Update: Microsoft results lifted by cloud products, but profit drops

Commercial cloud revenue more than doubled, but consumer software sales were disappointing

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Cloud services like Azure and Office 365 were once again the stars in Microsoft's quarterly earnings report, with revenue from those products more than doubling from a year earlier.

They helped lift Microsoft's overall revenue by 8 percent last quarter, to $26.6 billion, the company said Monday. That was higher than analysts had expected.

But restructuring costs and a tax adjustment led to a drop in profits. Microsoft posted net income of $5.86 billion for the quarter, which ended Dec. 31, down nearly 12 percent year-on-year. That was equivalent to $0.71 per share, matching the estimate of analysts polled by Thomson Reuters.

"Our commercial cloud services delivered triple-digit revenue growth for the sixth consecutive quarter," CFO Amy Hood said on a call to discuss the results. "Office 365 continues to be priority for CIOs, as both existing and new customers move to the cloud," she said. "This transition accelerated with 45 percent of our renewal seats in Office moving to the cloud this quarter."

Microsoft's Surface Pro 3 tablet performed well, and revenue from the company's Surface hardware climbed 24 percent to pass $1 billion for the first time. The XBox platform struggled, however. Revenue fell 20 percent, or $703 million, thanks to lower console shipments and the transition from Xbox 360 to Xbox One, Microsoft said.

Microsoft generated $2.3 billion in revenue from a business that didn't exist only a year earlier: phone hardware. Were it not for Nokia's old business, Microsoft would have been a poorer performer last quarter, at least in terms of sales.

The company's Devices and Consumer Licensing segment looked bleak, with Microsoft reporting $4.2 billion in revenue from consumer licenses -- a 25 percent drop over the year-ago quarter. Licensing revenue includes money from OEMs for the Windows operating system, as well as license revenue for Windows Phone, consumer editions of Office 2013 (as opposed to the subscription-based Office 365 Home Premium), and intellectual property for consumer products.

Although Microsoft's cloud performance stole much of the attention, lurking not far behind was Windows 10 -- especially, how its offer of one free subscription year to upgraders will impact future revenue.

Windows 10 will create opportunities for further monetization down the road, CEO Satya Nadella said.

"Overall, I think the most strategic objective for us is to get developer momentum with Windows 10, and that's where we're focused with a lot of different actions," he said.

"One is the one unified developer platform -- I think that's perhaps the most strategic piece of Windows 10, along with the unified Store," he said. Coupled with the upgrade offer, he said, "we are creating a great opportunity for every developer to write these universal Windows applications."

Forthcoming changes to the Windows 10 Desktop will enable these universal apps, on all platforms, to be more "naturally discoverable" on the most used part of Windows -- which he acknowledged was the Desktop, not the Start Screen.

But it was the cloud products that stole the day. The creation of premium tiers for some of Microsoft's cloud services was a key contributor to increasing profits this past quarter, Hood said. As Nadella explained, the premium tiers now available for Office 365, Enterprise Mobility Suite, and Dynamics CRM have helped turn all three categories into high-growth businesses.

When customers deploy applications and other virtual services on top of Azure, he said, it gives Microsoft the opportunity to attract further business. A company might build a mobile front end on their Azure app using Azure Mobile Services or Media Services, for instance.

The way Microsoft builds its hosting infrastructure helps keep the cost of hosting thos services down, Nadella said. It has one common infrastructure for Office 365, XBox Live and other services. "We don't have different infrastructures for these different services," he said.

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