Cloud growth buoys Microsoft even as revenue shrinks

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A building on the Microsoft Campus

Credit: Stephen Brashear/Getty Images for Microsoft

The company's fiscal Q1 growth was driven by cloud successes but hurt by exchange rates and phone losses

Microsoft's cloud successes buoyed the company through its last quarter, which was otherwise a mixed financial bag.

Revenue fell more than 12 percent from a year earlier to $20.4 billion, though profit grew almost 2 percent to $4.62 billion. 

Like other companies, Microsoft cited currency exchange rates for its revenue drop. They had a pronounced effect on some of the company's key metrics. For example, Office commercial products and cloud services revenue declined 2 percent, but grew by 5 percent when evaluated on a "constant currency" basis, which is a metric designed to smooth over the impacts of currency fluctuations.

If there was one other albatross around Microsoft's neck, it was its "More Personal Computing" segment, which includes Windows licensing and phone hardware. Revenue for that segment declined 17 percent to $9.38 billion. Currency accounted for part of that, but phone hardware sales hit the division hard. They were down 58 percent year-over-year. That reflects the company's reduced focus on phones. Earlier this year, Microsoft announced that it was cutting 7,800 jobs, primarily in its phone hardware division.

Windows licensing revenue from both computer manufacturers and volume licensing deals declined across the board year over year, reflecting the slowing PC market. However, revenue from the Surface division also slowed down, coming in at only $672 million compared with $908 million a year earlier, when customers were flocking to the newly introduced Surface Pro 3. The Surface sales probably were also dampened by buyers waiting for the Oct. 6 announcement of the new Surface Pro 4 tablet and Surface Book laptop.

The company's cloud segment, which includes revenue from the Azure cloud platform, Windows Server software and Enterprise Services division, was its shining star for the quarter. That segment grew 8 percent year over year, thanks to growth in Azure and premium server products. Compute usage on Microsoft Azure more than doubled year over year, which is a good sign for the company's overall ambitions as a cloud platform provider.

In more good news, Office 365's subscriber base grew across both consumer and commercial markets. Right now, the company has 18 million consumer subscribers to its productivity software-as-a-service offering, and it said Office 365 commercial seat licenses grew 66 percent year over year. That's well below the 96 percent rise the company saw during the year-earlier period, but that growth was coming off a much smaller base.

The firm did beat Wall Street's expectations, however, which was enough to send its stock price up more than 6 percent in after hours trading. 

Microsoft expects the current quarter to look much like the one just past. Its guidance points to lower revenue in both the productivity and personal computing segments, with cloud revenue up again. That's not surprising, because the PC market is expected to keep shrinking. Microsoft’s smartphone sales are also expected to fall, given the company’s shift in focus.

This story has been updated with information about Microsoft’s fiscal second-quarter forecast.

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