Microsoft Zooms Past Forecasts on Azure Revenue

Commercial cloud annualized revenue run rate exceeds $13.0 billion during Q1 FY17

m1Technology giant Microsoft Corp. (NASDAQ: MSFT) announced its Q1 FY17 financial results on October 20th, 2016.

Headquartered in Redmond, Washington, Microsoft develops, licenses, and supports a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to customers. Microsoft operates in four segments: Productivity and Business Processes, Intelligent Cloud, More Personal Computing, and Corporate and Other.

m2The Company’s products include operating systems for computers, servers and server applications for distributed computing; desktop and server management tools; and software development tools. It also offers cloud-based solutions that provide customers with software, services, and content over the Internet by way of shared computing resources located in centralized data centers. Its cloud-based computing services include Bing, Microsoft Azure, Microsoft Dynamics CRM Online, Microsoft Office 365, OneDrive, Skype, Xbox Live, and Yammer. It also provides consulting and product & solution support services as well as trains and certifies system integrators and developers. Microsoft has offices in over 100 countries. Read more about Microsoft’s financial results below.

Q1 FY17 financial highlights

m3Microsoft’s Q1 FY17 GAAP revenue rose 0.4% to $20.45 billion, the first growth in the last five quarters, and was at $22.33 billion on an adjusted basis. The tech major beat forecasts for both sales and profit, sparking a rally of its stock, which breached the company’s all-time high of $59.56 during the dot-com boom in 1999.

Microsoft’s Q1 FY17 revenue was driven by the Intelligent Cloud segment, which reported an 8% growth, with Azure revenue up 116%, and server revenue up 11%. Commercial cloud annualized revenue run rate exceeded $13.0 billion during Q1 FY17. Microsoft reported GAAP operating income of $5.2 billion during Q1 FY17, and $7.1 billion on a non-GAAP basis.

Similar to its rivals Cisco Systems Inc. (NASDAQ: CSCO) and Oracle Corp. (NYSE: ORCL), Microsoft is focusing on reinventing itself as a business technology services company. CEO Satya Nadella is channeling all efforts to steer Microsoft from a PC software maker to a company that sells business technology services, cloud-based services, and subscription products. Although the cloud is driving Microsoft’s results, it only accounts for a small part of the Company’s overall business, while PC software still accounts for a hefty chunk of Microsoft’s top line. Microsoft is faced with the challenge of scaling up its cloud and subscription businesses at a faster clip than the slowdown of its legacy operations.

During Q1 FY17, Microsoft’s net income decreased to $4.69 billion, or $0.60 per share, compared to $4.90 billion, or $0.61 per share, a year ago. Excluding the impact of revenue deferrals and restructuring charges, adjusted EPS was at $0.76 during the reporting quarter.

Segmental highlights

m4Microsoft’s Productivity and Business Processes segment revenue grew 6% (up 8% in constant currency) to $6.7 billion during Q1 FY17. Within this segment, Office commercial products and cloud services revenue grew 5% (up 8% in constant currency) driven by Office 365 commercial revenue growth of 51% (up 54% in constant currency). Office consumer products and cloud services revenue grew 8% (up 8% in constant currency) and Office 365 consumer subscribers increased to 24.0 million. Dynamics products and cloud services revenue grew 11% (up 13% in constant currency) driven by Dynamics online revenue growth.

m5Microsoft’s Intelligent Cloud segment revenue grew 8% (up 10% in constant currency) to $6.4 billion during Q1 FY17. Within this segment, server products and cloud services revenue jumped 11% (up 13% in constant currency) driven by double-digit annuity revenue growth. Noteworthy is the fact that Azure revenue soared 116% (up 121% in constant currency) with Azure compute usage more than doubling Y-o-Y. Enterprise Services revenue increased 1% (up 2% in constant currency) with growth in Premier Support Services and consulting offset by declines in custom support agreements.

