Biz & IT —

Booming cloud business is leading the way for Microsoft

Office 365 and Azure together generating more than $4.4 billion a year.

A Microsoft office (not to be confused with Microsoft Office).
Enlarge / A Microsoft office (not to be confused with Microsoft Office).

PCs may not be thriving the way they once were, but Microsoft has posted a strong set of financials for the fourth quarter of its 2014 financial year on the back of substantial, sustained growth in its cloud businesses.

Revenue for the quarter was $23.38 billion, up 17.5 percent on the same quarter a year ago. Operating income rose 6.7 percent to $6.48 billion, and earnings per share were down 5 percent to $0.56, with the drop largely attributed to a hefty tax adjustment.

The results for the quarter were complicated by Microsoft's purchase of Nokia's Devices and Services business, which closed in April. In the wake of the purchase, the company has adjusted the way it breaks down its earnings. The "Devices and Consumer Hardware" segment has been renamed "Computing and Gaming Hardware." This includes Surface and Xbox hardware. A new segment, "Phone Hardware," will cover the Nokia business.

Devices and Consumer (D&C) Licensing, spanning OEM and retail/consumer Windows and Office licensing, was up 9.5 percent at $4.70 billion. Gross margin was up 13.6 percent to $4.40 billion. Windows OEM revenue was overall up three percent. The difference between the corporate and consumer worlds is stark: non-Pro revenue was down nine percent, with Pro revenue up 11 percent. The former represents the majority of end-user sales; the latter corporate sales. Microsoft reports that the (long overdue) Windows XP replacement cycle is continuing to stimulate these corporate sales. Office consumer revenue outpaced the overall consumer PC market, rising 21 percent.

For the full financial year, D&C Licensing revenue was down 1.2 percent to $18.80 billion, with gross margin up 1.0 percent to $17.22 billion.

The newly named Computing and Gaming Hardware segment saw revenue grow 23.4 percent to $1.44 billion, with gross margin of $0.02 billion, as compared to a loss of $0.65 billion for the same quarter a year ago attributed to the $0.9 billion write-down for the first generation Surface devices.

Surface revenue was $0.41 billion. Microsoft declined to give any indication of the Surface cost of revenue but noted that there was impact from a "decision to not ship a new form factor." This statement all but confirms the cancellation—or at least the long-term postponement—of the Surface Mini that was widely anticipated in May, only to be replaced at the last minute by the Surface Pro 3.

While no sales figures were offered for the Surface, the company did say that Xbox platform revenue was up 14 percent in the quarter, with a total of 1.1 million consoles (both current and previous generation) sold, compared to 1.0 million a year ago.

Full year revenue was up 49 percent to $9.63 billion, and gross margin was down 6.6 percent to $0.89 billion.

The new Phone Hardware division posted revenue of $1.99 billion, with a gross margin of $0.05 billion. In the just over two months that Microsoft owned the former Nokia division, it sold 5.8 million Windows Phone-powered Lumias, along with 30.3 million non-Lumia devices. These latter devices (a mix of Asha, S40, and Nokia X phones) are not long for this world, with the company planning to end their development—or in some cases transition them to Windows Phone.

Looking forward, Nokia's phone division currently has annualized operating expenses of about $4.5 billion, which Microsoft is striving to reduce. The company claims that there is great scope for "synergies" leading to more than $1 billion in savings and a break-even phone business in the 2016 financial year.

D&C Other revenue was up 20 percent to $1.88 billion, and gross margin was up 21 percent to $0.45 billion. Highlights included the addition of more than 1 million Office 365 consumer customers for a total of more than 5.6 million, and a 40 percent increase in advertising revenue at Bing. The Bing improvement was driven both by greater search volumes, higher revenue per search, and the expiration of revenue guarantee payments made to Yahoo. Bing's US market share now stands at 19.2 percent. In its earnings call, Microsoft said that it expects Bing to be profitable on a standalone basis from the company's 2016 financial year.

For the year, revenue was up 9.7 percent to $9.63 billion, gross margin down 13.5 percent to $1.77 billion.

Commercial Licensing revenue was $11.22 billion, up 5.6 percent, with gross margin up 6.5 percent to $10.30 billion. Server product revenue was up 14 percent, with double digit growth shown by SQL Server, the System Center range, and premium versions of Windows Server. Office revenue was up 4 percent, and Windows volume license revenue was up 11 percent.

Over the full year, revenue was up 5.9 percent to $42.02 billion, and gross margin was up 6.5 percent to $38.60 billion.

The big success story was the Commercial Other segment. This segment includes both Microsoft's corporate-oriented cloud services (including Azure and Office 365) and its Enterprise Services consultancy and support division. The total segment revenue was up 44 percent to $2.26 billion, with gross margin up 105 percent to $0.691 billion. Most of this growth came from cloud services: there was triple-digit growth in both Office 365 and Azure, for total cloud services revenue growth of 147 percent. The annual run rate for the cloud business is now more than $4.4 billion. Enterprise Services revenue was also up by 11 percent.

While still only a small piece of the overall Microsoft pie, the cloud business is growing explosively. Microsoft wasn't the first company to operate in this space, but its range of services and its ability to span both on-premises and public cloud with the same software and management tools clearly has customer appeal. This on- and off-premises reach also offers something unique when compared to cloud offerings from Amazon, Google, Salesforce, and others.

For the full financial year, revenue was up 33 percent to $7.55 billion, and gross margin rose 101.5 percent to $1.86 billion.

Across the whole company for the whole year, revenue was up 11.5 percent to $86.83 billion, and gross margin was up 4.0 percent to $59.90 billion.

Overall, it has been a good year for the company. Its cloud businesses are growing well, and while the consumer PC market in particular remains soft, corporate sales have perked up thanks to the Windows XP end-of-life.

One thing that wasn't talked about much was the impending layoffs. We know that much of their impact will be felt by former Nokia employees, with some 12,500 job losses coming from Nokia's factories and other employees. This restructuring is expected to incur expenses of $1.1 billion-1.6 billion.

In the earnings conference call, Satya Nadella repeated information disclosed last week, such as the closure of Xbox Entertainment Studios, but he said nothing about the concrete implications for the company or its workers. Instead, the same vague talk of productivity and streamlining was the order of the day.

Channel Ars Technica