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Microsoft profits fall but cloud success sends share price up

Strong fourth-quarter performance of Microsoft’s cloud services indicates that CEO Satya Nadella’s transformation plan is working

Microsoft's share price rose 6% in after-hours trading despite the company announcing fourth-quarter financials on 29 January 2016, showing a 15% year-on-year fall in profits and a 10.1% drop in revenue for the past three months of 2015.

Revenue was down to $23.8bn and profit fell to $5bn, mainly as a result of the strong dollar and shrinking PC market that has affected the fourth-quarter results of most US tech firms.

Investors were nevertheless encouraged by the strong performance of the company's cloud and mobile software divisions, which are indications that CEO Satya Nadella's transformation plan is working.

Under his leadership, Microsoft has been shifting its business towards cloud services, such as Microsoft Azure, Dynamics CRM and Office 365.

The better than expected results were driven mainly by Microsoft's cloud services division, which reported a 5% year-on-year revenue hike to $6.3bn, accounting for more than a quarter of the company's total revenue.

Microsoft said sales growth would have been 11% in "constant currency" conditions and that the annualised revenue run rate for commercial cloud exceeds $9.4bn.

Azure revenue soared 140% in constant currency terms, with revenue from Azure premium services nearly trebling year on year. Office 365 revenue jumped 70% compared with Q4 2014 and the cloud-based office suite reached 20.6 million customers.

Sky's the limit for cloud

"Businesses everywhere are using the Microsoft cloud as their digital platform to drive their ambitious transformation agendas," said Nadella, describing the enterprise cloud market opportunity as "massive" in an earnings call.

The global cloud storage industry was worth almost $19bn in 2015 and is expected to rise to $65bn by 2020, according to Research and Markets.

The latest PC market share report from Gartner shows that the market declined 8% worldwide in 2015 compared with 2014. In line with that, Microsoft's revenue from personal computing, which includes its Windows operating system,  fell 5% in the fourth quarter to $12.7bn.

However, Nadella said businesses are piloting Windows 10, which he expects will drive deployments beyond 200 million active devices. Unlike previous versions of the operating system, Windows 10 is designed to work on ultrabooks, tablets and hybrid devices, decoupling it from the PC market.

Nadella also indicated that he expects the new security and compliance features of Windows 10 will encourage the crucial business market to upgrade, according to Business Insider.

Mobile boost

Microsoft also benefited from the shift away from PCs to mobile computing devices, with Surface revenue up 29% in constant currency terms, driven by the launch of Surface Pro 4 and Surface Book.

Microsoft's gaming and digital content business reported similar growth, with Xbox Live monthly active users growing 30% year-on-year in the quarter to a record 48 million.

"It was a strong holiday season for Microsoft, highlighted by Surface and Xbox," said Kevin Turner, chief operating officer at Microsoft. "Our commercial business executed well as our sales teams and partners helped customers realise the value of Microsoft's cloud technologies across Azure, Office 365 and CRM Online."

The most significant decline was a fall in phone revenue of 49% in constant currency. Microsoft said this reflected the company's strategy change, announced in July 2015.

However, Microsoft is seeing some success in mobile software such as Skype, which Nadella said in an earnings call had been downloaded more than 900 million times on iOS and Android devices, while Office mobile apps have been downloaded over 340 million times.

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