In October, Microsoft (NASDAQ: MSFT) released a quarterly report that exceeded investor expectations across the world. The tech giant's 2016 fiscal year began with an almost 2% increase in profit to $4.62 billion.
Microsoft's unexpected growth can be directly linked to its bustling cloud computing industry. Cloud computing involves the storage and management of data over the internet rather than on local servers. An Oxford Economics and SAP study, "The Cloud Grows Up," predicts that even though many new business are already on the cloud, the technology could be used by 50% more consumers in as few as 3 years. It's the next big thing, and Microsoft is taking advantage of that.
Kevin Turner, the chief operating officer at Microsoft, said "We're seeing great traction with businesses who want to bring Microsoft's cloud, mobile device management technology and data analytics together to improve security and productivity resulting in almost 70 percent year-over-year growth in our commercial cloud run rate."
Revenue from cloud computing alone exceeded $5.9 billion and accounted for almost 30% of total Microsoft revenue. What captivates investors is not the value of this market right now but its apparent potential in coming years. $5.9 billion represents a massive 8% increase in cloud revenue since last quarter. And Microsoft doesn't want to stop there. Satya Nadella, chief executive officer at Microsoft, says "we're making great progress towards our goal of $20 billion in annualized commercial cloud revenue run rate, which now exceeds $8.2 billion."
The company's cloud computing platform is called Microsoft Azure (previously Windows Azure) and has been in the works since 2008. It entered the market just as cloud computing took off and now dominates it.
Microsoft isn't completely alone in cloud computing today, though. We've seen its competitors Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) also produce unexpectedly high figures for the last quarter. Like Microsoft, their success is partly due to their respective cloud computing industries: Amazon Web Services (AWS) and Google Cloud Platform. AWS generated $2.09 billion with an exceptionally large run-rate of $7.9 billion. AWS is growing significantly faster than Azure because of the money Amazon pumped into it last year. Google did not release its cloud revenue data but experts estimate that its revenue totaled upwards of $500 million.
On the other hand, some companies aren't able to embrace the cloud and are probably regretting it. They were crowded out because they joined too late. HP (NYSE: HPQ) recently announced that it was in the process of shutting down its cloud computing business. Companies like Oracle (NYSE: ORCL) that are still in the market are suffering losses because they aren't able to compete well. These companies couldn't achieve the Azure-like scale necessary for cloud computing to be profitable.
By correctly calculating the potential of cloud computing early on, Microsoft, like Amazon and Google, reaped enormous profit benefits. Nevertheless, Microsoft's overall raw revenue has decreased by $2.8 billion since the first quarter in the 2015 Microsoft fiscal year.
The large loss is not actually that disheartening, partly because profits still increased. Microsoft management correctly claims that there are two main reasons for the revenue drop. First, Microsoft's "Personal Computing" revenue decreased by 17%, primarily due to lower revenue from phones. This loss purposefully "reflects a change in strategy for the phone business" that will play out positively in the long-term. Second, Windows 10 net revenue deferrals masked the true potential of Microsoft growth during the first quarter. The deferrals accounted for $1.28 billion of hidden revenue. They will not be included in this quarter's earnings because of an American accounting caveat. Microsoft marked Windows 10 as a free upgrade for existing Window's users meaning it could not legally cite profit from OEMs (Original Equipment Manufacturers) during this quarter.
Microsoft ultimately adapted very well to its changing environments. Much like Apple (NASDAQ: AAPL) entered the smartphone market when it faced stagnant profits in PCs, Microsoft turned to cloud computing to diversify its revenue streams during poor performance quarters. Amy Hood, Chief Financial Officer, said "During Q1, we exceeded our own expectations across many of our businesses and more importantly, we saw healthy indicators of future growth." What Microsoft did in 2008 has provided them with a solid footing into their 2016 fiscal year.