Microsoft (NASDAQ:MSFT) has been crushing expectations since CEO Satya Nadella took over three years ago, and this quarter's earnings results are a testament to that.
In this segment from Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Evan Niu go over some of the most important earnings and trends from Microsoft's quarterly report and explain why the market is so excited about the stock's potential.
A full transcript follows the video.
This video was recorded on Nov. 3, 2017.
Dylan Lewis: One surprise, frankly, for me, was looking at Microsoft's results. It's insane for me to see something where Microsoft moved 7%. You think of them as a tried-and-true, chugging along company. But when a company handily beats on earnings and revenue, that's exactly what happens. The company put up $24.5 billion on the top line, 12% growth. They posted $0.84 per share in earnings. I think they beat estimates by $1 billion on the top line.
Evan Niu: I think it's really a testament to what a good job Satya Nadella is doing and executing as CEO. I've always had a lot of faith in him, since he became CEO three years ago. I think, he really has a much more cohesive vision for the company compared to Steve Ballmer. He had plenty of mistakes throughout his long tenure. But, Nadella is really focused on cross-platform compatibility and the cloud, and they're executing and killing it.
Lewis: Their rallying cry when he first came on was cloud first, mobile first. And it seemed like it's been like, cloud definitely first.
Niu: [laughs] Yeah, they kind of backed away from the mobile, particularly on the phone front.
Lewis: And you can see that emphasis even in the conference call. You look through the order of operations for what management decided to talk about. I think they made it about 30 seconds into the call before they start talking about Microsoft's commercial cloud business. So, that's obviously a priority for them, and I think that's part of the reason why the market was so excited with these results.
Niu: Right. The big achievement this quarter was, they hit $20.4 billion in annualized run rate for the commercial cloud. Speaking of how they had to present their information, if you look at all their earnings releases over the past couple of years, that's literally the very first thing, that's the little subtitle to their earnings release is basically what this commercial cloud revenue run rate is. So, they've been emphasizing this very clearly for a few years now. Back in 2015, Nadella basically predicted, "We want to get this to $20 billion." And back then, it was about $6 billion or so. That's a pretty big, ambitious goal, to say, we want to triple this business in a few years. And he predicted that would be able to do so by mid-2018. So, they're just now kicking off fiscals 2018, but we're still 2017, so, they're ahead of schedule and they've now hit $20 billion, which is a huge milestone.
Lewis: And I think, seeing that $20 billion figure, and having just talked about Amazon's AWS run rate of roughly $18 billion, it would be easy to make the mistake to think that Microsoft is the leader in cloud infrastructure, but that isn't quite true. I think it's worth working through why that's the case.
Niu: Right. Microsoft's commercial cloud includes tons of these cloud-based, subscription-based offerings, most notably Office 365, which now has, on the commercial front, 120 million monthly active users, that's all enterprise customers. On the consumer side, they have 28 million subscribers. So, total Office 365 is about 150 million users, which is pretty strong. With Office 365 Commercial, that's obviously a huge business and one of the biggest cash cows. They also have things like Dynamics 365, which is their CRM platform that's all so deeply integrated with LinkedIn. Those are things that aren't directly related to cloud infrastructure in the way that you think of AWS. It's really just Microsoft Azure alone, which is also part of the commercial cloud. Azure is really what competes with AWS. They don't break out its revenue directly, but they did say it was up like 90%.
Lewis: Not too shabby. But, not on the scale of Amazon's AWS, at least for the cloud infrastructure side of what they're doing. Still a lot of really good cloud stuff going on at Microsoft.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Dylan Lewis owns shares of Amazon. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.