Microsoft (MSFT) closed fiscal 2017 with a bang, delivering top- and-bottom line results that easily outpaced our expectations. We are beginning to see Microsoft’s cloud business drag consolidated top-line results along with it, and while Commercial Cloud margins remain a drag on profitability, these margins continue to accelerate along an upward trajectory. We are maintaining our wide moat rating, and after incorporating management’s initial guidance for fiscal 2018, we will maintain our $83 fair value estimate, and continue to see moderate upside in the shares today.
Fourth-quarter adjusted revenue rose 9% versus the prior-year period to $24.7 billion, driven once again by the firm’s flagship cloud properties. A core component of our long-term thesis for Microsoft remains centered around the firm’s public cloud offering Azure, a business that continues to deliver impressive results. Azure revenue rose 97% year over year (98% in constant currency), but more importantly, Azure premium services revenue grew in excess of 100% for a 12th consecutive quarter. We think the latter figure carries significant weight, as it signals to us that customers are becoming increasingly enveloped in the Azure ecosystem beyond commoditized compute and storage services, a trend we believe heightens the likelihood that these enterprise customers will become long-term Azure users.
Beyond Azure, Office 365 is more than offsetting declines in the legacy Office business, as Microsoft is successfully migrating both enterprise customers and retail users alike to the cloud-based productivity suite. Office 365 commercial revenue rose 43% versus the prior-year period, while the firm added another 800,000 Office 365 subscribers, bringing the total subscriber base to 27 million. Management expressed confidence that Office 365 would continue to push combined Office revenue higher in fiscal 2018. Overall, the Commercial Cloud run rate reached nearly $19 billion in the quarter.
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