Microsoft Earnings: Cloud Services Continue To Boost Revenues

by Trefis Team
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Microsoft (NASDAQ:MSFT) announced its earnings for fiscal Q3 on April 27. [1] The company posted 7.56% year-over-year growth (7% in constant currency) in revenues to $22 billion as the assimilation of LinkedIn boosted the top line. In our pre-earnings note, we noted that cloud services would boost revenues across the Productivity and Business Processes and the Intelligent Cloud segments. The Commercial Cloud annualized revenue run rate revenue exceeded $15.2 billion, and the company is on course to achieve a $20 billion annual run rate by fiscal year 2018. However, the organic revenue growth (revenue excluding LinkedIn top line) was tepid at 2.8%. The highlights from the earnings announcement are as follows.

See our complete analysis of Microsoft here

Increasing Cloud Adoption Boosts Productivity And Business Processes Division

Microsoft has been able to leverage the popularity of its enterprise productivity offerings to cross-sell its cloud SaaS products. During the quarter, Microsoft reported that its Office commercial products and cloud services revenue grew 7% (up 8% in constant currency), driven by Office 365 commercial revenue growth of 45% (up 45% in constant currency). Monthly active users of Office 365 commercial now number over 100 million, while the Office 365 consumer subscriber base grew to 26.2 million, resulting in 15% growth in Office consumer and cloud services revenue.

Microsoft’s Dynamic Cloud services continue to report an increased adoption, as Microsoft’s clients continue to adopt the CRM and ERP services. During the quarter, Dynamics products and cloud services revenue grew 10% (up 11% in constant currency) driven by Dynamics 365 revenue growth, which grew 81% (82% in CC). We expect Dynamic ERP and CRM revenue will continue to grow as it offers the benefit of cloud and the backing of Microsoft’s ecosystem of services. Additionally, LinkedIn added $975 million to the top line in Q3.

As a result of the growth in cloud productivity solutions, revenues for Productivity and Business Processes grew by 22% (23% in CC) to $7.96 billion.

Server & Cloud Witness Another Quarter Of Strong Adoption

Microsoft’s Windows Server division contributes over 32% to our estimated stock price for the company. During Q3, the intelligent cloud segment (Azure, Server products, and enterprise services) delivered $6.76 billion of revenues, year-over-year growth of 11% (12% in constant currency). While server products and cloud services revenue grew by 15% (16% in constant currency), driven by growth in Microsoft SQL Server, adoption of the cloud-based Azure platform resulted in 93% growth (94% in constant currency) in its revenues. As a result of these products, the company’s cloud revenue run rate exceeded $15.6 billion. However, Enterprise Services revenue decreased 1% (unchanged in constant currency) with declines in custom support agreements offset by growth in Premier Support Services and consulting.

Decline In Smartphone Sales Offsets Growth In OS Licensing

While the Windows Operating System is the third largest division and makes up 10% of Microsoft’s value per our estimates, Xbox Games and Bing Search makes up over 11% of our price estimate. Together, these division make up Microsoft’s More Personal Computing Segment. During the quarter, Microsoft’s More Personal Computing segment declined by 7% (down 7% in constant currency) to $8.84 billion, driven primarily by lower phone revenue.

Microsoft reported that its Windows OEM non-Pro licensing revenues declined by 1% and its OEM Pro revenue grew by 10%. Despite the slowdown in PC hardware sales, the company was able to buck this trend as license sales grew due to improvements in both the commercial PC market and the mix of premium devices. As both its existing and new OEM partners are bringing to market an expanded set of device offerings at lower price points, we expect sales to pick up in the coming quarters.

The company reported that Microsoft’s XBox Live continues to find favor among gamers. With nearly 52 million Xbox Live users, the company generated $1.92 billion revenues during the quarter. While gaming revenue grew 4% (or 6% in constant currency) due to strong engagement on the Xbox platform which grew 7%. Additionally, its Bing search ads revenues grew 8% driven by higher revenue per search and search volume.

Microsoft’s devices continued to perform poorly as revenue decreased 51% due to a $730 million decline in phone hardware revenue. Additionally, Surface revenue decreased 26%, driven by fatigue in its product line and increased competition in the 2-in-1 category. We expect the Surface sales to pick up as the company plans to launch new Surface devices at its May event.

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Notes:
  1. Earnings Release FY17 Q3, April 27 2017 []
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