Microsoft Keeps its High Score

Microsoft


MSFT 0.11%

has shown it can operate in thin air. Now investors can breathe a sigh of relief.

Once again the world’s most highly valued public company, Microsoft faced lofty expectations heading into its fiscal year-end report Thursday afternoon. Its results cleared a high bar.

Total revenue grew 12% year over year to $33.7 billion, driven mostly by the company’s strong cloud and corporate software business. Even the aging Windows business got a boost from surprisingly strong PC sales during the period. The only blemish was a slowdown in videogaming revenue. Operating income jumped 20% year over year to $12.4 billion, notching the company’s highest operating margin in at least five years.

Microsoft also eased growing concerns about the future. Management’s forecast for its vital cloud segment came in ahead of Wall Street’s projections for the current quarter. They also affirmed a previously stated target for growing both revenue and operating income by double digits for the fiscal year that ends next June. Microsoft’s shares—already up 34% this year—rose another 2% following the results.

The company needs to keep up its game more than ever and keeps rising to the challenge. Its ability to grow both its top and bottom line are especially remarkable given the deep-pocketed companies with which it competes. Once the sole 800-pound gorilla on the block, it now competes fiercely with titans like

Amazon.com

and Google. All are striving to build up massive networks to power cloud computing services, along with other products. Microsoft spent a record $16.9 billion in research and development in the fiscal year ended in June and another $13.9 billion in capital expenditures. The latter figure is up 20% from the previous year.

But it hasn’t let spending get out of control. Microsoft’s R&D has remained at 13% of revenue for the last eight years. Meanwhile, its capital spending still pales in comparison to Google, which is now expending more than $20 billion annually as it races to build up its own cloud services.

To stay above the trillion dollar mark, though, Microsoft needs to make all of its billions count.

Write to Dan Gallagher at dan.gallagher@wsj.com

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