Microsoft’s More Personal Computing segment revenue declined 2% (down 1% in constant currency) to $9.3 billion during Q1 FY17. Within this segment, Windows OEM revenue was flat Y-o-Y (flat in constant currency), slightly ahead of the PC market. Windows commercial products and cloud services revenue was also flat Y-o-Y (up 2% in constant currency) driven by annuity revenue. m6Phone revenue plummeted 72% (down 71% in constant currency), while gaming revenue declined 5% (down 4% in constant currency) driven by lower Xbox console revenue offset by higher Xbox software and services revenue. Lastly, search advertising revenue excluding traffic acquisition costs grew 9% (up 10% in constant currency) driven by increased revenue per search and search volume during Q1 FY17.

Share Repurchase

During Q1 FY17, Microsoft returned $6.6 billion to shareholders in share repurchases and dividends. During the reporting quarter, the Company announced an 8% increase in its quarterly dividend to $0.39 per share, a new share repurchase program authorizing up to $40 billion in share repurchases, and reaffirmed it is on track to complete its current $40 billion share repurchase program by December 31st, 2016, among the largest buybacks in the past decade.

Other highlights

Deal closures: Microsoft also said it expects to finish its acquisition of LinkedIn Corp. (NYSE: LNKD) and the sale of its entry-level feature phone business in Q2 FY17. After the closure of the LinkedIn deal, Microsoft will report LinkedIn results under its Productivity and Business Processes segment. The Company will separately report the impact of LinkedIn operations and any one-time integration and transaction-related expenses during Q2 FY17.

m7Partnership with Adobe: Microsoft announced a partnership with creative software company Adobe Systems Inc. (NASDAQ: ADBE) on October 17th, 2016, in which Adobe named Microsoft Azure as its preferred cloud platform. Microsoft in turn name Adobe Cloud Marketing is its preferred marketing service. CEO Satya Nadella said that the agreement would bring together the cloud horsepower and end-to-end capabilities brands need to design and deliver great digital experiences. The two companies will work together on data integration so customers can work across the Microsoft Dynamics 365 and Adobe Marketing Cloud business applications.

The move comes after market leader Amazon.com Inc.’s (NASDAQ: AMZN) Amazon Web Services, which commands 31% share of the cloud storage market, announced an alliance with VMWare Inc. Hybrid cloud offerings are expected to be used by 80% of IT firms by 2018, according to IDC estimates.

Renewable energy usage: Microsoft has joined major technology companies including Alphabet Inc.’s (NASDAQ: GOOG), Apple Inc. (NASDAQ: AAPL), and Amazon.com in ramping up renewable energy usage. m8At the Verge16 Conference at Santa Clara, California, held on September 19-22nd, 2016, Rob Bernard, Microsoft’s chief environmental & cities strategist, announced that Microsoft plans to power its data centers using 50% renewable energy by 2018. Moreover, the technology giant will also boost its usage of renewable power for its data centers to 60% by the early 2020s. Currently, roughly 44% of the electricity used by Microsoft’s data centers comes from renewable energy sources.

Breakthrough in speech recognition: Microsoft announced on October 19th, 2016, that it has achieved a major breakthrough in speech recognition by developing the first technology that recognizes words in a conversation as well as humans do. m9A team of researchers and engineers in Microsoft’s Artificial Intelligence and Research unit created a speech recognition system that makes the same or fewer errors than professional transcriptionists. They reported a word error rate (WER) of 5.9%, down from the 6.3% WER that the team reported in September 2016. The 5.9% error rate is about equal to that of people who were asked to transcribe the same conversation, and it is the lowest ever recorded against the industry standard Switchboard speech recognition task.

The milestone will have broader implications for consumer and business products that can be significantly augmented by speech recognition. That includes consumer entertainment devices like the Xbox, accessibility tools such as instant speech-to-text transcription and personal digital assistants such as Cortana.

Guidance for FY17

Going forward, Microsoft is projecting that its annualized revenue run rate for cloud products will be more than $12.1 billion.

Source: Microsoft
Source: Microsoft

 

Stock Performance

m11Microsoft’s stock stood at $59.66, gaining 4.21%, at the close on Friday, October 21st, 2016, having vacillated between an intraday high of $60.45 and a low of $59.49 during the session. The stock’s trading volume was at 79,987,575 for the day. The Company’s market cap was at $464.69 billion as of Friday’s close.

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