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Microsoft profit up as demand for cloud service soars

Microsoft Corp reported a 3.6 percent rise in fiscal second-quarter profit on Thursday, helped by growth in its fast-growing cloud computing business, but it saw a slight decline in margins in the unit that includes its flagship cloud platform Azure.

Shares of the world’s biggest software company were up about 1.1 percent in after-hours trading.

Since taking charge in 2014, Chief Executive Satya Nadella has steered the company toward cloud services and mobile applications and away from its slowing traditional software business.

Gross margins for Microsoft’s so-called “commercial cloud” business, which includes Azure and versions of its online Office 365 product sold to businesses, were 48 percent, said Chris Suh, head of Microsoft’s investor relations.

That is down from last quarter’s 49 percent but up from 46 percent a year ago, Suh said. The figure is watched closely by investors as a sign of the actual profit made of Microsoft’s cloud products, which the company does not publish.

The Azure platform competes with cloud infrastructure offerings from market leader Inc, Alphabet Inc’s Google, IBM and Oracle Corp.

“We’re not at Amazon’s margin today,” said Suh. “Their infrastructure business is much larger. They have the benefit of scale. We track more like what Amazon was when they were closer to our size.”

On the company’s earnings conference call, Chief Financial Officer Amy Hood fielded questions from analysts about Azure-specific gross margins. She did not disclose a number but said there was a “material improvement” since last quarter.

Analysts also questioned Microsoft’s practice of providing a combined gross margin for cloud infrastructure, which at other firms tends to have gross margins around 30 percent, and cloud software, which at other firms has higher margins of 70 percent or 75 percent. “I do think it will be a blend of those,” Hood said.

But CEO Nadella emphasized that the company thinks of its cloud offerings as comprehensive lineup of both software and infrastructure, as it did with its historical business as a combination of products with different margins, like Office and Windows Server.

“We have a cloud strategy that is not just about infrastructure,” Nadella said, pointing out differences with Amazon Web Services.

Revenue from Microsoft’s ‘Intelligent Cloud’ business, which includes Azure, along with other data center software, rose 8.0 percent to $6.9 billion in the quarter. That beat analysts’ average estimate of $6.73 billion, according to research firm FactSet StreetAccount. Microsoft’s estimates for next quarter were $6.45 billion to $6.65 billion, only slightly hire than FactSet’s $6.61 billion estimate.

In constant currency, Azure’s revenue grew 94 percent year over year, a good pace but still the lowest growth rate since Microsoft began disclosing the number in 2015, and down from 121 percent the previous quarter.

“In general, as long as it’s close to doubling right now, that’s extremely solid performance given the business is getting big from an overall standpoint,” said Cross Research analyst Shannon Cross.

Sales of Office 365 to businesses rose 49 percent, down from 54 percent in the previous quarter. As with Azure, Microsoft does not give an absolute dollar figure for Office 365 sales.

Sales in Microsoft’s personal computing business, which includes its Windows software, once the bedrock of the company, fell 5.0 percent to $11.8 billion, slightly beating the rate at which personal computer sales fell in the quarter.

Along with his push into cloud and mobile, Nadella also orchestrated Microsoft’s biggest acquisition, the $26.2 billion deal for LinkedIn, which closed last month.

LinkedIn contributed $228 million of revenue in the quarter, Microsoft said, but reported a net loss of $100 million, or one cent per share.

Excluding LinkedIn and some other items, Microsoft earned 84 cents per share in the quarter. That beat Wall Street’s average estimate of 79 cents, according to Thomson Reuters I/B/E/S.

The company’s net income rose to $5.20 billion, or 66 cents per share, in the quarter ended Dec. 31, from $5.02 billion, or 62 cents per share, a year earlier. (

Its adjusted revenue, excluding LinkedIn, was $25.838 billion, ahead of analysts’ average estimate of $25.298 billion.

Microsoft’s shares had risen 23.2 percent in the past 12 months, compared with the 20.7 percent gain in the broader SP 500 index.

