Microsoft's Q1 strong as commercial cloud hits $34 billion annual revenue run rate

Microsoft's move to add LinkedIn's commercial revenue and services to its commercial cloud helped turbocharge results. Windows 10 upgrades and Office 365 also added fuel to the first quarter fire.

Microsoft's first quarter was strong across the board as its commercial cloud, which now includes LinkedIn's enterprise sales, continued its momentum and hit a $34 billion annual revenue run rate.

Microsoft reported net income of $8.8 billion, or $1.14 a share, on revenue of $29.1 billion, up 19 percent from a year ago.

Wall Street was looking for Microsoft to report first quarter earnings of 96 cents a share on revenue of $27.9 billion.

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Microsoft's core businesses fared well. Productivity and business process revenue was $9.8 billion, up 19 percent. Office commercial products and cloud services revenue surged 16 percent led by Office 365 revenue growth of 36 percent. Consumer Office 365 ended the quarter with 32.5 million subscribers.

Dynamics products and cloud services revenue was up 20 percent and LinkedIn saw sales gain 33 percent from a year ago.

Intelligent Cloud revenue was $8.6 billion, up 24 percent from a year ago led by server products and services. Azure revenue growth was up 76 percent. Azure growth of 76 percent in the first quarter was down from 89 percent in the fourth quarter and 93 percent in the third quarter.

The More Personal Computing unit saw sales of $10.7 billion, up 15 percent due to commercial sales, gaming revenue and Surface sales gains of 14 percent. It's also worth noting that Microsoft's Windows revenue is faring well on the enterprise side, but flagging a bit with consumers. Surface first quarter revenue of $1.18 billion was essentially flat with the fourth quarter.

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By product, Microsoft saw double digit percentage revenue growth for most categories.

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Going into the results, few analysts were expecting any real hiccups in the quarter. Wall Street expected strong cloud gains and multiple upgrade cycles. Meanwhile, analysts were upbeat on the company's Microsoft 365 effort.

Stifel analyst Brad Reback said:

We expect to hear more about Microsoft 365, which is a newer SKU combining Office 365, Windows 10, and Enterprise Mobility & Security, especially given Microsoft's R&D reorganization announced earlier this year that combines Windows and Office-related R&D into one organization. Recall during F4Q18, Microsoft disclosed that M365 is a multi-billion dollar business.

The cloud horse race

With Microsoft's commercial cloud revenue topping a $23 billion a year, some analysts are betting the company can ultimately top revenue of $35 billion in the next three years. Including LinkedIn's commercial business, Microsoft's commercial cloud sales were $26.6 billion for fiscal 2018.

LinkedIn's commercial business includes products like business subscriptions, LinkedIn Recruiter and Sales Navigator. LinkedIn launches Talent Insights for HR analytics, talent planning

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Top cloud providers 2018: How AWS, Microsoft, Google Cloud Platform, IBM Cloud, Oracle, Alibaba stack up

While Amazon Web Services remains the clear public cloud leader, Wedbush analyst Daniel Ives argues that Microsoft may ultimately take the pole position due to its position in the hybrid cloud market and appeal to small businesses.

Ives wrote:

While the massive secular shift to the cloud is a "two horse race" between Amazon (AWS) and MSFT we are seeing a clear inflection point in the field as more enterprises and government agencies make this transformational move to a hybrid cloud architecture with Redmond making a major partner push on the SMB front. We believe the shift to cloud is a major secular trend that is significantly benefiting Microsoft.

He added that Microsoft can combine Azure with Office 365, Dynamics and other services to create bundles that'll appeal to corporations.

The partner network--Microsoft sports more than 70,000 cloud partners--is an interesting thread because it highlights how the software giant has a good ground game it can use to appeal to customers. This partner network has been built up over the years via Windows dominance and wares that appeal to smaller companies.

AWS has addressed the hybrid strategy with its partnership with VMware. In addition, the AWS channel strategy has also evolved, but it's hard to argue that Microsoft partner network is more mature.

Either way, it's tricky to compare AWS and Microsoft head-to-head since the two companies have unique characteristics. Add Google in the mix and the big three public cloud providers rhyme with each other, but don't offer direct comparisons.

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