Nine surprises from Microsoft's Q1 2016 results

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Nine surprises from Microsoft's Q1 2016 results

The big take-away from Microsoft's financial results Thursday was the cloud is king and plays a key part in its makeover as it transitions from a software company to a cloud giant. Microsoft profit for the first quarter of fiscal 2016 increased to US$4.62 billion, up nearly 2 percent from US$4.54 billion in the same quarter a year ago, due in large part to big strides in its cloud computing business.

While revenue dropped to US$20.38 billion, down 12 percent from US$23.2 billion a year ago, sales for its Azure cloud business more than doubled and sales of its cloud-based Office 365 were up 70 percent in constant currency.

During a conference call with analysts Thursday, Microsoft CEO Satya Nadella shed light on the company's current success and challenges and outlined how it planned to achieve US$20 billion in cloud revenue by 2018. What follows are highlights and some surprises from Microsoft's most recent quarterly financial results.

Strong cloud growth

Microsoft's cloud unit, which includes Azure, Windows Server and database services, reported US$5.9 billion in sales for its first fiscal quarter for a gain of 8 percent compared with US$5.5 billion during the same period last year. Its commercial cloud now has an annual run rate of US$8.2 billion and is on track to reach US$20 billion in annual cloud sales by 2018, Nadella told financial analysts Thursday.

Nadella: 'Only Two' enterprise cloud platforms

Nadella singled out Microsoft and Amazon Web Services as the industry leaders in driving massive scale via the cloud.

"While many companies are developing commercial cloud offerings, there are really only two driving enterprise cloud platform innovation at massive scale: Amazon and Microsoft. We push each other, and we each have a unique approach," Nadella said.

Amazon for its part reported a blowout third quarter Thursday, with Amazon Web Services generating sales of US$2.09 billion, up 78 percent compared with the same quarter a year ago.

Bing is profitable

Microsoft's Bing search engine finally reached profitability and also crossed the US$1 billion quarterly sales milestone, said Amy Hood, Microsoft's CFO, who broke the news during the company's earnings call. Search revenue grew 29 percent in constant currency with a chunk of that driven by Windows 10 devices. Windows 10, Cortana integration and Microsoft's Edge browser appear to be helping drive more eyeballs to Bing. Bing's market share in the US is at nearly 21 percent, Microsoft said. 

For the past year Microsoft has been streamlining its search and advertising business, inking deals with AOL to take on its display advertising business and brokering a search deal with Yahoo to power results.

Office fust isn't what it used to be

Microsoft said consumer Office 365 subscription revenue finally offset losses it has seen in Office licenses. Still, Office consumer products and cloud services revenue fell 13 percent (down 4 percent in constant currency). But the same can't be said for enterprise where licensing still is more lucrative to Microsoft than Office 365 subscriptions.

That said, Office commercial product and cloud services revenue fell 2 percent year over year but grew 5 percent in constant currency, which Microsoft credited to Office 365 transitions. Still, overall Office 365 revenue was up almost 70 percent, with Microsoft now counting 18.2 million subscribers, about 3 million of whom are new.

Microsoft is looking to drive more margins out of Office 365

Commercial Office 365 monthly active users grew to 60 million, with nearly 60 percent of Microsoft's installed base using "premium workloads," Nadella said during the conference call. In addition, Microsoft said it added 50,000 new small-business customers in each of the last 19 consecutive months, he said.

Microsoft is hoping to capitalise on the momentum and beef up its revenue with more new premium SKUs starting with an Office 365 suite called E5, unveiled in July. Microsoft said E5 will bring several new capabilities to Office 365 including Information Protection, Cloud PBX, analytics, Power BI and advanced security capabilities.

Microsoft quietly lays off about 1,000

On Thursday, The New York Times reported that Microsoft will lay off around 1,000 of its employees. The pink slips are separate from previously announced 18,000 layoffs earlier this year. The layoffs were not mentioned during Microsoft's earnings call.

Microsoft Phone business continues to struggle

Microsoft's mobile phone business revenue declined a whopping 54 percent in constant currency. The decline was not unexpected given Microsoft has sharply scaled back its handset business. Despite its mobile retreat, earlier this month Microsoft announced a bevy of Windows 10 flagship devices including the Lumia 950 and 950 XL phones.

More hardware blues

Windows OEM revenue also fell, by 6 percent, something Microsoft attributes to lagging PC sales while noting that its OEM business outperformed the PC market. Declines also came from Microsoft's Surface hardware. For the first quarter of 2016, Microsoft reported Surface device revenue had fallen to US$672 million, down from US$908 million in the same quarter a year ago. Tapering sales were in large part due to delayed Surface sales in anticipation of Surface Pro 4, which goes on sale next week, the company said.

Windows 10 Enterprise sales better than expected

The launch of Windows 10, Nadella said, has helped the overall Microsoft ecosystem and is pushing enterprise customers toward services such as Azure. He said more than 110 million devices are running Windows 10. 

Microsoft said it's seeing a much faster adoption cycle than originally anticipated with Windows 10. Nadella said 8 million business PCs are already running Windows 10. "We expect enterprise deployment to start in earnest at the beginning of next calendar year or the second half of our fiscal year," Nadella said. "The fact there is pull already is a good sign."

This article originally appeared at crn.com

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