Cloud Lifts Microsoft's Q1 Earnings, Again

Beating Wall Street expectations, Microsoft reveals that its commercial cloud annual run rate passes the $13 billion mark.

Microsoft

Microsoft's fiscal year 2017 is off to a strong start.

On Oct. 20, the Redmond, Wash., software maker announced it had generated $22.3 billion in sales and a profit of $7.1 billion, or 76 cents per share, during its first fiscal quarter ending Sept. 30. Wall Street analysts had expected Microsoft to post revenue of just over $21.7 billion and earnings per share of 68 cents.

"We are helping to lead a profound digital transformation for customers, infusing intelligence across all of our platforms and experiences," said Microsoft CEO Satya Nadella in a statement. "We continue to innovate, grow engagement, and build our total addressable market."

Increasingly, enterprises are turning to Microsoft's cloud to help them on their digital transformation journey, according to Nadella. His company's commercial cloud annual run rate has exceeded $13 billion and is on track to hit the $20 billion goal the company has set for fiscal year 2018, he said during an Oct. 20 investor's conference call.

The company's Intelligent Cloud segment racked up $6.4 billion in sales last quarter, an 8 percent year-over-year gain (a 10 percent increase on constant-currency basis).

"That's a continued steady growth and is 116 percent year-over-year growth," observed Forrester principal analyst Dave Bartoletti. "Intelligent Cloud includes Office 365 and Dynamics 365 as well as Azure, so we still can't extract an actual Azure number but the overall cloud business growth continues to be impressive."

Microsoft considers Office, Dynamics and Azure as inextricably linked, according to Nadella, a sign the company will report Azure revenue separately. "Overall Microsoft revenue is relatively flat—$22.6 billion last quarter, $22.3 billion this quarter, but the steady expansion in Intelligent Cloud is certainly the growth engine."

Productivity and Business Processes, Microsoft's business software segment, was also a winner. Sales hit $6.7 billion, a 6 percent increase compared with the same quarter last year. The Dynamics CRM and ERM cloud and on-premises software portfolio surged 11 percent, due in large part to the growing popularity of Dynamics Online.

Office commercial software and cloud sales rose by 5 percent. On the consumer side, the company boasted an 8 percent increase in Office 365 revenue along with subscriber numbers of 24 billion.

Sales of Windows, both OEM and commercial, were essentially flat. But there were some bright spots, according to Jack Gold, principal analyst at J. Gold Associates.

"Commercial PC sales were up slightly resulting in more Pro licenses. This is aligned with what Intel said at their earnings, which is enterprises are starting to refresh systems," Gold told eWEEK. "This is also in line with what we've seen as well. And while consumer PC sales have been stagnant, sales that are taking place seem to be in higher value machines that translate into higher level licenses for Microsoft."

Meanwhile, Windows Phone sales plummeted 72 percent. Surface hardware sales hit $926 million, after nearly hitting the $1 billion mark last quarter and surpassing it in Q2 and Q3 of fiscal 2016.

In terms of its $26 billion acquisition of LinkedIn, Microsoft reiterated that the company expects the deal to close by year's end. The company also said it expects the sale of its feature phone business to wrap up before the new year. In May, Microsoft announced it was selling the unit to FIH Mobile, a Foxconn subsidiary, and HMD Global for $350 million.

Pedro Hernandez

Pedro Hernandez

Pedro Hernandez is a contributor to eWEEK and the IT Business Edge Network, the network for technology professionals. Previously, he served as a managing editor for the Internet.com network of...