Microsoft on track for strongest annual growth in over a decade

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Microsoft looks on track to record its strongest annual growth for more than a decade, following a revenue boost from its cloud business in the latest quarter and a bullish forecast for the final quarter of its fiscal year. Shares in the world’s biggest software maker jumped by 3 per cent in after-market trading as it predicted revenues of as much as $29.5bn in its current quarter, about $1.5bn above most analysts’ estimates.

Hitting that target would represent growth of more than 20 per cent for the year to June and confirm the stock market’s recent confidence that Microsoft has broken decisively away from its PC past. Amy Hood, chief financial officer, said recent heavy investment in everything from building a bigger salesforce to acquisitions such as that of LinkedIn was starting to pay off and supported “our focus on being a growth company, even at our scale”. Underpinning the latest advance was a 58 per cent jump in revenues from Microsoft’s commercial cloud operations — its Office 365 productivity service, Azure cloud platform and Dynamics 365 cloud applications. At $6bn, these accounted for 22 per cent of overall sales in the quarter.

Azure continued its rapid advance, with revenues growing by 93 per cent from a year earlier, cementing Microsoft’s position as the second-largest public cloud computing platform after Amazon Web Services. “There is growth in Azure across each of the layers . . . that I think will continue,” said Satya Nadella, chief executive. “We’re still in the early innings of the cloud transition,” he added, predicting that this would lead to a jump in “lower-margin services first [and] higher margin services over time”. Revenues from Windows, once the core of Microsoft’s business, accounted for 17 per cent of the total in the latest quarter.

In a sign of how far the priorities in Microsoft’s business have changed, Mr Nadella broke up the Windows engineering group earlier this year, reallocating engineers with the cloud and Office divisions that are the new pillars of its business. Microsoft’s shares had already risen 38 per cent in a year, even before the latest earnings, which is more than double the rise in the Nasdaq, reflecting growing confidence among investors that the company will eventually boost its profit margins from the fast-growing cloud business.

On Thursday, Microsoft executives sought to put the focus on growth rather than margin expansion — while stressing that profits overall were growing in line with sales. “We saw plenty of opportunity for gross margin growth, in terms of dollars, because of the number of markets we participate in,” Mr Nadella said. That pushed gross profits up by 16 per cent to $17.6bn, in line with the growth in sales, even as the margin remained flat. Microsoft reported overall revenues of $26.8bn, boosted by growth of 17 per cent in both its intelligent cloud division and its productivity and business processes group. That was $1bn ahead of Wall Street’s expectations. Earnings per share rose by 36 per cent to 95 cents, compared with expectations of 85 cents.

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