Microsoft Earnings: Revenue Increases As Growth Across Cloud Services Continues

by Trefis Team
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Microsoft (NASDAQ:MSFT) announced its earnings for its fiscal Q1 on October 26. The company posted 12% year-over-year growth in revenues to $24.5 billion. In our pre-earnings note, we noted that cloud services would boost revenues for the company. The company’s Commercial Cloud annualized revenue run rate (ARR) exceeded $20 billion, ahead of schedule. The highlights from the earnings announcement are as follows:

  • Productivity and business process revenues grew by 28% to $8.2 billion. The growth in this vertical was driven by:
    • 10% growth in Office commercial product, which grew due to Office 365 commercial revenue growth of 42%. The Office 365 commercial subscriber base swelled to 120 million in Q1.
    • 12% growth in Office consumer products as Office 365 consumer subscribers increased to 28 million.
    • 13% growth in Dynamics products and cloud services as Dynamics 365 revenue grew by 69%.
  • Intelligent Cloud revenue grew by 14% to $6.9 billion, due to the following factors:
    • 17% growth in Server products and Cloud services driven by growth in Azure revenue, which increased by 90%
    • Enterprise Services revenue increased by 1%
  • Personal Computing revenues were reported at $9.4 billion. Some revenue drivers for the vertical were:
    • 4% growth in Windows OEM revenue, as it outperformed the overall PC market, and 7% growth in Windows commercial products
    • Higher revenue per search and search volume drove 15% growth in search advertising revenues.
    • Surface revenue increased by 12% as sales of new Surface devices gained traction in the quarter.
    • Strength in Xbox software and services (21% growth) offset lower hardware revenue and drove gaming revenues 1% higher.

Some other key takeaways from the earnings:

  • Cloud services continue to boost the Productivity division revenues in the coming quarters as the company continues to unveil new cloud solutions and products.
  • LinkedIn continued to report strong numbers as growth across jobs posted (65% growth), feeds updated (60% growth) and messages sent (40%) continued in the quarter.
  • Microsoft continues to build its platform that tightly integrates LinkedIn and Dynamic. This integration will not only provide a credible cloud-based CRM software to develop a cross-selling platform but also add a talent marketplace solution to Microsoft’s portfolio of products.
  • The company continues to add capabilities such as adding AI to its Azure hybrid cloud offering. Azure is fast emerging as an attractive platform for Microsoft’s clients for Infrastructure as a Service (IaaS) and Platform as a Service (PaaS), as evidenced by the ~100% growth in revenues.
  • Windows continues to outperform the PC market, as OEM Pro revenue grew 7%. With many OEMs coming out with new Windows hardware, Windows sales are expected to continue to outperform PC sales.

Our $67 price estimate for Microsoft is around 15% below the current market price.

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