Microsoft's Sales Get Azure Boost; Tax Charge Leads to Net Loss update from February 2018

Dina Bass (Bloomberg) -- Microsoft Corp. topped analysts’ estimates for second-quarter revenue, helped by brisk quarterly growth in its cloud and corporate-software businesses, while a tax charge caused the company to report a net loss.

The software maker said it had a $13.8 billion charge related to taxes owed on overseas cash, a result of recent changes to U.S. tax law. The net loss in the second quarter, which ended Dec. 31, was $6.27 billion, or 82 cents a share. Excluding the charge, profit was 96 cents, compared with an average analyst projection of 86 cents, according to data compiled by Bloomberg.

Sales of Azure cloud-computing services almost doubled as businesses increasingly seek to run applications and store data in Microsoft’s data centers. Chief Executive Officer Satya Nadella is adding machine learning and data-analysis features to Azure, seeking to woo customers from market leader Amazon.com Inc. The company is also switching more customers to online subscription versions of productivity programs like Word and Excel, helping buoy Office 365 revenue by 41 percent.

"Office is continuing on its merry way, moving customers to Office 365," said Mark Moerdler, an analyst at Sanford C. Bernstein & Co. "And Azure is continuing to chug along."

Sales in the quarter climbed 12 percent to $28.9 billion, exceeding the average analyst estimate of $28.4 billion.

As of June 30, almost $128 billion of the Microsoft’s cash and short-term investments were held overseas. In December, Congress passed a sweeping tax overhaul that scrapped a previous system that let companies defer U.S. income taxes on foreign earnings until they returned that income to the U.S. Now companies will have to pay taxes on accumulated foreign income -- cash at a tax rate of 15.5 percent and less liquid assets at a rate of 8 percent. Companies have eight years to pay. Microsoft hasn’t disclosed whether or when it plans to repatriate its foreign income.

The company’s shares slipped less than 1 percent in extended trading following the report, after closing at $95.01 in New York. Microsoft stock jumped 15 percent in the December quarter, outpacing the 6.1 percent gain in the Standard & Poor’s 500 Index.

Microsoft in the fiscal first quarter said commercial cloud revenue had already exceeded its target of $20 billion in annualized revenue, and KeyBanc analysts wrote in a note earlier this month that Microsoft will reach $40 billion in total cloud revenue in 2019. The bank estimated Microsoft’s Azure gained market share from Amazon Web Services in the most recent quarter. Amazon still leads by a margin of more than 3 to 1, KeyBanc said, but that’s an improvement over the 4-to-1 ratio of the same period a year earlier.

The Redmond, Washington-based company has rolled out services that add artificial intelligence conversations and language understanding into its cloud programs. It also started offering customers the ability to host their workloads in France, bringing the number of regional options for data-center services to 42, and signed a seven-year deal to be the primary cloud provider for Chevron Corp.

At the same time, as Microsoft’s new data centers come online and become more efficient, their profitability increases. Bernstein’s Moerdler expects Azure’s expansion to continue for the next few years and provide a significant source of revenue and earnings growth for Microsoft.

Investors will also be looking for any update from Microsoft on whether its business will be affected by two major chip security flaws disclosed earlier this month. While Microsoft has said the fixes for those flaws aren’t significantly slowing Azure, there have been major impacts for some server tasks. Any slowdown could actually require some customers to purchase more servers to regain speed lost when the patches were applied. Meanwhile, Microsoft had to issue an emergency fix that disables the Intel fix because it was causing some machines to reboot or lose data.

The software fixes for the chip vulnerabilities are also slowing the performance of older PCs, a market that has been in decline for several years. Global PC shipments fell 2 percent in the last three months of the year, according to Gartner Inc., bringing the total drop for 2017 to 2.8 percent.