Shares of Microsoft (NASDAQ:MSFT) were slightly higher in early morning trading hours Thursday, the first trading period after the release of the company’s fiscal second-quarter earnings report. The tech giant successfully surpassed estimates for both earnings and revenue on the back of impressive growth, leading many investors to wonder what is driving this expansion.
For the second quarter, Microsoft reported adjusted earnings of $0.96 per share and revenues of $28.92 billion, beating the respective Zacks Consensus Estimates of $0.86 and $28.35 billion. Non-GAAP earnings were up about 15.7% from the year-ago period, while total revenues gained about 11.2%.
Microsoft also reported a $13.8 billion net charge related to the recent Tax Cuts and Jobs Act. Factoring in this charge, the company witnessed a loss of $0.82 per share on a GAAP basis (also read: Microsoft Reports Earnings Beat, Azure Revenue Soars 98%).
But how exactly is a technology behemoth of Microsoft’s scope able to consistently post double-digit growth on the top and bottom line? First, let us turn to management’s comments for some clues.
“This quarter’s results speak to the differentiated value we are delivering to customers across our productivity solutions and as the hybrid cloud provider of choice,” said CEO Satya Nadella in the company’s press release. “Our investments in IoT, data, and AI services across cloud and the edge position us to further accelerate growth.”
Nadella uses the word “cloud” twice in this quote, and that is because cloud computing is now at the core of his company’s business model. The CEO acknowledges that investments in emerging cloud-based trend set Microsoft up for further growth, but he also cites the firm’s cloud leadership as a primary reason for its growth right now.
One way we can gauge how successful Microsoft’s cloud focus has been is to track the performance of its Intelligent Cloud division, which includes its server and enterprise products like Azure.
Heading into the report, our exclusive non-financial metrics consensus estimate file, which is compiled through detailed estimate data for business segment metrics from expert stock analysts, called for Microsoft to post Intelligent Cloud revenues of $7.501 billion.
Microsoft comfortably surpassed that estimate, posting total Intelligent Cloud revenues of $7.795 billion in the second quarter. That marked growth of 15.3%. What’s more, Microsoft cited Azure growth of 98% as a key catalyst for its overall Intelligent Cloud performance.
Azure and Intelligent Cloud are large parts of Microsoft’s impressive top line expansion. And these businesses are also relatively profitable for the company.
The Intelligent Cloud unit contributed nearly 27% of Microsoft’s total revenues, but the segment contributed more than 32.6% of the company’s operating income. Indeed, out of the $8.679 billion of total operating income Microsoft reported yesterday, about $2.832 billion came from Intelligent Cloud.
It is no secret that cloud computing has become a major growth driver throughout the technology industry. For Microsoft, the cloud has allowed a PC software giant shake off its dependence on the personal computer and witness impressive expansion in key businesses.
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