(Reporting by Narottam Medhora in Bengaluru; Editing by Sriraj Kalluvila and Bill Rigby)

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Data center growth drives Intel’s fourth-quarter revenue, profit beat

Intel Corp reported better-than-expected quarterly revenue and profit driven by a stabilizing PC market and growth in its data center business, which offers cloud-based software services.

Revenue from the data center business rose 8.4 percent to $4.67 billion in the fourth quarter, while revenue from its traditional PC business rose 4.3 percent to $9.13 billion.

Intel continues to expect a similar growth rate in the cloud segment, but does not expect an improvement in its enterprise unit, the company said on a call with analysts.

The PC unit includes sales of chips for mobile phones and tablets.

Worldwide PC shipments — which consist of laptops, desktops and workstations — fell by 1.5 percent in the fourth quarter, compared with a 3.9 percent decline in the preceding quarter, according to research firm IDC, continuing the recent trend of stabilizing demand.

“In the data center group, it seems that cloud is still an area of strength, offsetting the weakness in enterprise,” Stifel Nicolaus analyst Kevin Cassidy said.

Cassidy added that at some point in the future, the enterprise clients would upgrade their data centers, leading to further growth in the business.

Intel has been building its data center, Internet of Things and automotive businesses, to reduce dependence on the PC market, which has been roiled by users’ shift to mobile phones for their computing needs.

The Santa Clara, California-based company’s net revenue rose 9.8 percent to $16.37 billion, beating the average analysts’ estimate of $15.75 billion, according to Thomson Reuters I/B/E/S.

Excluding items, the company earned 79 cents per share, beating estimates of 74 cents per share.

However, the company said its net income fell to $3.56 billion, or 73 cents per share, for the fourth quarter ended Dec. 31, from $3.61 billion, or 74 cents per share, a year earlier. (

The company’s revenue forecast for the year 2017 was flat, which according to Cassidy, pleased investors as they would rather have conservative estimates for the year, and then have it go up, rather than give aggressive estimates.

Intel said it expects first-quarter revenue of $14.8 billion, plus or minus $500 million. Analysts on average were expecting $14.53 billion.

Shares of the world’s largest chipmaker were little changed in extended trading on Thursday.

Up to Thursday’s close, Intel’s shares had risen 25.5 percent in the last 12 months, falling short of the 60 percent rise in the broader semiconductor index.

(Reporting by Aishwarya Venugopal and Supantha Mukherjee in Bengaluru; Editing by Sriraj Kalluvila and Shounak Dasgupta)

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Keystone XL pipeline: A ‘Canada First’ energy plan?

CALGARY, Alberta U.S. President Donald Trump’s move this week to revive the Keystone XL oil pipeline marked a major step under his “America First” energy plan to boost U.S. drillers and create new U.S. jobs. But the project’s biggest winners may be Canadian.

If built, TransCanada’s Keystone XL from Alberta to Nebraska would yield about $2.4 billion (C$3.2 billion) a year for Canada, split between government revenues, shareholder profits and re-investment into the still-recovering Canadian oil patch, according to a Conference Board of Canada research note prepared for Reuters on Thursday.

That’s because the 800,000 barrels-per-day (bdp) line would provide cheaper shipping and a new outlet for the country’s vast but landlocked oil sands reserves, giving them increased access to the stronger U.S. market. Canadian producers could likely command around $2 more per barrel, analysts and investors said.

For the United States, where environmental opposition to the pipeline had led to its temporary demise under former President Barack Obama, there are also economic advantages. But it is unclear how they compare to Canada’s.

Trump has said the project would create 28,000 jobs in the United States and pledged to use American steel for the pipe.

But a 2014 State Department study predicted just 3,900 construction jobs and 35 permanent jobs. And steelmakers and analysts say TransCanada’s stringent raw materials requirements may disqualify most U.S.-based manufacturers.

