Microsoft Shares Hit a High With Promise of the Cloud’s Profit Margins


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On Thursday, Microsoft said its gross profit margin from its commercial cloud business was 49 percent, much lower than its traditional software business, but still attractive and growing quickly.

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Mauritz Antin/European Pressphoto Agency

SEATTLE — Microsoft has staked its future on cloud computing, the next big technology wave for companies, and is now telling investors more about how much money it’s making from the business.

It appears they like what they hear so far: Microsoft’s share price hit a high on Thursday — up 6 percent to more than $60 a share in after-hours trading — after the company released the financial results of its most recent quarter.

The last time Microsoft’s stock was this valuable was back in 1999, when Bill Clinton was still president, Mark Zuckerberg was in high school and the company was heading toward an antitrust showdown with the Department of Justice.

Cloud computing represents a big change in the way businesses get access to and purchase software and computing resources because it lets customers rent what they need as they go.

For outfits like Microsoft, the method is not as profitable as the old-fashioned way of selling copies of software, a business with gross profit margins above 90 percent — that’s the total profit a company can make off a product once the cost of making and selling it is subtracted.

But the cloud has other advantages, including more dependable flows of revenue. Tech companies like Microsoft also believe cloud computing will help make the overall technology market far bigger over time.

On Thursday, Microsoft said its gross profit margin from its commercial cloud business was 49 percent, much lower than its traditional software business, but still attractive and growing quickly. Microsoft has shared gross profit margins for its cloud business on occasion before, but recently said it would do so more explicitly in its earnings statements.

“The more details you get, the better,” said Colin Gillis, an analyst at BGC Partners. “It also shows the business is coming of age.”

Many products make up Microsoft’s cloud offerings, but revenue from one, Azure, jumped 116 percent during the quarter compared with a year earlier. Azure lets customers rent online storage and other computing infrastructure from Microsoft.

Microsoft was initially slow to recognize the importance of cloud computing, while its crosstown rival, Amazon, built a large business serving start-ups and big corporate customers. But after spending billions on data centers, Microsoft is finally recognized as a credible No. 2 in the market.

Microsoft said net income for the company’s fiscal first quarter, which ended Sept. 30, was $4.69 billion, or 60 cents a share, compared with $4.9 billion, or 61 cents a share, a year earlier. Revenue was $20.45 billion compared with $20.38 billion a year ago.

Investors focus on a different set of figures that exclude the effect of large revenue deferrals related to Windows 10, the Microsoft operating system from which the company recognizes revenue over time because of accounting rules governing software delivered as a service.

Without those deferrals, Microsoft earned nearly $6 billion, or 76 cents a share, compared with $5.66 billion, or 70 cents a share, a year earlier. Revenue of $22.33 billion was up from revenue of $21.66 billion a year ago. The results were well ahead of the 68 cents a share in earnings and $21.71 billion in revenue that represent the average estimate of analysts surveyed by Thomson Reuters.

There were blemishes on Microsoft’s quarter. The revenue it gets from PC makers who put Windows on their systems did not grow, a reflection of the stagnant PC market. Its revenue from selling phones, a market Microsoft has backed away from, fell 72 percent. And its revenue from games declined 5 percent because of falling Xbox game console sales.

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