Microsoft's Q2 financial report for the 2018 fiscal year revealed impressive growth in its Azure cloud services, with revenue increasing by over 90% compared to the previous year. This marks the tenth consecutive quarter of year-over-year growth, showcasing Microsoft's strong position in the cloud market. The company managed to capture 4 percentage points of market share from Amazon, challenging the latter’s long-standing dominance in cloud computing.
Since Satya Nadella took the helm as CEO in 2014, Microsoft has undergone a significant transformation, shifting its focus from traditional software to internet-based services. The "cloud first" strategy has become a core pillar of this transformation and has driven much of the company's recent performance growth.
In its second-quarter earnings report for fiscal year 2018, Microsoft reported that its intelligent cloud business saw a 15.3% year-on-year increase, reaching $7.8 billion. Specifically, Microsoft Azure's revenue surged by 98% year-on-year, marking the tenth straight quarter of double-digit growth.
Overall, Microsoft’s revenue for the quarter rose by 12% year-on-year to $28.92 billion. In addition to the cloud segment, the company’s traditional productivity division, including Office, grew by 24.7% to $8.95 billion. Meanwhile, the PC business unit saw modest growth of 3%, generating $12.17 billion in revenue.
During the investor call following the earnings release, Nadella emphasized that Microsoft will continue to invest heavily in cloud services. A recent report by KeyBanc noted that Amazon Web Services (AWS) held 62% of the cloud market share in the last quarter of 2017, down from 68% the previous year. In contrast, Microsoft Azure's market share rose from 16% to 20% during the same period, indicating that Microsoft gained 4 percentage points from AWS.
Analysts believe that the cloud market is unlikely to be dominated by a single provider, as users tend to avoid relying solely on one service due to concerns about pricing power and flexibility. Kim Forrest, an analyst at Fort Ford Pitt Capital Group, pointed out that market monopolization could lead to reduced competition and higher costs for customers.
Another notable figure in Microsoft's quarterly report was a one-time tax expense of $13.8 billion. While this reduced the company's net profit to $6.3 billion, it was an accounting adjustment related to new tax reform legislation. The expense reflects potential future taxes on overseas income that may be repatriated to the U.S., rather than an immediate cash outlay.
Despite strong growth in other areas, Microsoft’s hardware business remains sluggish. The Surface division saw only a 1% year-over-year revenue increase. Although the Surface Pro line was fully upgraded and a new second-generation Surface Book was launched, the products did not perform well during the key holiday shopping season.
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