Trump’s invitation for TransCanada to reapply for Keystone XL, in an executive order signed on Tuesday, was welcomed by TransCanada shareholders, the Canadian energy industry and both the opposition Conservatives and governing Liberals.

“This pipeline provides a more efficient means to supply our customers in the U.S.,” said Sneh Seetal, spokeswoman for Suncor Energy Inc (SU.TO), Canada’s largest oil and gas company.

Officials at Canadian Natural Resources Ltd (CNQ.TO) and the Canadian Chamber of Commerce said in separate statements that such pipelines ensure “full value” for Canadian crude.


It is yet unclear how the regulatory process in the United States will unfold. TransCanada said on Thursday it has resubmitted its application for Keystone XL. If approved, analysts estimate it would take two to three years to come online.

“Connecting our resources, which are the third-largest oil resources in the world to the largest heavy-oil refining complex in the Gulf Coast has a lot of benefits,” said Tim McMillan, the head of the Canadian Association of Petroleum Producers (CAPP).

“We can be more efficient, more effective, make investments in Canada rank higher on the priority list,” he said.

That would be welcome news for the Alberta oil sands sector still reeling from a two-year slump in oil prices that cost it more than 35,000 jobs in 2015 and the effects of wildfires last year that shut in production and sapped $1 billion in revenues.

CAPP last year estimated the industry’s capital spending declined $50 billion since 2014, the largest two-year decline since it started tracking the figure in 1947.

U.S. refineries that process with heavy oil such as that from Canada would also benefit, according to Wood Mackenzie analyst Afolabi Ogunnaike, who said the facilities currently depend heavily on supply from less-reliable producers Venezuela and Mexico.

A source familiar with operations at Valero Energy Corp’s (VLO.N) 335,000 bpd Port Arthur, Texas, refinery said the company completed work last year to process greater amounts of heavy crude, anticipating an inflow of Canadian oil. Valero did not reply to a request for comment.

A Marathon Petroleum Corp (MPC.N) spokesman said Keystone XL will help bring the reliable supply of crude it needs.

Canada’s oil industry makes up one-sixth of the nation’s economy, but it is plagued by transport constraints and relatively high cost of production.

Canadian pipeline export capacity is currently about 4 million bpd, and producers are matching that with 4 million bpd of export-ready output, according to CAPP data. But supply available for export is expected to grow to 5.5 million bpd by 2030, and the industry wants more pipeline to accommodate it.

The Canadian government approved two pipeline projects late last year, Kinder Morgan’s (KMI.N) Trans Mountain pipeline and Enbridge’s (ENB.TO) Line 3, that are intended to further help the industry access higher-priced markets.

Without pipelines, shippers would increasingly need to export by rail, a more expensive option that would eventually lower the price of their product even further to about $18 to $20 below the U.S. benchmark, Wood Mackenzie’s Ogunnaike said.

Royal Bank of Canada analysts said in a note that Trump’s support for the pipeline “is not a silver bullet for Canadian crudes in the near term.”

But they added “the longer-term lookout for Canadian crudes is brighter today than it was a few short months ago.”

(Additional reporting by Ernest Scheyder and Erwin Seba in Houston, Texas, Catherine Ngai in New York and John Tilak in Toronto; editing by Richard Valdmanis and Cynthia Osterman)

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As regulators waver, Apple takes on Qualcomm in courts

SAN FRANCISCO Apple Inc’s new legal assault on Qualcomm in the United States and China reflects its conclusion that regulators are unlikely to put an end to what it considers the chip maker’s unfair business practices, analysts said.

Apple (AAPL.O) has long objected to Qualcomm’s practice of charging for the “modem” chips that help phones use wireless networks data plans and its demands for a license fee based on the total price of the phones. Qualcomm (QCOM.O) was the original inventor of a number of key wireless technologies.

The U.S. Federal Trade Commission sued Qualcomm over the practice on Jan. 17. But earlier this week, U.S. President Donald Trump named FTC Commissioner Maureen K. Ohlhausen to head the regulatory agency. Ohlhausen had vigorously opposed the FTC’s lawsuit.

