Microsoft reports strong third-quarter

Bill Bennett -

Microsoft announced its third-quarter 2019 results in a press release. Highlights are

  • Revenue was $30.6 billion and increased 14 per cent.
  • Operating income was $10.3 billion and increased 25 per cent.
  • Net income was $8.8 billion and increased 19 per cent.
  • Diluted earnings per share was $1.14 and increased 20 per cent.

An impressive result by any standard. In the last five years or so, the big story at Microsoft has been the rise of the company’s Azure branded cloud services. The latest quarter was no exception:

“Demand for our cloud offerings drove commercial cloud revenue to $9.6 billion this quarter, up 41 percent year-over-year”.Amy Hood, executive vice president and chief financial officer of Microsoft.

But the next part of the release was more of an eye-opener. Microsoft Office is also on a roll. Quoting from the press release:

Revenue in Productivity and Business Processes was $10.2 billion and increased 14 per cent, with the following business highlights:

  • Office Commercial products and cloud services revenue increased 12 per cent driven by Office 365 Commercial revenue growth of 30 per cent.
  • Office Consumer products and cloud services revenue increased 8 per cent and Office 365 Consumer subscribers increased to 34.2 million
  • LinkedIn revenue increased 27 per cent
  • Dynamics products and cloud services revenue increased 13 per cent driven by Dynamics 365 revenue growth of 43 per cent.

Back in the first division

In other words Microsoft is firing on all cylinders. The turn around in the five years since Satya Nadella replaced Steve Ballmer is astonishing.

Not so long ago the company looked like a has-been. Nadella rebooted the business to focus on the cloud and today it is primed for an optimistic future.

No surprise that the company’s share price jumped 5 per cent after the announcement.

What wasn’t part of the popular narrative of the last five years is the pain Microsoft went through as its shifted its focus. The company needed to invest vast sums in cloud capacity to get where it is today. That was a huge risk. Similar investments have not paid off for the likes of IBM or Oracle.

Windows advantage

To a degree Microsoft is still playing catch up with Amazon, which invented cloud computing as we now know it. It had one huge advantage over Amazon; its installed base. Windows was, in some cases still is, loaded onto millions of servers the world over.

As these workloads move from on-premise hardware to the cloud, customers know it’s not hard to move Windows apps and data from a local server to Azure.

There’s a downside for Microsoft. Cloud margins are small compared to Windows licences. Microsoft could rely on gross margins as high as 90 per cent when it sold licences. It’s lucky to get half that from selling cloud services. Still, 40 per cent or thereabouts is still a healthy margin.