Microsoft Earnings: Cloud Delivers Growth Yet Again

Microsoft announced its earnings for Q4 FY14 on July 22. The company posted a good 17% year-over-year growth in revenues to $23.38 billion, which also includes $1.9 billion revenues from Nokia s phone division. If revenues from phone sales are excluded, Microsoft MSFT -0.09%s revenues still grew 10% during the quarter. In our pre-earnings note, we noted that cloud services would boost revenues. The company reported 147% growth in commercial cloud services, which includes commercial Office 365 and Microsoft Azure platform. We also anticipated that Windows OS license sales would grow during the quarter despite the downturn in PC shipments. Microsoft was able to buck the declining PC sales trend as its Windows original equipment manufacturing revenues grew by 3% year over year driven by strong growth in Windows OEM Pro revenue. It did show less of a lift in this improving environment than Intel INTC -0.92%, however. Below, we review Microsoft’s Q4 FY 14 results by segment.

Microsoft’s Windows Server division is one of the fastest growing divisions of Microsoft. During Q4 FY14, revenue from commercial segment, which includes servers, commercial office licensing and cloud platform, grew 6% to $11.22 billion, driven by higher SQL server sales and adoption of the cloud based Azure platform. Server products grew by 14% year over year with double digit (15%) growth in SQL servers. Furthermore, its Azure cloud offering clocked in triple digit (147%) growth in revenues with an annualized run rate that exceeds $4.4 billion. We’re encouraged by the continual growth that this division posted, and it is becoming an important driver for Microsoft’s value.

Consumer Office revenue grew 21%, mainly due to higher volume of licenses sold. Furthermore, commercial Office revenue also grew by 4% during the quarter. In addition, Microsoft reported that Office 365 now has over 5.6 million subscribers and that revenue from this cloud offering in the quarter more than doubled year over year. As subscription model transitions, revenues for this division are expected to become more recurring and predictable going forward.

The company reported that its consumer licensing revenues, which includes Windows original equipment manufacturer and consumer Office, grew by 9% to $4.69 billion. Despite tepid PC sales, its Windows OEM revenues grew by 3%, reflecting a 11% increase in OEM Pro revenue. Windows volume licensing also had a solid 11% year-over-year growth in revenues, partly due to end of support for Windows XP.

In our earnings note published earlier, we stated that the device sales will be significantly higher in Q4. Microsoft?s hardware revenues were buoyed by growth in Surface sales and Xbox One shipments. While Surface revenues grew to $409 million, the company sold 1.1 million Xbox consoles during the quarter. As a result, revenue for hardware devices was up $274 million or 23% to $1.44 billion.

We are in the process of updating our Microsoft model. At present, we have $41 price estimate for Microsoft, which is approximately 8% below the current market price.


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