“[W]e have a hard time seeing the case go forward with the dissenting FTC commissioner slated to become the head of the FTC,” Morgan Stanley analyst James Faucette wrote in a note to investors on Wednesday. “If the FTC abandons its case, it certainly would not be helpful to Apple, but we would guess that Apple will probably still try to push the issue.”

In the Qualcomm case, Ohlhausen broke her usual practice of not commenting on her dissenting votes, saying the lawsuit was “based on a flawed legal theory … that lacks economic and evidentiary support” and “fails to allege that Qualcomm charges more than a reasonable royalty.”

The FTC did not immediately respond to a request for comment.

In its U.S lawsuit, filed on Jan. 20, Cupertino, California-based Apple alleges Qualcomm withheld $1 billion in rebates and other payments owed to Apple as a result of a Korean Fair Trade Commission investigation into the San Diego-based chip maker. That probe led to a $853 million fine for Qualcomm but no demand for changes to its business model.

“For many years Qualcomm has unfairly insisted on charging royalties for technologies they have nothing to do with,” Apple said in a statement the same day it filed the lawsuit.

But the intent of the suit is to challenge Qualcomm’s full-device royalty model. “They’re very clearly trying to attack the business model – that’s crystal clear,” said Stacy Rasgon, an analyst with Bernstein.

Apple also filed two lawsuits against Qualcomm in China this week. Despite fining Qualcomm $975 million in 2015, Chinese antitrust regulators did not take immediate aim at the chip maker’s business practices either.

On its earnings call on Wednesday, Qualcomm said it would defend its business model in courts around the world.

“There has been no sudden change in the law to make this practice improper, and it remains the most efficient and fair method of licensing,” Qualcomm President Derek Aberle said.

(Reporting by Stephen Nellis; Editing by Jonathan Weber and Paul Simao)

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TransCanada re-submits application for Keystone XL pipeline

TransCanada Corp said on Thursday it submitted a presidential permit application to the U.S. Department of State for the approval of the Keystone XL pipeline.

The announcement comes two days after U.S. President Donald Trump signed an order that allowed TransCanada to reapply for a permit for the pipeline, after it was rejected in 2015 by then-President Barack Obama on environmental concerns.

(Reporting by Komal Khettry in Bengaluru; Editing by Saumyadeb Chakrabarty)

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Geely’s Lynk plans 2019 U.S., Europe car launch, eyes Trump tax

NEW ORLEANS Chinese automaker Geely Automobile Holdings Ltd (0175.HK), the owner of Volvo cars, plans to roll out its mid-priced Lynk Co brand in the United States and Europe in early 2019, but cautioned those plans could change if U.S. President Donald Trump imposes a border tax on imported vehicles, a senior company executive told Reuters.

Senior vice president Alain Visser said Geely planned to launch the Lynk Co brand in San Francisco and Berlin before expanding within months to other cities. The possibility that the United States would impose a tax or tariff on imported cars is a risk, Visser told Reuters on the sidelines of the National Automobile Dealers Association convention in New Orleans.

“That’s an open question but we’re going to offer employment in the U.S. so we believe there’s a positive business case to let us in,” Visser said.

Geely has said Lynk is aimed at the middle of the market where it would likely compete with established brands like Toyota (7203.T) and Honda (7267.T). Volvo, which Geely bought from Ford in 2010, will continue to focus on premium vehicles, company executives have said.

Lynk is also looking to forge partnerships with auto dealers that would allow it to sell its electric and hybrid vehicles through company-owned stores, but get them repaired through a franchised dealer network.

“Our target is not to upset the dealers or say their model doesn’t work,” Visser said. “The dealer model can exist and we’re going to offer them business.”

The brand’s first vehicles in Europe and America will likely be plug-in hybrids or possibly even fully electrified.

“Because of the cost structure we have, we would be able to offer an electric car at the price of a normal combustion-engine car,” he said.

