Microsoft continues its transition from the Windows company to a cloud company

Microsoft is marching toward its $20 billion commercial cloud goal, reaching a $13 billion annual run rate in its latest quarter.
Written by Mary Jo Foley, Senior Contributing Editor

Microsoft's commercial cloud services business continued to grow during its first quarter of fiscal 2017, reaching a $13 billion annual run rate, officials said today, the day the company reported its latest earnings.


The company reported first quarter earnings of $4.7 billion, or 60 cents a share, on revenue of $20.5 billion. Non-GAAP results were 76 cents a share on revenue of $22.3 billion for the first quarter.

Microsoft doesn't separate out the revenue contributions of the various business-cloud services that it puts in its "commercial cloud" bucket. In the roughly $3.25 billion in commercial cloud revenues for this quarter, there's no public Azure vs. Office 365 vs. Dynamics Online breakouts available from the company, as it continues toward its $20 billion commercial cloud annual-run-rate target that officials still expect to hit by 2018. (Microsoft officials maintain that business customers tend to buy multiple cloud services, not just infrastructure services, when explaining why they don't break these numbers out.)

Despite the lack of a detailed split, there were a few interesting tangible numbers in Microsoft's latest earnings report.

  • Office 365 Commercial (business plans) now have 85 million monthly active users, up from 70 million in Microsoft's Q4 FY'16 quarter.
  • Office 365 Consumer is up to 24 million monthly active users, up from 15.2 million last quarter.
  • Enterprise Mobility + Security, Microsoft's mobile device management and security service, which also falls in the Commercial Cloud bucket, now has 37,000 customers.
  • "Commercial cloud gross margin" -- a brand-new metric from Microsoft for investors -- is at 49%, which officials said was up seven points, quarter over quarter. (This is the gross margin percentage for the combined commercial cloud business -- Azure, Office 365, Dynamics Online and other commercial cloud properties)
  • Revenues from on-premises server products was up two percent this quarter. But that doesn't mean sales were insignificant here. On-premises SQL Server continues to be a multi-billion-dollar business for Microsoft and was the biggest contributor this quarter in this category officials said, followed by Windows Server.

There was less bullish news this quarter for Microsoft's "More Personal Computing" Windows and Devices segment. But that shouldn't have surprised anyone following Microsoft's ongoing transition toward becoming more of a cloud company, and less of a Windows one.

  • Windows Commercial products and cloud services revenue growth -- another new metric provided for the first time this quarter -- was flat, and driven by annuity revenue, officials said. I don't think we got an actual number. (This is a measure of Windows volume licensing, new Windows cloud services and other Windows commercial offers aimed at specific customer segments, like academic. The number includes both annuity and transactional licensing sales.)
  • Surface revenues were $926 million, up from $672 million in the same year-ago quarter. But they were down sequentially for the last three quarters, as Microsoft hasn't introduced any new Surface devices in the past calendar year. So far, anyway.
  • Just when you think it can't get any worse for the company's mobile phone business, Microsoft's phone business was down another 72 percent, or $799 million, for the quarter. And officials said they expect it to be down again next quarter, as the company's sale of its feature-phone business won't close until Q2 FY'17. This is not unexpected; it's part of Microsoft's plan to stem losses (ultimately) by pulling back from the consumer phone business.
  • Total gaming revenue, another new investor metric introduced this month, was $1.896 billion. This number was down 5 percent, driven by lower Xbox console pricing and lower console volume. (This total gaming revenue figure includes revenues from Xbox consoles, Xbox Live service, first party games and third party game royalties.)

Investors seems to like what they're seeing, in terms of Microsoft's ongoing plan to shift its business model. In after-hours trading, Microsoft's stock price hit an all-time high of above $60 that it hasn't reached since 1999.

Editorial standards