2-1-18 2:47 AM EST | Email Article

Company carves spot behind No. 1 Amazon; tax overhaul exacts a toll of $13.8 billion

By Jay Greene 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 1, 2018).

Microsoft Corp. took a $13.8 billion charge related to the new U.S. tax law but reported significant growth in its cloud operations, the business fueling the company's resurgence.

Microsoft keeps overseas the vast majority of its cash, which rose to $142.8 billion in the quarter. In an interview, Chief Financial Officer Amy Hood declined to say when the company might bring home some of that money.

Ms. Hood said Microsoft has been "one of the leading returners of capital to shareholders" in recent years, using debt to finance much of that. She said the cash would mitigate the need to turn to debt markets to pay for stock repurchases.

Microsoft already has carved a spot for itself as the No. 2 company behind Amazon.com Inc. in renting computing power and storage over the web. For its fiscal second quarter, the company reported strong gains in the two biggest pieces of its cloud-computing business: its Azure infrastructure services and Office 365 online-productivity business.

Though Microsoft doesn't disclose revenue for those businesses, it said Azure jumped 98% and Office 365 grew 41%. In the previous quarter, Azure gained 90% and Office 365 grew 42%.

Its Intelligent Cloud segment, which includes Azure, climbed 15% to $7.8 billion. Its Productivity and Business Processes segment, which includes Office, gained 25% to $8.95 billion.

Overall, Microsoft posted a loss of $6.3 billion, or 82 cents a share, compared with a profit of $6.27 billion, or 80 cents a share, a year earlier. Revenue grew 12% to $28.92 billion.

Excluding the impact of the tax law, Microsoft reported a profit of $7.5 billion, or 96 cents a share.

Analysts surveyed by S&P Global Market Intelligence expected Microsoft to report per-share earnings of 86 cents on revenue of $28.41 billion.

Shares, which have climbed nearly 50% in the past year to set records, fell a penny to $95 in after-hours trading.

The company's adjusted tax rate, which doesn't count the big charge, was 18%, up slightly from a year ago. Looking ahead, Ms. Hood said it expects a 16% tax rate for the second half of the fiscal year, plus or minus 2 percentage points. For fiscal 2019, the company expects the tax rate to be slightly below the new U.S. corporate rate of 21%.

Microsoft rose to its former tech dominance on the strength of Windows, its PC operating system. And while the More Personal Computing segment that includes Windows is Microsoft's largest, it is also the company's slowest growing.

That is in part because growth in world-wide PC sales remains sluggish, inching up only 0.7% in the last quarter, according to International Data Corp. More Personal Computing, though, gained 2% to $12.17 billion in the latest period.

In a conference call with Wall Street analysts, Chief Executive Satya Nadella said investments in security technology helped Microsoft quickly address the recent threats from the Spectre and Meltdown processor vulnerabilities.

"Our investments to make Windows 10 the most secure, always up-to-date operating system enabled us to move quickly to protect customers in the face of these threats," Mr. Nadella said.

The More Personal Computing segment also includes Microsoft's Xbox videogame business. The holiday quarter is particularly important for gaming at Microsoft, even more so after the company released its new Xbox One X console in November. In the period, gaming revenue -- which includes sales of the Xbox console, Xbox Live subscriptions and transactions, and game and accessory sales -- rose 8%.

It has been a year since Microsoft purchased LinkedIn Corp., the professional social network, for $27 billion. In the quarter, LinkedIn added $1.31 billion in revenue.

Write to Jay Greene at Jay.Greene@wsj.com


(END) Dow Jones Newswires

February 01, 2018 02:47 ET (07:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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