U.S. dealers and individual states have aggressively pushed back against Tesla Motors Inc’s (TSLA.O) model of selling directly to consumers instead of using the franchise model.

Lynk unveiled its ’01’ model, a compact SUV, in Berlin last October.

The brand expects to open 170 retail stores in China in 2017 and has plans for around 100 stores in American cities. For those who do not want to buy a car, Lynk will allow customers to use cars for a subscription fee, with owners and Lynk sharing the revenue.

(Reporting By Nick Carey; Editing by Andrew Hay)

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Walgreens working to finalize Rite Aid deal, clear antitrust hurdles

WASHINGTON The chief executive of Walgreens Boots Alliance Inc (WBA.O) said Thursday that the biggest U.S. drug store chain was pressing on with its purchase of smaller Rite Aid Corp (RAD.N), which was announced in October 2015 and has not closed.

Rite Aid Corp said on Dec. 20 that it would sell 865 stores to Fred’s Inc (FRED.O) for $950 million to satisfy antitrust concerns on the deal, which was valued at $9.4 billion when it was announced in October 2015.

The Federal Trade Commission is assessing the proposed merger to ensure it complies with antitrust law.

“During the year, we also continued in our effort to get regulatory approval for our acquisition,” said Stefano Pessina, Walgreens Boots Alliance chief executive, at an annual shareholders meeting in New York City.

Pessina declined to detail issues raised in the review: “The only thing I can repeat is that we are actively engaged in dialogue with the FTC and we are doing everything we can to support their work,” he said.

Pessina said Walgreens was also talking to Rite Aid. “These discussions include taking into account anything required to gain approval for the transaction,” he said.

It could take two months for the agency to assess a proposed divestiture of that size since it would look at the proposed sales, store by store, and in detail, said David Balto, a former FTC official now in private practice.

“Retail market divestitures are very complex. It’s unrealistic to assume that they could get through a divestiture that’s this significant in a few weeks,” said Balto.

The purchase is a big expansion for Fred’s. The chain has more than 650 discount stores in the southeastern United States with 350 pharmacies, according to its website.

Walgreens has 13,200 stores, nearly 60 percent of which are in the United States, while Rite Aid has 4,570 stores in the United States.

The FTC may be doubly careful after it was stung by the failure of an earlier retail divestiture. It allowed regional grocer Haggen to buy 146 stores as part of a deal to allow Albertsons to buy Safeway in early 2015, only to have Haggen file for bankruptcy that same year. Albertsons bought dozens of the stores.

The FTC is also in transition. President Donald Trump named Commissioner Maureen Ohlhausen the acting chair on Wednesday. Another commissioner, former Chairwoman Edith Ramirez, leaves early next month.

(Reporting by Diane Bartz and Siddharth Cavale; Editing by Cynthia Osterman)

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Dow holds above 20,000; Qualcomm weighs on S&P, Nasdaq

U.S. stocks were little changed on Thursday in the wake of a two-day rally that pushed the Dow Jones Industrial Average above the 20,000 mark, as investors grappled with the latest round of earnings.

Qualcomm (QCOM.O) weighed on both the SP 500 and Nasdaq as the chipmaker fell 5.7 percent to $53.82 after posting a lower-than-expected rise in quarterly revenue.

The post-election rally reignited this week following a solid start to earnings season and optimism over U.S. President Donald Trump’s pro-growth initiatives, giving the benchmark SP 500 its best two-day performance in seven weeks and catapulting the Dow above the historic level.

Trump’s business-friendly decisions since taking office on Friday include signing executive orders to reduce regulatory burden on domestic manufacturers and clearing the way for the construction of two oil pipelines.

Early fourth-quarter earnings have also boosted sentiment and are now expected to show growth of 7 percent, their biggest increase in two years, according to Thomson Reuters data.

Of the 146 companies that have reported earnings through Thursday morning, 69.2 percent have topped expectations, compared with the 63.6 percent average since 1994.

