Microsoft (MSFT) Beats Q1 Earnings On Strong Cloud Growth
Zacks Investment Research | Oct 20, 2016 10:56PM ET
Microsoft Corporation (NASDAQ:MSFT) reported first-quarter fiscal 2017 earnings adjusted for Windows 10 deferrals and currency effect of 76 cents per share, which comfortably surpassed the Zacks Consensus Estimate of 68 cents.
Revenues (adjusted for Windows 10 deferrals) of $22.33 billion dipped 1.4% sequentially but up 3.1% from the year-ago quarter (up 5% in constant currency or CC) and the Zacks Consensus Estimate of $21.54 billion.
Encouragingly, annuity-based revenue continued to grow, offsetting declines in transactional revenue indicating that the user base continues to migrate to the cloud. Notably, commercial cloud annualized revenue run rate exceeded $13.0 billion at the end of the quarter.
However, increased investment in the cloud impacted margins along with unfavorable foreign exchange.
Shares surged almost 6% in after-hour trading.
Segment Details
Productivity & Business Processes includes the Office and Dynamics CRM businesses. Revenues slipped 4.5% sequentially but increased 5.6% (up 8% CC) on a year-over-year basis to $6.66 billion.
The Commercial business (products + Office 365 & related cloud services) revenue was up 5% from year-ago level (up 8% CC). Office 365 saw commercial seat growth of 40% from the year-ago quarter. This is an area of tremendous focus with reselling partners up to 90K in the last quarter as Microsoft goes all out to target the SMB segment.
Monthly active users of Office 365 commercial increased 40% year over year to more than 85 million. The company continues to win customers like eBay (NASDAQ:EBAY) , Allergen, Exelon (NYSE:EXC) and Liberty Mutual Insurance. Office 365 commercial revenue soared 51% (up 54% in CC) from the year-ago quarter.
The Consumer business revenue grew 8% (8% CC) year over year in the quarter. Office 365 consumer subscriptions are now at 24 million, up from 23.1 million in the previous quarter.
Dynamics and cloud services revenue jumped 11% (13% CC). Management noted that more than 70% of new Dynamics enterprise customers are choosing Dynamics online. The company mentioned HP Inc., which is replacing its CRM systems with Dynamics 365 to take advantage of the built-in intelligence feature.
Intelligent Cloud includes server and enterprise products and services. The segment reported revenues of $6.38 billion, which was down almost 5% sequentially but improved 8.3% (up 10% in CC) year over year.
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Server product and cloud services revenue went up 11% year over year (up 13% in CC). Annuity revenue grew double-digits while transaction revenue declined.
The high point was Azure revenue, which soared 121% CC year over year, with Azure compute usage doubling. Microsoft is benefitting from its hybrid and hyperscale cloud, which spans multiple jurisdictions, making it ideal for multinational companies and banks that have operations all over the world and are required to be in compliance with laws of the countries in which they operate.
This is the reason Microsoft cites that has drawn 80% of the world’s largest banks to Azure. Moreover, the company’s expanding cloud services have also helped it to capture big customers like Boeing (NYSE:BA), Rolls-Royce (LON:RR), Schneider Electric (PA:SCHN) and Facebook (NASDAQ:FB).
Microsoft continues to expand its data center footprint. The company recently announced its plan to build data centers in France so as to provide Azure, Dynamics 365 and Office 365 services to the French populace by the beginning of next year.
The expansion will help Microsoft to compete Amazon.com (NASDAQ:AMZN) , which also intends to open an Amazon Web Services (AWS) Region in Paris in 2017. (Read More: Zacks Investment Research
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