The Microsoft Q1 2017 results were announced yesterday to rave reviews. They resulted in a boost to the share price that reached $60.63, its highest in recent years. It marks a significant recovery from the $14.87 it hit in May 2009 and is the highest since the share splits in 1999.
The results and share price are a massive justification for the strategy that Satya Nadella, CEO at Microsoft has taken since his elevation to the role. Non-GAAP revenue rose by 3% to $22.3 billion (GAAP $20.5 billion). Importantly this was above the expectations of $21.7 billion by analysts. The revenue was also not driven by a market grab. Profits also increased with earnings per share rising 6 cents to $0.76, significantly above the $0.68 expected.
Nadella has been driving Microsoft towards the cloud as well as several partnerships to help accelerate that growth. The days when Microsoft under Ballmer would stand alone are long gone. As a result most of the growth was driven either by cloud-based productivity tools such as Microsoft Office365 or by the intelligent cloud. Nadella stated: “We are helping to lead a profound digital transformation for customers, infusing intelligence across all of our platforms and experiences. We continue to innovate, grow engagement, and build our total addressable market.”
The highlights included Office 365 commercial revenue that rose by 51% (54% in constant currency). The consumer side of that business also grew by 8% and Office 365 consumer subscriptions rose to 24 million. While the actual figures for commercial Office 365 were not available this is good growth for Microsoft. It shows that in the commercial space they are winning the battle against Google Apps. Amy Hood, executive vice president and chief financial officer at Microsoft commented: “Our first quarter results showed continued demand for our cloud-based services. We continue to invest, position ourselves for long-term growth, and execute well across our businesses.”
The Productivity and Business Processes which includes the Office 365 products saw an overall increase of 6% to $6.7 billion. Dynamics revenues grew by 11% and with Dynamics 365 about to launch that figure may increase further with the new product. The other stream that was successful includes Azure, which Nadella was once directly responsible for. Intelligent Cloud grew an impressive 8% to $6.4 billion.
Azure outperforms everything
Azure revenue grew 116% (up 121%) in constant currency. This means that the Azure compute usage has more than doubled year over year. This is a growing market though. It is only in comparing like for like figures with their competitors such as AWS and Google that one is able to gauge how successful they are. Certainly Microsoft are connecting up to network providers and this will have helped drive revenues.
Ballmers pet project Microsoft phone continues to decline. A drop of 72% in phone revenues shows that the great hope is no more. Nadella will need to decide what to do with this business as it seems in a terminal state. Whether he can turn around what remains after the cuts earlier this year is difficult to say. At some point it will either disappear completely or show a turnaround in fortune. Windows OEM remained flat, despite a drop in the PC market. The OEM cash cow will remain for some time but it expects to see this continually decline and become less important for Microsoft. As applications move to the cloud PC manufacturers may look to alternate operating systems that are cheaper as well.
Perhaps surprisingly the gaming market continues to decline, down 5% year on year. This reason given is that Xbox console revenues declined. This is despite an increase in subscription and software sales. That decline should be reversed though when project Scorpio reaches the shops. Xbox 2 is due to launch next month. Its release was announced by Phil Spencer, Chief Executive of Microsoft’s Xbox Division at E3 2016.
Nadella is making a positive difference to Microsoft and the investors seem in agreement. Getting the share price to a record high for the company vindicates his approach to the cloud and partnerships. There are more challenges ahead though, notably in the shape of Oracle with their recently announced IaaS solution.
The second and possibly more serious challenge in the medium term will come from Salesforce. If they can integrate the collaborative business productivity tool Quip into their platform it could be a serious threat to Microsoft Office in the future. For now though Nadella can bask in the recognition of a job well done from many commentators and shareholders.