Microsoft's consistent push to the cloud, featuring its strategy to keep Office 365 and Azure front and center, paid off in the third quarter. Although sales crept upward and profit declined, its earnings report on Thursday was more positive than negative and, overall, indicated a successful result, say company leaders.
Revenues for the quarter, ending March 31, hit $21.7 billion with operating income at $5.5 billion and earnings per share at $0.61.
The revenue figure represents a 6 percent increase compared to a year ago. Analysts expected $0.51 earnings per share.
"Customers continue to choose Microsoft to transform their business and as a result we saw incredible growth across our cloud services this quarter," stated CEO Satya Nadella.
Overall, the commercial cloud revenue stream grew 106 percent. The earnings report revealed that Office 365 consumer subscription grew 35 percent, to over 12.4 million; search ad revenue increased 21 percent; and Xbox Live use increased over 30 percent. Surface Pro 3 also played a positive role, with Surface revenue up 44 percent, to hit $713 million.
"We executed with strong operational and financial discipline again this quarter, and are seeing positive impact from our investments in key growth areas," said CFO Amy Hood.
The device and consumer revenue increased 8 percent, reaching $9 billion. Even Microsoft's fledgling and slightly shaky mobile phone business boasted revenues of $1.4 billion, with 8.6 million Lumia units sold.
There were some dark clouds in Q3, on the software side, with Windows Pro and non-Pro revenue taking dips. Windows Pro declined 19 percent and Windows non-Pro dropped 26 percent, which Microsoft attributes to a draw down in channel inventory. Windows volume licensing revenue dipped 2 percent.
Profits decreased, compared to a year ago, from $5.7 billion to $5 billion. The decline didn't seem to put a damper on Microsoft's reaction to earnings.
"We remain focused on strong execution from our sales teams. Around the world we're seeing high interest in deployment of our cloud and server products, as well as participation in the enterprise early adopter program for Windows 10," said COO Kevin Turner.
Microsoft's earnings overall beat street expectations and Nadella, who has been at the helm for just over a year, has been busy trying to shift Microsoft's dependency on the PC market. One of his most notable strategies has been a move to make Office apps free on Android devices. He is even going to make the impending Windows 10 OS a free upgrade for most PC owners.
While both those moves are clearly being taken to grow Windows' user base, the future impact on software sales is a bit hard to decipher at this point, noted the report.
It was clear that the earnings report went over well with shareholders and investors as Microsoft's stock jumped more than 4 percent after hours.
The cloud business boost is an admirable achievement given the intense competition Microsoft is battling with players such as Amazon and its Web Services offering. On Thursday, Amazon offered the first-ever glimpse at AWS revenue, claiming it stands at $1.57 billion, which represents a 49 percent jump compared to the same quarter a year ago.
The softening PC market is proving challenging to most software vendors, although research firm IDC expects it will get a bit more robust when Windows 10 is released in or around July.
During the earnings call, Nadella reiterated Microsoft's clear intentions on making Windows 10 one of, if not the, best loved OS platforms in the company's history.
"Most importantly, Windows 10 will be a service across an array of devices and usher in an era of more personal computing, an era where experience, not the device, is paramount," stated Nadella.
