core cloud-computing product, Azure, has grown. In the most recent quarter, Azure grew 68 percent compared with the previous year, maintaining a rapid pace of expansion even as the business gets bigger.

Ms. Lowe, who estimated Azure brought in roughly $13 billion in annual sales, said, “That pace of growth, at that scale, is pretty unprecedented.” (By comparison, Amazon’s cloud business had about $28 billion in sales in the past four quarters, up 46 percent.)

This quarter, for the first time, Intelligent Cloud, the part of Microsoft’s business that includes Azure, became the company’s largest revenue generator. “It has been a long time coming,” said Mike Spencer, who runs investor relations for Microsoft.

Amazon, the cloud-computing leader, is the provider of choice for digitally native companies like Netflix, but Microsoft has found traction with traditional large corporations and organizations, Ms. Lowe said.

Microsoft has been pushing the adoption of cloud service beyond the simple storing of information in remote data centers. It has persuaded corporate customers to employ cloud computing to transform how they do business using tools like artificial intelligence, and to connect workers on retail sales floors and assembly lines to corporate technology.

In traditional setups, when companies ran their own servers, it was hard to upgrade and add new functions. “Every time you wanted to do something new, you had to buy new hardware,” said Sid Parakh, a portfolio manager in Seattle at Becker Capital, which invests in Microsoft. “With cloud, you have as many capabilities as you want overnight.”

One Microsoft metric — known by the long, wonky name of server products and cloud services revenue growth — provides clues about whether that approach is taking hold. It lumps together sales for traditional data centers and cloud services, and this quarter it was up 24 percent over the previous year. That it is growing at such a solid clip suggests the cloud business is not just taking old revenue and moving it online.

Last week, Microsoft announced a deal with the Providence St. Joseph Health system that is geared toward collecting health data from different sources in one place, using artificial intelligence to improve results for patients and connecting more than 100,000 caregivers to one another. This week, it announced a deal with AT&T, which Satya Nadella, Microsoft’s chief executive, told analysts was “the largest commercial deal that we have signed.”

That wonky metric is also a sign of what is known as a hybrid approach to cloud computing, where big organizations keep some information on their own servers and some in the cloud, using a single set of tools to work on it all. Such an approach eases companies’ transition to the cloud, and is a particular strength for Microsoft.

Microsoft still sells Windows and Office software to consumers, and some of its Surface tablet and laptop sales also target individual customers. But the most interesting part of its consumer business is gaming.

The past fiscal year has been odd for Microsoft’s gaming business, in part because it is overdue for a new Xbox gaming console (the company recently announced that one would be out for the 2020 holiday season). In the long term, Microsoft is working to become a hub for players to stream games live from the cloud. It went so far as to enter a partnership with Sony, which makes a competing console, under which the companies will work on online entertainment together.

A year ago, Microsoft’s gaming business did particularly well on the success of Fortnite. The company cautioned investors that this past quarter, gaming might not be as strong. Indeed, the company reported that gaming revenue declined 8 percent.

Executives expressed optimism for the coming fiscal year, saying the company once again expects double-digit growth in sales. Its projections for next quarter’s revenue were slightly higher than analysts had expected.

Mr. Nadella said the company had been forging “deeper partnerships and larger, longer commitments” with customers as they transform their business, and that path will continue.

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