Microsoft's Nadella Presents Q4 Earnings Buoyed By Commercial Cloud; Wall Street Not Particularly Impressed

Microsoft delivered Q4 financials Tuesday buoyed by a cloud-first strategy that's building off the software giant's traditional strengths in business productivity tools.

While Microsoft's legacy PC business showed steep OEM and licensing revenue declines in the final quarter of the fiscal year, and the device business was dragged down by a disastrous $7.5 billion Nokia phone write-down, the company just beat expectations at 62 cents earned per share on the strength of its various cloud services and with an assist from server software growth.

As Microsoft continues overhauling its delivery model and prepares for the release of Windows 10, CEO Satya Nadella said he's optimistic about the year ahead as his company focuses "on areas of differentiation and significant opportunity in large addressable markets."

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Share prices dropped after-hours about 3.3 percent, to $45.40, at publication time.

Microsoft notched quarterly revenue of $22.2 billion, a 5 percent year-over-year increase. At the same time, commercial cloud revenue grew 88 percent, and shows no sign of slowing down.

Office 365 adoption, at some 1 million new subscribers every month, adding to 15 million current subscribers, is a major driver of that cloud expansion, Nadella said.

The upcoming E5 edition of Office 365 presents a market opportunity of $50 billion, according to the CEO.

With a CRM market that has "massive opportunity for reinvention"; new analytics tools for Azure, including the Cortana Analytics Suite; growth in Visual Studio; and a market rife with security opportunities, Nadella said the company is "on a strong trajectory" to realize $20 billion in cloud business in 2018.

Windows 10, set to launch in the coming weeks, will give millions of users a platform to adopt cloud services, he said.

"Our aspiration with Windows 10 is to move people from needing to choosing to loving Windows," he said.

The Surface tablet business was also a strong performer over the past quarter, with revenue growth of more than 100 percent.

In response to an analyst's question, Nadella said Microsoft is seeing a broad spectrum of use cases on its Azure public cloud.

Those include development and testing, production workloads, Infrastructure-as-a-Service deployment, high performance SKUs and storage, Azure SQL Database, Machine Learning-as-a-Service and building back-ends for mobile apps.

"As every company out there becomes a software company, beyond our even traditional reach to IT, everyone has a digital office inside the company. They're in fact doing things in advanced analytics, using machine learning," Nadella said of the emerging "intelligent cloud" market.

Also asked if he knew the ratio between IaaS and Platform-as-a-Service use cases in Azure, Nadella said he wasn't sure of the exact breakdown, though there had been significant growth in IaaS in the last year.

"That's probably the place we have had more of a weakness that we've now overcome," he said of Azure's Infrastructure-as-a-Service capabilities.

And "what starts off as IaaS" often evolves into use of higher-level services such as identity management and media services for encoding, he said.

The trend, Nadella said, "is nothing is pure IaaS or pure PaaS."

PUBLISHED JULY 21, 2015