Microsoft Posts Record Sales

By Todd Horwitz 

Microsoft Corp.’s cloud business is continuing to serve as a source of strong profits even as the company spends heavily to expand its offerings and acquire new customers. The Redmond, Wash., software giant Wednesday posted stronger fiscal second-quarter earnings on record sales, driven by growth in its cloud-computing offerings. Gross margins for the commercial cloud business, which includes Azure computing services and Office 365 applications, grew to 67%. And while margins for the business rose for a fourth-consecutive quarter, executives told analysts on a conference call that percentage should continue to rise this year.

Revenue from the commercial cloud business grew 39% to $12.5 billion, which Chief Executive Satya Nadella said reflected the company’s ability to sell a broader set of cloud products, including cloud infrastructure as well as cloud-based productivity applications.

“Our partner conversations this quarter continued to emphasize Azure’s momentum, which is enabling the company to significantly outpace the overall market’s growth,” Goldman Sachs analysts led by Heather Bellini wrote in a Monday note. “Partners commented this quarter that they have seen Azure investments continue to increase significantly, as well an effective enterprise sales force focused on driving Azure adoption and usage.”

The most high-profile win for Azure in the quarter came from the U.S. Department of Defense, which awarded the controversial Joint Enterprise Defense Infrastructure (JEDI) cloud contract to Microsoft, worth up to $10 billion over a decade. Additionally, rival Salesforce said it would tap Azure to run its Marketing Cloud service.

Microsoft included a new risk factor about government work in its latest quarterly earnings statement. “We may be subject to government audits and investigations relating to these contracts, we could be suspended or debarred as a governmental contractor, we could incur civil and criminal fines and penalties, and under certain circumstances contracts may be rescinded,” the company said.

It did not mention JEDI by name in the risk factor, despite that Amazon is currently challenging the contract award in court.

The Intelligent Cloud segment, which holds Azure, GitHub, server products like SQL Server and Windows Server and enterprise services, had $11.87 billion in revenue, up about 27% and more than the $11.40 billion consensus.

Todd “Bubba” Horwitz