In the second quarter of fiscal year 2018, Microsoft's financial report revealed a remarkable surge in its cloud services revenue. Specifically, Microsoft Azure saw an increase of over 90% compared to the previous year, marking the tenth consecutive quarter of year-over-year growth. This performance allowed Microsoft to capture 4 percentage points of market share from Amazon, challenging the latter’s long-standing dominance in the cloud computing sector.
Since Satya Nadella became CEO in 2014, Microsoft has undergone a significant transformation, shifting its focus from traditional software to internet-based services. The "cloud first" strategy has proven to be a pivotal element in this shift, driving substantial growth and becoming a key factor in the company’s overall success.
Microsoft's Q2 2018 earnings report showed that the intelligent cloud business recorded a 15.3% year-on-year increase, reaching $7.8 billion. Within this segment, Azure's revenue jumped by 98%, continuing its streak of double-digit growth for ten quarters in a row. This impressive performance highlights the company’s strong position in the cloud market.
The company’s total revenue for the quarter reached $28.92 billion, reflecting a 12% year-on-year increase. In addition to the cloud division, Microsoft’s traditional productivity group, including Office, grew by 24.7% to $8.95 billion. Meanwhile, the PC business unit saw modest growth of 3%, with revenues amounting to $12.17 billion.
During the investor call following the earnings release, Nadella emphasized Microsoft’s continued commitment to investing in its cloud business. A recent report by KeyBanc noted that Amazon Web Services (AWS) held 62% of the market share in the last quarter of 2017, down from 68% the previous year. Meanwhile, Microsoft Azure increased its share from 16% to 20%, capturing 4 percentage points from AWS.
Analysts suggest that the cloud market is unlikely to be dominated by a single provider. Kim Forrest, an analyst at Fort Pitt Capital Group, pointed out that users tend to avoid relying solely on one cloud service due to concerns about pricing power if a monopoly were to occur.
Another notable aspect of the report was a one-time tax expense of $13.8 billion. This charge impacted Microsoft’s net profit, which came in at $6.3 billion for the quarter. However, the expense was an accounting adjustment related to future tax obligations under new tax reform legislation, specifically regarding repatriating overseas income to the U.S.
While many of Microsoft’s businesses experienced strong growth, its hardware division remained sluggish. The Surface computer division only saw a 1% year-on-year increase in revenue. Despite launching new products like the second-generation Surface Book, the division struggled to perform well during the traditional holiday shopping season.
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