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Microsoft’s earnings report shows it is becoming a serious force in the cloud

And investors cheer.

Microsoft CEO Satya Nadella
Asa Mathat

Microsoft on Tuesday reported earnings that easily topped expectations as the company continues to shift from a traditional software seller to a provider of cloud-based services.

Excluding certain items, the Redmond, Wash.-based company said it earned $5.5 billion, or 69 cents per share, on adjusted revenue of $22.6 billion. On that basis, the company had been expected to report per-share earnings of around 58 cents, according to Zacks, with analysts expecting revenue of around $22.1 billion, roughly flat from the prior year.

Including all items, per-share earnings would have come in at 39 cents on revenue of $20.6 billion.

“This past year was pivotal in both our own transformation and in partnering with our customers who are navigating their own digital transformations,” CEO Satya Nadella said in a statement.

The software maker’s results come as the company continues to downplay its phone ambitions as well as a prolonged slowdown in PC sales that has limited its Windows PC business.

Last week Microsoft officially conceded it won’t hit its prior goal of having a billion devices running Windows 10 by 2018.

Meanwhile, the company has been chugging along in its efforts to convert old-school software customers into subscribers of cloud computing products like Office 365.

The company is also in the process of completing its mammoth $26.2 billion deal to buy business-oriented social network LinkedIn.

Update: In the business unit that includes Office, revenue grew 5 percent to $7 billion, while the no-Office business cloud unit saw sales up 7 percent to $6.7 billion. Sales in the unit that includes Windows software and hardware fell 4 percent to $8.9 billion.

Interestingly, Microsoft noted in a slide presentation for investors that revenue from licensing patents dipped in the quarter. It said it saw a drop in both total units from which it got royalties as well as a decline in the amount of revenue per device.

Microsoft has mounted an aggressive program over the past several years to collect patent royalties from each Linux and Android device sold.

Among other highlights:

  • Office 365 subscription revenue from businesses was up 54 percent.
  • Consumer revenue from Office was up 19 percent.
  • Sales from server products and other business cloud services were up 5 percent, with Azure revenue nearly doubling that of a year ago.
  • Sales from consumer versions of Windows were up 27 percent while business Windows sales were up 2 percent.
  • Surface PC revenue increased 9 percent. On the negative side, though, phone sales were down 71 percent.

Shares of Microsoft traded up slightly after the report, changing hands recently at $54.87, up $1.78 or more than 3 percent.

3:04 p.m. PT: On a conference call with analysts, Microsoft said it should see further benefit in the coming year from its cloud business now that it has reached scale and built out data centers around the world. Overall profit margins in that area should increase “materially,” CFO Amy Hood said.

The company did forecast yet another drop in device revenue for the current quarter, though, as Surface sales won’t offset another drop in phone sales.

3:20 p.m. PT: Last quarter said Microsoft saw consumer PC market better than it had anticipated, which benefitted consumer Office sales. Japan PC market was also better than expected, Hood said.

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