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Microsoft Earnings Beats Expectations as Office, Server Gains Offset a Weak PC Market

The company also quietly laid off around 1,000 employees this week, while search business finally reached profitability.

Asa Mathat

Microsoft on Thursday reported fiscal first quarter adjusted quarterly sales and earnings ahead of what most analysts expected, despite a continuation of the sluggish market for new computers.

Excluding certain items, the company posted a net income of $5.4 billion, or 67 cents per share, on revenue of $21.4 billion. On that basis, the company had been expected to report per-share earnings of around 59 cents and revenue of around $21 billion, according to various consensus estimates.

Those figures don’t reflect the impact of some deferred income and revenue related to Windows 10. This is also the first quarter under a new reporting structure that breaks the company into three main units: Personal Computing (Windows), Productivity and Business Processes (Office) and Intelligent Cloud (Windows Server).

As for Office, the company said it added more than three million consumer subscriptions, with 18.2 million consumers now subscribed to Office 365.

On the business side, Microsoft said Office commercial products and cloud services revenue grew 5 percent on a constant currency basis, with Office 365 revenue up nearly 70 percent. Server products and cloud services were up 13 percent, again adjusting for currency fluctuations.

“We’re seeing great traction with businesses who want to bring Microsoft’s cloud, mobile device management technology and data analytics together to improve security and productivity resulting in almost 70 percent year-over-year growth in our commercial cloud run rate,” operating chief Kevin Turner said in a statement.

Things were less rosy on the Windows side of things, where the company’s “More Personal Computing” segment saw revenue drop 17 percent, to $9.4 billion, amid weak PC and phone sales. Phone revenue dropped 54 percent as the company continued to scale back that part of the business. The company has exited a number of regions and segments of the market in an effort to contain costs.

Microsoft said its Windows revenue from computer makers dropped 6 percent, but outpaced the overall PC market as computer makers built higher-end machines for Windows 10.

Search revenue, excluding traffic acquisition costs, was up 29 percent on a constant currency basis, Microsoft said. Windows 10 is helping the search business as well, Microsoft said, with 20 percent of September search revenue from Windows 10 devices.

The number of monthly active Xbox Live subscribers grew 28 percent, to 29 million.

In July, Microsoft’s last report, the company topped estimates but took a huge writedown related to its Nokia acquisition.

Microsoft shares traded higher after the earnings were released, changing hands recently at $50.65, up $2.62, or more than 5 percent.

Update, 2:25 p.m. PT: Getting set for the conference call at 2:30 p.m. PT; New York Times reports that Microsoft quietly laid off approximately 1,000 employees on Wednesday. Microsoft declined to confirm the number, but did say it made layoffs across the company.

“The job reductions were spread across more than one business area and country and reflect adaptations to business needs,” a company spokesman said in a statement.

2:35 p.m. PT: CEO Satya Nadella said on the conference call said the company is “well on its way” toward its goal of a billion Windows 10 users within three years’ time..

He added that company is also on pace to reach another goal: $20 billion in business revenue from cloud services by fiscal 2018, with current sales from that unit at an annualized rate of $8.2 billion, up 70 percent from a year ago.

There are really only two serious players in that area, Nadella said, clarifying that he was referring to Amazon and Microsoft. “We push each other and we each have a unique approach,” Nadella said.

Nadella said Microsoft, after opening data center in India, now has operations in 20 regions, more than any of its rivals and said global footprint is essential.

2:45 p.m. PT: Turning to the PC side, Nadella touted Windows 10 and the impact it has had on other parts of the business, noting that Windows 10 has driven Bing’s U.S. search market share above 20 percent. He also said Microsoft is seeing good pre-orders for the company’s new Surface, Surface Book and other new hardware, though he did not give specifics.

2:50 p.m. PT: Turning to the numbers, CFO Amy Hood noted that search revenue topped $1 billion last quarter and the business finally reached profitability.

3:00 p.m. PT: For the coming quarter, Hood said Microsoft expects revenue of around $6.6 billion or $6.7 billion for its productivity business, $6.2 billion to $6.3 billion in business cloud unit and $12 billion, to $12.4 billion from its personal computing unit.

Bing should continue its strong growth and remain profitable for the rest of the fiscal year, Hood said.

3:03 p.m. PT: On to Q and A.

3:17 p.m. PT: Asked about Michael Dell’s recent comments that enterprises are taking a bigger interest in Windows 10 than in other recent releases.

“That is absolutely the case,” Nadella said. While most early adoption has been from consumers, Nadella noted there are already 8 million business PCs running the new software. Nadella said that the company expects business adoption of Windows 10 to begin in earnest starting early in calendar 2016.

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