Microsoft Earnings Report Shows Cloud Highs and Device Lows

Microsoft is attracting more well-heeled corporate buyers to its cloud, but the company's latest earnings report show that its devices business is struggling.

Microsoft Cloud Rises

Microsoft yesterday announced mixed financial results for the third quarter of the company's 2017 fiscal year. Revenue ($23.56 billion) came in just below Wall Street estimates but earnings per share ($0.73) surpassed expectations, due, in part, to the Redmond, Wash. tech titan's increasingly profitable cloud business.

Increased demand for Azure and other cloud services "drove our commercial cloud revenue run rate over $15.2 billion, growing 52 percent," said Amy Hood, Microsoft's CFO, during an April 27 earnings conference call. "Our commercial cloud gross margin percentage increased to 51 percent, up six points from last year, with improvement across Office 365, Azure and Dynamics."

During the call, CEO Satya Nadella rattled off a number of recent and high-profile customer wins, including shipping giant Maersk.

The global shipping company, which operates across 130 countries and moves 17 million shipping containers each year, is now using Azure's suite of intelligent services to add Internet of Things capabilities and real-time analytics to its business processes, enabling Maersk "to transform its supply chain management and global trade," Nadella said.

Other publicly-disclosed customers include GEICO, which is tapping Azure for its hybrid-cloud capabilities. USB will use Microsoft's cloud for risk management workloads while advertising and public relations heavyweight Publicis Groupe is working on artificial intelligence marketing applications that use the Cortana Intelligence Suite and associated cloud technologies, Nadella added.

Microsoft has created an operationally efficient cloud business for itself, noted Jack Gold, principal analyst at J. Gold Associates.

"All of the cloud offerings from Azure to Office 365 to Dynamics 365 to Xbox One share a common platform, so Microsoft can leverage all the tools and solutions across the board," said Gold in email remarks sent to eWEEK. "High-level services will attach in Azure first, but then flow to Office 365 and Dynamics. So Azure is the first, but not the last, part of the [company's cloud] offerings to customers."

Moving Office productivity software suite to the cloud was another prudent move. Gold noted that Office 365 now has more than 100 million active users and sales were up 45 percent on an annual basis. "This is key to Microsoft's long term recurring revenues and growth," Gold added.

Microsoft also appears to be gunning for "coopetition." Despite entering into a headline-grabbing strategic partnership with Salesforce in 2014, Microsoft is directly challenging the leading cloud customer relationship management service provider—even if Microsoft isn't overtly saying so—by integrating LinkedIn's sales and jobs features with Dynamics 365, Gold observed.

Abysmal Windows phone sales aside, declining Surface sales means that Microsoft's PC and tablet line could use a breath of fresh air. Although last fall's Surface Studio all-in-one PC was warmly received, the Surface Pro 4, the company's bread-and-butter Windows tablet offering for enterprise customers, has been on the market for more than a year and a half without a major upgrade.

Surface revenues were down 26 percent last quarter, signaling that older products are badly in need of a refresh, Gold said. "Price-cutting and aged products will continue to create declines until new product is released."

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 network of...