Microsoft: Cloud Growth Not Sucking Revenue Away From Server Products

While its Nokia acquisition did result in a loss on earnings per share, Microsoft’s fourth fiscal quarter revenue beat analyst expectations. The company’s top execs sounded pleased with growth of its cloud business, which includes both Office 365 and Azure, on Tuesday’s earnings call.

After they reported 147-percent growth in commercial cloud revenue, an analyst on the call asked whether that meant companies weren’t buying as many licenses for their on-premise server software (products like Windows Server, System Center or SQL Server). The execs said that was not the case and pointed to 16-percent growth in this product category.

“We don’t see it as a zero-sum,” Microsoft CEO Satya Nadella said about the relationship between server products and its -as-a-Service offerings. He cited continuously growing server virtualization rate as one of the factors driving growth in the category.

Microsoft sells server OS licenses for Azure cloud deployments as well, but CFO Amy Hood said there was also a lot of growth in on-premise server software sales this past fiscal quarter, which concluded the company’s fiscal 2014. SQL Server and System Center revenue growth was in the double digits.

Annualized revenue run rate for commercial cloud now exceeds $4.4 billion, Hood said.

The executives offered little detail on the plan to cut 18,000 jobs the company announced earlier this month and reiterated that Microsoft will continue to focus on cloud and mobility. That focus, Nadella said, will continue informing the company’s investment decisions.

Data centers that support Azure have been and will continue to be one of the biggest areas of investment. In the past fiscal year, Microsoft added data center capacity in Australia, Brazil, Japan and China and doubled capacity in previously existing data center locations.

Nadella expects the company to continue this expansion in fiscal 2015: “We will expand our Azure data center footprint and increase capacity in existing regions.” Hood added that the company expected its capital expenditures in the first quarter to be higher than fourth-quarter expenditures because of further expansion of cloud infrastructure.

Microsoft reported $23.4 billion in revenue for the fourth quarter – up 18% year over year. Operating income was $6.5 billion (up 7 percent), and earnings per share were down 7 percent at $0.55.