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Microsoft: Cloud Growth Fails to Offset Overall Revenue Decline

Growth in Microsoft's cloud business failed to offset declines in its core PC market, as Microsoft reported earnings Thursday that fell short of analyst expectations.

Microsoft Corp. (Nasdaq: MSFT)'s "intelligent cloud" business grew 3.3%, to $6.1 billion, with operating profits shrinking 14%, despite more than doubling Azure cloud revenue. The intelligent cloud business includes traditional server software as well as Azure. (See Microsoft Cloud Strength Highlights 3rd Quarter Results.)

Overall revenue fell to $20.53 billion for the third quarter ending March 31, lower than the $22.09 billion analysts expected, and down from $21.73 billion in the year-ago quarter. Net income fell to $3.76 billion or 47 cents per share, down from $4.99 billion, or 61 cents per share a year ago.

Windows OEM revenue decreased 2% in constant currency, as analysts at IDC estimated worldwide PC shipments fell 11.5% in the quarter ending in March.

Microsoft's cloud run rate was $10 billion in the third quarter, putting the company halfway toward its goal of $20 billion by fiscal 2018, noted CEO Satya Nadella on the earnings call Thursday.

Microsoft stock was down 5.34% to 52.80 in after hours trading Thursday.

Also on that call, an analyst asked Microsoft to compare its competitive position with Amazon.com Inc. (Nasdaq: AMZN) AWS. Nadella said Microsoft differentiates by focusing on hybrid cloud. "Every server product of ours has cloud enrollment rights, whether it be SQL or Windows server, and we see this increasing in the next wave of servers," Nadella said.

In addition to Microsoft, VMware Inc. (NYSE: VMW) also has problems with a rising cloud business vying with a decline in its traditional line. In VMware's case, the traditional line is server virtualization software. Unlike Microsoft, VMware's traditional business is declining at a slower pace than its cloud business is rising. (See Cloud Helps Drive VMware Revenue Higher.)

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— Mitch Wagner, Follow me on TwitterVisit my LinkedIn profile, West Coast Bureau Chief, Light Reading

Mitch Wagner 4/22/2016 | 4:11:56 PM
Purple Rain, Purple Rain I've seen report that Microsoft was playing Prince music prior to the earnings call starting. I started listening a few seconds late so I missed that if it happened.
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