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Microsoft Cloud Stumbles But Company Sees Light Ahead

Microsoft Holds Annual Shareholder MeetingMicrosoft Holds Annual Shareholder Meeting
Microsoft CEO Satya Nadella.Photograph by Stephen Brashear—Getty Images

Microsoft’s pinning a big chunk of its hopes on its cloud business which hit a bit of a speed bump last quarter.

Overall, Microsoft reported a profit of 62 cents per share, excluding some costs for its quarter ending March 31. That fell short of analyst expectations of 64 cents. Meanwhile, sales of $22.1 billion were in line with investor forecasts.

The weak profits along with similar negative news from Google (GOOG), cast a pall on the markets after close Wednesday. At one point, Microsoft shares @msft(MSFT) fell 4.8% to $53.10 in after-hours trading.

The company’s key “intelligent cloud” reporting unit, which incorporates Azure public cloud as well as products that run on-premises like the Windows Server operating system and SQL Server database, saw sales rise 3.3% to $6.1 billion. But profit for the unit fell 14% to $2.19 billion for the quarter.

Still chief executive Satya Nadella reiterated that Microsoft’s Azure cloud and Office 365, its productivity software sold via subscription, remain critical for the company. He also reiterated that Microsoft customers can run some of their computing in the Microsoft-owned-and-operated Azure data centers, while keeping other work in-house running on a “mini-me” version of Azure called Azure Stack.

Satya Nadella Q&A

“Azure Stack is completely unique to Microsoft, no one else in public scale of any type has that capability,” he noted.

For the most part, those other providers went unnamed at least by Microsoft executives—Nadella did comment that Azure is one of two leading players in this field. But analysts wanted to know how Microsoft Azure could distinguish itself from Amazon (AMZN) Web Services, the leader in public cloud.

“Our differentiation is hybrid cloud,” Nadella noted. “People think of the cloud as being the edge of their servers… We also think of our servers as the edge of our cloud.”

By that he means that Microsoft will let its database software run internally on customer servers but, if a certain calculation needs massive resources, the transaction can be handed off to its cloud products to provide a sort of turbo charge.

And it is true that the two other major public cloud players—market leader AWS and Google Cloud Platform—do not (yet) offer anything similar. Microsoft is also banking that hundreds of thousands of existing Windows and Office users will turn to Azure as their preferred cloud.

Chief financial officer Amy Hood said Microsoft provides Azure cloud “enrollment rights” with its server products. That means customers buying Windows Server to run in their own data centers, may link it to Azure cloud-based services and pay for that access, which would mean future revenue.

msft share price

As is always the case with cloud numbers, there is a lot of room for interpretation.

For example, Microsoft (MSFT) claimed its “commercial cloud” business, which includes Azure, Office 365 applications for business users but not consumers, is now on track to earn $10 billion a year with the goal of hitting $20 billion for fiscal year 2018. But “commercial cloud” is not the same as the aforementioned “intelligent cloud” reporting unit.

Why the difference? In complexity there is opportunity to claim that Microsoft’s cloud is nearly as big as AWS which Amazon claims is on a $10 billion run rate.