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Microsoft 4th Quarter 2018 Earnings: Cloud and Office Power Strong Growth

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

Microsoft (NASDAQ:MSFT) released its 4th quarter fiscal 2018 results yesterday and it posted a solid beat on both revenue and earnings per share. Top growth factors for Microsoft were the cloud-computing Azure service and Office 365 offerings which both helped drive a $30.09 billion dollar quarter.

Key Facts

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  • 4Q FY2018 operating income of $10.4 billion up from $7.7 billion a year ago, a 35% increase
  • 4Q FY2018 revenue of $30.09 billion versus Wall Street estimates of $29.21 billion
  • Azure up 89%, powering Commercial Cloud division to 53% overall sequential gain
  • Cornerstone Windows and Office products performing very well

Azure, Gaming, Office, and LinkedIn are the cornerstones of Microsoft's growth this quarter as seen below.

Source: CNBC.com

Microsoft has three principal business units: Cloud, Productivity and Business Processes, and Personal Computing. Let's dive in and examine how each performed.

Microsoft Intelligent Cloud Business leads the charge with 23% growth

Perhaps the biggest takeaway from the earnings release is the rapid pace of growth that Microsoft's cloud computing offering, Azure has achieved. The service grew 89%, according to Microsoft, sequentially from the previous quarter. MS does not specifically break out Azure revenue/profit but given its massive growth, it was easily the biggest driver to the division's 23% overall revenue growth to $9.61 billion for the quarter.

CEO Satya Nadella offered his praised the Cloud division on the earnings conference call:

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Our commercial cloud business surpassed more than $23 billion in revenue for the year with gross margin expanding to 57%. The strength of our results reflects accelerating innovation and the trust customers are placing in us to power their digital transformation.

Moving forward this will be Microsoft's primary vehicle for revenue and margin growth. Azure is gaining traction and is currently sitting at 16% overall cloud market share versus Amazon Web Services which has around 32% based on recent market data. Analysts noted that AWS did enjoy a healthy head start but that Azure is enjoying faster growth rates at this point versus AWS.

Industry experts expect Cloud to continue to outpace traditional software sales models which Microsoft is well aware of. Windows and Office remain strong product lines but are much more mature with limited growth potential.

Microsoft Office 365 now at 31.4 million paying subscribers

The Productivity and Business Process business segment includes LInkedIn, Office, and Dynamics and grew 13% overall with $9.67 billion in revenue.

LinkedIn chipped in $1.46 billion, up a whopping 37% over the previous quarter. The company cited record levels of job postings and LinkedIn sessions, 41% gain over a year prior.

Revenue for Office 365 subscriptions rose 36% as a result of Microsoft adding about 4 million consumer subscribers compared to 4Q 2017.

Microsoft More Personal Computing

Last but not least is Microsoft's "More Personal Computing" division which includes the classics - Windows OEM and commercial as well as Xbox gaming groups and the Surface family of products.

The MPC group grew 17% to $10.81 billion, making them still the largest division of the Redmond, WA-based giant.. for the time being.

Windows 10 is in the middle of its upgrade cycle and the slightly positive numbers show this. Windows OEM revenue is up 14% Y-o-Y and Windows Commercial did even better with 23% growth.

The Surface family of products contributed $1.19 billion to Microsoft coffers and was ever so slightly up from the previous quarter, but up 23% for the year.

Microsoft Xbox One X

Xbox Live active users is 57 million, down two million from the previous quarter but up from 53 million a year ago. Total gaming revenue was a healthy $2.3 billion, up from $1.6 billion a year ago. The Xbox One X no doubt had a part to play here.

Finally, search and advertising revenue grew 17% year over year.

Stifel analyst Brad Reback summed it up nicely in terms of the overall picture currently at Microsoft.

“Microsoft continues to fire on all cylinders as the company benefits from its strong positioning across major secular compute themes (hybrid, intelligent cloud/intelligent edge, gaming).This, coupled with a favorable IT/macro environment, a Win10 replacement cycle, strong sales force execution and expense discipline, should enable Microsoft to continue to deliver accelerating operating profit and FCF generation in coming quarters.”

He increased his price target to $118 from $107 which is in line with the majority of other analysts response to the positive earnings beat.

Wall Street wasted no time in reacting with Microsoft shares hitting all time highs this morning opening at $108 before settling to about $106 in afternoon trading, a roughly 2% gain for the day.