Microsoft’s $25.7 Billion In Quarterly Revenue & $0.78 EPS Beat, Shares Up

Microsoft this afternoon announced non-GAAP holiday quarterly revenue of $25.7 billion, net income of $6.3 billion and $0.78 EPS. These numbers beat both top and bottom line consensus analyst estimates. The company’s stock is up in after-hours trading.

Bing search revenue grew 21 percent (but was down sequentially), boosted by Windows 10 adoption according to the company. Windows OS revenue was down 5 percent but not as much as the PC industry as a whole. Mobile phone revenues were down 49 percent.

Sales of Surface Pro 4 and Surface Book generated revenue growth of 29 percent year over year. Cloud services (Azure) grew 140 percent. Office 365 saw 70 percent revenue growth and now has 20 million consumer subscribers.

Here are some of the segment highlights verbatim:

1. Search advertising revenue ex-TAC grew 21 percent in constant currency with continued benefit from Windows 10 usage

2. Windows OEM revenue declined 5 percent in constant currency, outperforming the PC market, driven by higher consumer premium and mid-range device mix

3. Surface revenue increased 29 percent in constant currency driven by the launch of Surface Pro 4 and Surface Book

4. Phone revenue declined 49 percent in constant currency reflecting our strategy change announced in July 2015

5. Office 365 consumer subscribers increased to 20.6 million

6. Azure revenue grew 140 percent in constant currency with revenue from Azure premium services growing nearly 3x year-over-year

7. Xbox Live monthly active users grew 30 percent year-over-year to a record 48 million

As with Apple and other US companies operating internationally, “currency headwinds” took a toll on Microsoft’s earnings. Performance was better in constant currency vs actual currency, whose volatility vs. the US Dollar is the result of global economic instability.

Selected notes from the earnings call:

CEO Satya Nadella:

1. Microsoft’s commercial cloud run rate surpassed $9 billion. Nadella says that the cloud segment is massive, larger than any market Microsoft has encountered. Microsoft is one of the two leaders in the space.

2. Windows 10 is outpacing adoption of any of the company’s previous operating systems. There are now 200 million devices running Windows 10

3. Consumer response to Office 2016 and 365 has been very enthusiastic. Nadella says Office downloads have been very successful on iOS and Android devices.

4. Machine learning and AI will be at the core of business systems going forward. He discusses Cortana analytics adoption

5. 30 percent of search revenue came from Windows 10, partly because of user engagement with Cortana

6. Surface sales $1.3 billion (Surface Pro and Surface Book)

CFO Amy Hood:

1. Microsoft saw higher search volumes and higher revenue per search. She says that Bing will continue to grow share and revenues

2. Devices revenues decreased 26 percent, mostly because of phone revenue declines of 49

3. Outlook: Phones will continue to decline, but Surface Book and Surface Pro 4 are expected to grow

Analyst questions:

There were numerous questions about the macro-economic environment and what was Microsoft seeing “out there.”

More questions focused on the growth of Microsoft’s cloud-services business and the opportunity going forward.

CFO Amy Hood also discussed the strength of the Microsoft advertising business (search + display) and the Surface device business. She says that the company will be taking Surface devices into the enterprise.

Question re opening up Office to third party platforms and has that provided lift. Nadella didn’t respond directly but said that overall “we want to make sure that the Office subscription is accessible across all devices.” This is consistent with Microsoft’s cloud strategy — consumers or business users can access Office on any device.

Most of the analyst questions focused on the success of Microsoft’s Surface device business and its cloud computing results and outlook.