Microsoft’s Earnings Soar with Cloud Computing Growth

Microsoft’s revenue may have fallen 12 percent because it sold fewer smartphones and copies of Windows. But its earnings rose and the company had strong growth in the right place for investors — cloud computing, a business that is intoxicating to Wall Street because it represents the future of technology. All else was forgiven as the tech giant posted its results on Thursday.

The quarter is the first to reflect financial results from Windows 10, one of the company’s biggest new software products in years. While Windows 10 laid the foundation for what Microsoft hopes will be a revival for sales of PCs and other devices, that has not happened yet, nor was it expected by analysts this soon.

A much bigger test for Microsoft will come during the quarter now underway, its second fiscal quarter, when a flood of new hardware running Windows goes on sale. Next week, Microsoft will begin selling two eagerly anticipated new computing devices of its own, the Surface Book and Surface Pro 4.

Microsoft’s Mission to Reignite PC Sector May Be Taking HoldOCT. 8, 2015
“Most of the new designs are just now landing in retail,” Amy Hood, Microsoft’s chief financial officer, said in an interview. She added: “We’re pretty excited headed into the holidays.”

The company reported net income of $4.62 billion, or 57 cents a share, compared with $4.54 billion, or 54 cents a share, in the period a year ago. Revenue fell to $20.38 billion from $23.2 billion a year ago.

If you include revenue that Microsoft was forced to defer from Windows 10 because of an accounting change — all $1.28 billion of it — the company had 67 cents a share in earnings. That was far better than the 59 cents a share that Wall Street analysts had been expecting, according to an average of their estimates by Thomson Reuters.

Daniel Ives, an analyst at FBR Capital Markets, said the company “hit it out of the park” with its profits. He was particularly happy with the company’s cloud business, which grew 8 percent, to $5.9 billion.

“Cloud is the epicenter of the growth story,” Mr. Ives said.

The company’s shares jumped more than 8 percent in after-hours trading.

Microsoft also continues to cut costs. On Wednesday, the company quietly laid off around about 1,000 employees, which amounts to less than 1 percent of its global work force, according to two people briefed on the layoffs who spoke on the condition of anonymity because the company did not plan to release the figure. The layoffs were in addition to earlier, deeper cutbacks in the company’s phone division.

“The job reductions were spread across more than one business area and country and reflect adaptations to business needs,” a company spokesman said in a statement.

Microsoft changed the way it reported its financial results this quarter, after its previous method was criticized for its complexity. Analysts said the changes provided better visibility into how its products were performing.

Satya Nadella, Microsoft’s chief, introducing new devices. CreditRichard Drew/Associated Press
One thing clear before Thursday was that the PC business, which is an important source of Microsoft’s revenue, is still in the doldrums. IDC, the technology research firm, reported recently that global PC shipments declined 10.8 percent during the quarter that ended in September.

The revenue Microsoft gets when it sells copies of Windows to PC makers fell 6 percent. The good news for the company was that sales fared better than the overall market. But sales still fell, and it is not clear that the business will return to growth anytime soon.

Microsoft has been making moves to be less reliant on its traditional sources of revenue. The company has long leaned on selling copies of its Windows operation system. This year, though, it began letting people upgrade free to Windows 10, the latest version. The goal is to have people quickly adopt Windows 10 so developers feel compelled to write applications. On Thursday, Microsoft said 110 million devices were already running Windows 10.

Microsoft’s Sales USP

The company is also seeking to bolster sales of its own PC hardware. During the quarter, Microsoft’s revenue from its Surface devices fell to $672 million, a steep drop from $908 million a year ago. Ms. Hood, Microsoft’s chief financial officer, said the sales slowed in anticipation of new devices from the company.

A more jarring decline was the 54 percent drop in revenue, when the impact of foreign currency fluctuations is excluded, from its mobile phone business. Microsoft has sharply scaled back its struggling phone business, reducing staffing in the division and the number of phones it offers.

In a call with investors, Satya Nadella, the chief executive of Microsoft, spent much of his time promoting the success of the company’s cloud business and other products that help customers be more productive.

He did, however, predict that another Microsoft product that comes out next week — Halo 5: Guardians, the science-fiction shooter game for the Xbox video game console — would actually make people less productive.

“I confidently predict time will become much more scarce for Xbox owners on Tuesday,” Mr. Nadella said.