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Microsoft kinda did OK this quarter – but whatever, Wall Street loves Satya Nadella

It's the cloud economy, stupid

By Iain Thomson, 21 Oct 2016

Microsoft's first-quarter results for its 2017 fiscal year reveal a four per cent year-on-year fall in profit and 10 per cent dive in operating income.

Just before the quarterly results were announced, Microsoft's stock was down about half a per cent to $57.25 a share. Then when the figures landed, and despite the fall in profit, the stock was pushed to an all-time high of more than $60 in after-hours trading.

That's because analysts were particularly pleased with Microsoft's cloud products and subscriptions, which are now on track to hit $20bn in annual sales. That division performed better than expected.

"We're off to a good start in 2017," said Microsoft CEO Satya Nadella. "I'm proud of the continued progress."

Here's the numbers for Microsoft's first quarter of its fiscal 2017, which ended on September 30:

  • Revenue: Redmond's sales hit $20.5bn, pretty much the same as it reported this time last year, and up $100m from the previous quarter. This quarter's non-GAAP revenue of $22.3bn is better than the $21.7bn analysts had estimated.
  • Operating income: It was a bad income quarter on GAAP terms, with Microsoft pulling in just $5.2bn, down 10 per cent on the same period last year once Windows 10 revenue deferrals have been taken into account.
  • Net income: Microsoft made $4.7bn in profit in the quarter, down 4 per cent year-on-year and only slightly up on its previous quarter.
  • Earnings per share: Microsoft's EPS of $0.60 for the quarter represents a 1 per cent fall; its adjusted earnings of 76 cents beat estimates of 68 cents. Microsoft also gave $6.6bn back to shareholders in the quarter through $3.6bn share repurchases and $3bn in dividends.
  • Productivity and Business Processes: Microsoft's Office and other apps division made $6.7bn for the quarter, up 6 per cent. Redmond's Dynamics product line was the star performer, with gains of 11 per cent on the year. Paid seats for Dynamics doubled year-on-year, with HP Inc as a big customer win for the firm.

    The number of consumer users of Office rose to 24 million and revenues rose 8 per cent, with a 5 per cent bump in business Office revenues and customer numbers rising 40 per cent. Office apps on Android and iOS also showed strong growth.

  • Intelligent Cloud: Satya Nadella has staked the future of the firm on cloud, and revenues rose 8 per cent on the year at $6.4bn. Azure had a stonkingly good quarter, growing revenues 116 per cent and doubling its compute usage. Microsoft now has data centers in 38 regions and has just opened new facilities in France and the UK, and signed up Britain's Ministry of Defence as a customer.

    Server products and cloud services revenue was up 11 per cent, but enterprise services only saw a 1 per cent rise due to companies being less interested in custom support agreements and end of support for Server 2003. Server premium products revenue grew in double digits.

  • More Personal Computing: Once again revenues fell in this division, this time by 2 per cent – half as much as the last quarter of FY 2016. OEM licensing revenue was flat as people continue to buy fewer PCs. Gaming revenue fell 5 per cent, although Xbox is still the top-selling US console.

    The number of Xbox Live monthly active users reached 47 million in Q1, up from 39 million this time last year, but down two million from Q4 2016.

    To date, Nadella reported that Windows 10 users now number 400 million, and more than 200 billion hours of use time has now been logged by Redmond. Revenues for the Surface fondleslab were up 37 per cent and deals for 500 units or more were up 70 per cent. Microsoft is confident that new products will drive additional revenue for the division.

    "HoloLens is opening up new opportunities," he said. "We have made developer editions available to those in the US and Canada, and then six more markets last week. It's still early, but it's great to see the innovation that developers are bringing to the platform, and next year we'll see hardware partners start to ship devices allowing true augmented reality."

    Nadella also announced that Microsoft is starting up a dedicated AI unit to try and bring intelligence to all of its products across the board. He said he was confident the unit could augment Redmond's software and increase their value.

    Windows Phone revenues dropped 72 per cent, reflecting that the operating system is about as popular as a rattlesnake in a piñata.

    The one bright spot was search, with revenues up 9 per cent.

  • Acquisitions and sales: Microsoft said it expects to close the purchase of LinkedIn in the second quarter of the year, which will affect its results. It's also hoping to confirm the sale of its feature phone business in the same time period.

"Our first quarter results showed continued demand for our cloud-based services," said Amy Hood, executive vice president and chief financial officer at Microsoft. "We continue to invest, position ourselves for long-term growth, and execute well across our businesses."

Overall, Wall Street is chuffed with the Windows giant and its progress in building sustainable cloud platforms, which are a much needed life-raft for the biz as PC sales continue to sink.

Stifel Nicolaus analyst Brad Reback said: "A lot of the investments [Microsoft] made in capital expenditures are paying off this quarter and should only accelerate." ®

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