Microsoft's fourth-quarter revenues show that the company's transition to cloud computing is paying off. Mike Blake/Reuters
Microsoft's fourth-quarter revenues show that the company's transition to cloud computing is paying off. Mike Blake/Reuters

Technology

Cloud switch paying off for Microsoft

US tech giant posts profits ahead of analysts' expectations

Microsoft's turnaround plan got back on track in the latest quarter, buoyed by rising sales of internet-based software and services.
Profit in the fiscal fourth quarter exceeded analysts' estimates and adjusted sales rose 9 per cent as demand almost doubled for Azure cloud services, which let companies store and run their applications in Microsoft data centres. A tax-rate benefit added 23 cents a share to earnings, Microsoft said.

Shareholders are watching closely to gauge whether Satya Nadella is making progress toward reshaping 42-year-old Microsoft as a cloud-computing powerhouse with new services related to Azure and the Office 365 online productivity apps - a shift that led to a massive sales-force restructuring earlier this month. The stock has surged 33 per cent in the past year to a record amid signs that the changes are taking root, and the company rewarded that optimism by posting a significant gain in
revenue from commercial cloud products along with wider margins for the business.
"They are a company that seems to be ahead of some of these old-line technology companies that are making transitions to the cloud," said Dan Morgan, a senior portfolio manager at Synovus Trust, which owns Microsoft shares. "The story is still intact but they still have a ways to go."
Profit excluding certain items in the quarter ended June 30 was 98 cents a share, including the 23-cent tax benefit, Microsoft said on Thursday in a statement. Excluding that boost, profit would have been 75 cents, still higher than the 71-cent average projection of analysts surveyed by Bloomberg. Revenue
climbed to $24.7 billion, compared with estimates for $24.3 billion.
Microsoft shares rose as much as 4.1 percent in extended trading following the report, then later pared gains to trade near their price at the close in New York, which was $74.22. The stock has jumped 19 percent in 2017, compared with a 10 percent gain in the Standard & Poor's 500 Index.
The company, which cut thousands of sales and marketing jobs earlier this month to concentrate on selling cloud and newer products like artificial-intelligence and data-analysis tools, said it recorded costs of $306 million for the restructuring in the fourth quarter.
Commercial cloud revenue was $18.9 billion on an annualised basis, moving closer to the $20 billion target the company set for the fiscal year that started July 1. Even as cloud sales rise, the company has been able to meet a pledge to trim costs, with commercial cloud gross margin widening to 52 percent. 
"In commercial cloud gross margin, we committed a year ago to material improvement and this is 10 points higher than where we were last year," the company's chief financial officer, Amy Hood, said in an interview.
Azure sales rose 97 percent in the period, while commercial Office 365 -- cloud-based versions of Word, Excel and other productivity software -- increased 43 percent. Microsoft's Azure cloud-computing service still lags behind market leader Amazon.com Inc., but more customers are starting to go with Microsoft, according to research from Credit Suisse Group AG.
Both corporate and consumer users are switching from older Office programs to the cloud subscriptions, providing more stable and recurring revenue.
"The underlying trends -- the shift to the cloud and also what it means for the legacy, on-premise stuff -- are likely to be in motion for a very long period of time," said Sid Parakh, a fund manager at Becker Capital Management, which owns Microsoft stock.
* Bloomberg

At a glance

Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.

 

Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year

 

Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month

 

Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30 

 

Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse

 

Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth

 

Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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