Microsoft's Q1 shines; Office 365 leads results

The software giant handily tops expectations as Surface Pro drove Surface revenue of $908 million. Office 365 subscriptions for home, personal and enterprise swelled.
Written by Larry Dignan, Contributor

Microsoft's Surface Pro 3 delivered a sales surge in the first fiscal quarter, enterprise cloud revenue---Azure, Office 365 and Dynamics CRM Online---was up 128 percent and most units hummed along as the software giant handily topped expectations.

The company reported first quarter earnings of $4.54 billion, or 54 cents a share, on revenue of $23.2 billion. The results included 11 cents a share in Nokia restructuring charges, which were higher than expected.

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Wall Street was looking for Microsoft non-GAAP first quarter earnings of 49 cents a share on revenue of $22 billion. The GAAP figure was a penny higher.

In either case, Microsoft delivered a healthy quarter. The enterprise unit continued to carry the profits. 


In a statement, CEO Satya Nadella said the company was innovating faster and laying the groundwork for future growth. Amy Hood, CFO, noted that Microsoft will continue to invest in high growth areas.

Nadella touted Microsoft's growing Azure cloud business. He said on an earnings conference call:

We are expanding our data center capacity to meet demand, provide the best customer experience, enable data sovereignty, and deliver continuous innovation. We continue to add new features and capabilities faster than ever based on user feedback cycles. One major feature is released every three day on average, opening up many more new user scenarios for our customers. Our premium services on Azure create new monetization opportunities in media, data, machine learning, and fast analytics, and enterprise mobility. More than 60% of the Azure customers are now using at least one of these premium services such as enterprise mobility suite, which is off to a great fast start. In fact, 40% of Azure revenue now comes from startups a nice piece.

He added that Windows 10 has also generated a lot of developer feedback that is being incorporated. "With hundreds of thousands of pieces of feedback flowing into the team already, Windows 10 will be the most collaborative version of Windows we have ever shared," said Nadella.

As for the second quarter outlook, Hood said she expects the PC market to remain stable. She said commercial licensing revenue will be between $10.8 billion to $11 billion with other commercial sales between $2.5 billion to $2.6 billion. Computing and gaming revenue will be $3.5 billion to $3.8 billion with phone revenue of $2 billion to $2.2 billion. Other consumer revenue will be $2.3 billion to $2.4 billion. Devices and consumer licensing revenue will be between $4 billion and $4.2 billion. The total of revenue at the high-end of Hood's guidance is $26.2 billion, which is below the $27.86 billion expected by Wall Street.

Hood emphasized that the second quarter is a tough comparison to a year ago when the XP replacement cycle kicked in.


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Among the key figures:

  • Office 365 Home and Personal subscribers were more than 7 million in the quarter. Office commercial revenue was up 5 percent as customers moved from on-premise to Office 365.
  • Phone revenue was $2.6 billion, but Microsoft said it needs to focus on execution and costs.
  • Commercial revenue was up 10 percent in the first quarter from a year ago to $12.28 billion.
  • Server products and services revenue was up 13 percent from a year ago.
  • Windows volume licensing was up 10 percent from a year ago.
  • Office consumer revenue fell 5 percent due to the switch to the cloud.
  • Windows Phone revenue fell 46 percent in the first quarter due to Microsoft's move to cut royalties. One thing worth noting about Windows Phone revenue is that since Microsoft acquired Nokia it doesn't have licensing. In addition, Microsoft is essentially giving Windows Phone away for screens smaller than 9 inches. Meanwhile, cheaper Android devices also cut the licensing revenue Microsoft gets for patents. 
  • Windows OEM Pro revenue fell 4 percent, a drop Microsoft said was in line with PC replacement cycles.
  • Surface gross margins were positive and the bulk of Surface revenue is now Surface Pro 3.
  • Microsoft sold 9.3 million Lumia smartphones.
  • R&D spending in the first quarter was $3.06 billion, up from $2.77 billion a year ago.
  • Total cash, equivalents and short-term investments were $89.2 billion as of Sept. 30.


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