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Microsoft Gets a Boost From the Cloud

Story updated from 4:32 p.m. with Nadella's vision for Microsoft in paragraphs three to five and CFO guidance after 12th paragraph.

NEW YORK (TheStreet) -- Microsoft (MSFT - Get Report) was adding more than 2% in extended-hours trading after reporting better-than-expected fiscal 2014 third quarter earnings and in-line revenue amid a surge in Azure, Office 365 and Surface sales.

"This quarter's results demonstrate the strength of our business, as well as the opportunities we see in a mobile-first, cloud-first world," Microsoft CEO Satya Nadella stated in the earnings release. "We are making good progress in our consumer services like Bing and Office 365 Home, and our commercial customers continue to embrace our cloud solutions. Both position us well for long-term growth. We are focused on executing rapidly and delivering bold, innovative products that people love to use."

Nadella went on to add during the company's earnings call that Microsoft "wants to build products that people love to use," and that usage will increasingly be the leading indicator of the company's long-term success.


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"Our industry does not respect tradition, it only respects innovation," he explained.

Nadella said that in the coming months, the company will continue to concentrate on "rock solid" execution, "pivoting the company towards future" by pushing hard and moving quickly in building and developing products for the "mobile-first, cloud-first world."

The company posted net income of $5.66 billion, or 68 cents a share, vs. $6.055 billion, or 72 cents a year earlier. Revenue was $20.403 billion versus $20.489 billion the prior year. Microsoft was expected to earn 63 cents a share on revenue of $20.4 billion, according to Bloomberg data.

A breakdown of revenues by segment showed Devices and Consumer growing by the double digits and Commercial posting high single-digit growth.

Devices and Consumer revenue grew 12% to $8.30 billion. Within the segment, Office 365 Home had 4.4 million subscribers, adding nearly 1 million subscribers in just three months, while Surface revenue grew over 50% to about $500 million. Also, Microsoft sold in 2 million Xbox console units, including 1.2 million Xbox One consoles.

Windows original equipment manufacturer (OEM) revenue grew 4%, driven by 19% growth in Windows OEM Pro revenue, while the Bing U.S. search share grew to 18.6% and search advertising revenue grew 38%.

Commercial revenue grew 7% to $12.23 billion. The segment saw Azure sales grow over 150%. the company has announced more than 40 new features that it says is making the Azure platform more attractive to cloud application developers.

Office 365 revenue grew over 100%, and commercial seats nearly doubled, demonstrating strong enterprise momentum for Microsoft's cloud productivity solutions. Meantime, Windows volume licensing revenue grew 11% on robust demand from business customers. Lync, SharePoint, and Exchange, Microsoft's productivity server offerings, collectively grew double-digits.

Microsoft said it expects to close the acquisition of the Nokia Devices and Services business on April 25, 2014.

CFO Amy Hood's fourth-quarter guidance for the company excludes any related impact from the Nokia acquisition. She said that a clearer impact of the Nokia integration and acquisition will be included in Microsoft's fourth-quarter earnings report.

For the current quarter, Hood expects Microsoft to report Devices and Consumer Licensing revenue of $4.1 billion to $4.3 billion; Devices and Consumer Hardware revenue of $1.3 billion to $1.5 billion; and Devices and Consumer Other revenue of $1.9 billion.

Commercial revenues are expected to be at $13.1 billion to $13.3 billion, and within this, Commercial Other is forecast to be at $2.1 billion.

Hood said any unearned revenue should grow in line with normal seasonality. Her forecast for fourth-quarter operating expenses is $8.4 billion to $8.6 billion, representing full-year OPEX growth at the low end of the original guidance, as the company ramps up R&D spending but rationalizes marketing. Capital expenditures are estimated to come in at $1.5 billion amid the build-out of cloud infrastructure.

Microsoft is expecting a higher tax rate for the fourth-quarter, reaching 18% to 20% for the full year.

-- Written by Andrea Tse in New York

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