“It is going to be so important to see these earnings come in at or above expectations,” said Tim Dreiling, senior Portfolio Manager at the Private Client Reserve at U.S. Bank in Kansas City.

“In 2017, certainly in these first couple of quarters, so much more than Fed-driven liquidity or multiple expansion, we really do look for the growth in earnings to be what fuels any continued increase in U.S. equities.”

The Dow Jones Industrial Average .DJI rose 27.16 points, or 0.14 percent, to 20,095.67, the SP 500 .SPX lost 1.7 points, or 0.07 percent, to 2,296.67 and the Nasdaq Composite .IXIC added 1.04 points, or 0.02 percent, to 5,657.38.

Consumer discretionary .SPLRCD stocks, up 0.4 percent, were the best performing of the 11 major SP sectors. The group was lifted by a 2.5-percent gain in Comcast (CMCSA.O) after the cable operator reported earnings. Charter Communications gained 6.3 percent on merger speculation.

Royal Caribbean Cruises (RCL.N) jumped 9.2 percent to $95.72 after it forecast higher-than-expected adjusted earnings for 2017.

Whirlpool (WHR.N) tumbled 8.6 to $173.91. The world’s largest maker of home appliances posted a quarterly profit below expectations.

Among companies scheduled to report after the closing bell are tech giants Intel (INTC.O), Alphabet (GOOGL.O) and Microsoft (MSFT.O), as well as coffee chain Starbucks (SBUX.O).

Declining issues outnumbered advancing ones on the NYSE by a 1.15-to-1 ratio; on Nasdaq, a 1.60-to-1 ratio favored decliners.

The SP 500 posted 64 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 129 new highs and 13 new lows.

(Reporting by Chuck Mikolajczak; Editing by Nick Zieminski)

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Speculation builds on a Verizon-Charter tie-up, no offer made

Verizon Communications Inc is interested in exploring a combination with U.S. cable company Charter Communication Inc as part of a long list of acquisition targets but no proposal has been made for a tie-up between the two companies, sources told Reuters on Thursday.

Speculation over a combination of the companies has been building steadily since last month, when Verizon Chief Executive Officer Lowell McAdam told Wall Street analysts that such a deal would make “industrial sense.”

Analysts and investors have predicted a wave of deals in the telecommunication, media and cable sectors in the wake of ATT Inc’s planned $85.4 billion takeover of Time Warner Inc. Both ATT and Verizon have looked to diversify due to a saturated wireless market.

The Wall Street Journal, which first reported a preliminary approach between the companies, said it was unclear if Charter’s executives would be open to a transaction and that there was no guarantee a deal would be struck.

After rising as much as 10 percent and hitting a session high of $341.50 on the news, Charter shares eased and were trading up 7 percent at $332.35. Verizon shares were down 1 percent at $49.27.

Charter and Verizon declined to comment.

Verizon had a market capitalization of $203 billion as of Wednesday’s close, while Charter was valued at nearly $84 billion, according to Thomson Reuters data.

A Verizon-Charter combination would bring together Verizon’s more than 114 million wireless subscribers with Charter’s cable network, which provides television to 17 million customers and broadband connections to 21 million, the Journal said.

Analysts at JP Morgan wrote in a December note that a Verizon acquisition of Charter “would bring a greatly expanded fixed footprint,” and added on Thursday in an email that the deal’s math is “difficult to make work” and noted the combined company would have hefty leverage.

Verizon’s traditional wireless business has been losing customers to smaller rivals T-Mobile U.S. Inc and Sprint Corp and the company has been looking to diversify its revenue stream.

To that end, Verizon struck a deal to buy Yahoo Inc’s core internet properties. But the deal was cast into doubt after Yahoo disclosed data breaches last year.

Charter completed its acquisition of Time Warner Cable Inc last year.

(Reporting by Anjali Athavaley in New York and Liana B. Baker in San Francisco; Editing by Jeffrey Benkoe and Alan Crosby)

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