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The Re-Rise Of Microsoft

This article is more than 7 years old.

Once, Microsoft Corporation(NASDAQ:MSFT) was the shining star of the technology universe. Its Windows and Office products were installed in almost every PC around the world, boosting the company’s top and bottom lines, and rewarding investors who held on to its stock.

Then came the legal challenges and the competition from Apple, Google and the like to halt the company’s growth. And a few unsuccessful forays into new business that cost the company a great deal of money and scared investors away from its stock, which dipped to $18 in 2008, down from close to $60 in 1999.

Now Microsoft is shining again, as evident by a series of strong financial reports, including one last week for the quarter ended September 30, 2016:

         Revenue was $20.5 billion GAAP, and $22.3 billion non-GAAP

         Operating income was $5.2 billion GAAP, and $7.1 billion non-GAAP

         Net income was $4.7 billion GAAP, and $6.0 billion non-GAAP

         Diluted earnings per share was $0.60 GAAP, and $0.76 non-GAAP

The driver behind Microsoft’s re-rise is a host of strategic initiatives that “infuse intelligence across the company’s platforms and experiences.”

“We are helping to lead a profound digital transformation for customers, infusing intelligence across all of our platforms and experiences,” said Satya Nadella, chief executive officer at Microsoft, following the release of the financial report. “We continue to innovate, grow engagement, and build our total addressable market.” 

“Our first quarter results showed continued demand for our cloud-based services," added Amy Hood, executive vice president and chief financial officer at Microsoft. “We continue to invest, position ourselves for long-term growth, and execute well across our businesses.”

What this means in financial terms is that Microsoft has finally managed to generate sufficient revenues from new business like cloud-based services to more than make up losses from declining businesses like personal computing.

That’s music in the ears of Wall Street investors, who sent the company’s stock test the old 1999 highs.

Here are a few highlights from the report that confirm Microsoft’s report that confirm IBM’s transformation:

Revenue in Productivity and Business Processes jumped 6% (up 8% in constant currency) to $6.7 billion. Specifically:

         Office commercial products and cloud services revenue were up 5% (up 8% in constant currency) driven by Office 365 commercial revenue growth of 51% (up 54% in constant currency)

         Office consumer products and cloud services revenue grew 8% (up 8% in constant currency) and Office 365 consumer subscribers increased to 24.0 million

         Dynamics products and cloud services revenue soared 11% (up 13% in constant currency) driven by Dynamics online revenue growth

Revenue in Intelligent Cloud jumped 8% (up 10% in constant currency) to $6.4 billion. Specifically:

         Server products and cloud services revenue increased 11% (up 13% in constant currency) driven by double-digit annuity revenue growth

         Azure revenue leaped 116% (up 121% in constant currency) with Azure compute usage more than doubling year-over-year

         Enterprise Services revenue increased 1% (up 2% in constant currency) with growth in Premier Support Services and consulting offset by declines in custom support agreements 

Revenue in More Personal Computing declined 2% (down 1% in constant currency) to $9.3 billion.

While it is still unclear whether Microsoft will continue to grow at brisk rates, given its revenues size, one thing is clear: it has been effective in tackling the “innovator’s dilemma” -- as explained by M. C. Christensen -- and in engineering its own resurrection.

Disclosure: I own shares of MSFT