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Microsoft riding on cloud nine


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Microsoft riding on cloud nine

More than two years into Satya Nadella's tenure as 's CEO, the executive'smobile-first, cloud-oriented strategy appears to be paying off.

While the company's more hardware-oriented personal computing segmentstill made up the bulk of the company's revenue as of the quarter ended in June,growth in revenue at its cloud-related segments — bolstered by a large gain forcloud computing platform service Azure — outpaced that of the personal computingdivision. The cloud-related segments also reported more net operating income, thoughhigher costs weighed on the income of those segments in the just-ended period, executivessaid.

Nadella's tenure as CEO has been marked by a broad company restructuringthat has pivoted Microsoft away from hardware, with the company writing down andultimately selling assets acquiredwith Nokia's Devices and Services business, a $7.17 billion deal initiated underformer Microsoft CEO Steve Ballmer. Microsoft recorded a number of charges relatedto the acquisition and later restructuringand sale of the assets.The largest of these came in the quarter ended in June 2015, when Microsoft announced$8.44 billion in restructuring and impairment charges, with $7.5 billion directlyrelated to the Nokia acquisition.Nadella also has overseen a broader streamline of Microsoft's reported segmentsfrom the old licensing, computing and gaming hardware, phone hardware and otherdivisions, to its current lineup.

While the current hardware-oriented "more personal computing"segment still makes up a majority of revenue, its net operating revenue has declinedsequentially in recent quarters and shown flat or negative year-over-year growthsince June 2015, as the company started to move away from the phone hardware business.Revenue associated with phone hardware dropped 71% year over year for the just-endedquarter, a decline driven by reduced sale volumes.

In addition to cutting back on hardware, Microsoft has movedto acquire assetsthat position the company as an enterprise, cloud entity, including the recent announcementof a $26.2 billion acquisitionof the social networking company LinkedInCorp.

The company's personal computing segment reported $8.9 billion in revenue,or 43% of Microsoft's overall $20.61 billion in net operating revenue for the quarterended in June. The segment reported $964 million in net operating income, the smallestof the company's three product and services driven segments, but still a 26.5% year-over-yeargain.

By comparison, Microsoft's intelligent cloud segment reported $6.71billion in revenue, a year-over-year gain of 6.6%, while the company's productivityand business processes segment, which is driven largely by Microsoft's enterpriseand commercial Office cloud software services, reported $6.97 billion in net operatingrevenue, up 4.6%. That compared to a 3.3% decline in the personal computing segmentrevenue.

The intelligent cloud segment trailed on income growth, down 16.7%to $2.19 billion in net operating income, but its total income still far surpassedthat of the personal computing segment in the just-ended quarter. CFO Amy Hood attributedthe cloud segment's falling operating income to higher costs as the company madeinvestments in sales resources and engineering. Executives on a July 19 earningscall expressed a bullish sentiment about the cloud segment's growth potential.

Driving the segment's growth was Azure, the company's cloud computingplatform service, which saw a 102% year-over-year increase in revenue for the period.However, the intelligent cloud segment is not expected to surpass the productivityand business processes or the more personal computing segment in revenue in theupcoming quarter, with executives forecasting that intelligent cloud will bringin $6.1billion to $6.3 billion in revenue for the 2017 fiscal first quarter compared to$6.4 billion to $6.6 billion from productivity and business processes and $8.7 billionto $9 billion from more personal computing.

In a note titled "Solid Set of Results; Cloud Momentum Continues,"Nomura Group analyst Frederick Grieb reiterated a buy rating for the companyand said he believed that the cloud has more room to grow.

"Azure adoption is rising, and as customers look increasinglyto the cloud, we believe Microsoft can leverage its existing relationship with enterprisecustomers to sell more premium workloads and services in the cloud," Griebsaid in the July 20 note.

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