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Microsoft Q2 FY2017: Strong quarter for Cloud and Office; Xbox revenue dips, Phone plummets

Microsoft has published its latest financial results, covering the second quarter of its 2017 fiscal year (the fourth quarter of the 2016 calendar year).

The company reported net income of $6.5 billion non-GAAP ($5.2 billion GAAP) for the three months ending December 31, 2016, on revenue of $26.1 billion non-GAAP ($24.1 billion GAAP). Diluted earnings per share stood at $0.83 non-GAAP ($0.66 GAAP).

Microsoft beat Wall Street expectations, which had anticipated around $25.3 billion of revenue for the quarter, and earnings per share of $0.79.

Microsoft's investments in its Intelligent Cloud services, and its continued focus on products and tools for business and enterprise customers, continue to pay off for the company, with yet another quarter of strong growth in most areas.

Server products and cloud services rose by 12% (14% in constant currency (CC)), while Azure revenue increased by 93% (95% CC). For a further consecutive quarter, Azure compute usage more than doubled year-over-year. However, Enterprise Services revenue fell by 4% (2% CC) "with declines in custom support agreements offset by growth in Premier Support Services and consulting".

Revenue in its Productivity and Business Processes division rose 5% (7% CC), thanks in no small part to a 47% (49% CC) increase in Office 365 commercial revenue.

It was a strong quarter for its Office consumer business too, with Office products and cloud services revenue up by 22% (21% CC), with Office 365 consumer subscribers rising to a total of 24.9 million, up from 24 million last quarter (Q1 FY2017).

Dynamics products and cloud services revenue was up by 7% (9% CC), while LinkedIn also contributed $228 million to Microsoft's earnings following the completion of its $26.2 billion acquisition in December.

On the More Personal Computing side of Microsoft's business, it was a bit of a mixed bag.

Windows commercial products and cloud services were up by 5% (6% CC), "driven by double-digit annuity billings growth and installed base expansion". Windows OEM Pro revenue rose by 6% (6% CC), "slightly outperforming an improving commercial PC market"; while non-Pro revenue increased by 5% (5% CC), "primarily due to a higher mix of premium devices".

However, Surface revenue was down by 2%, but Microsoft noted that "gross margin dollars increased 6% (17% CC) as an increasing mix of Surface Pro 4 and Surface Book replace Surface 3 in the portfolio." A fall in Surface revenue might appear like bad news for the company, but it's worth bearing in mind that the Book and Pro 4 are both 15 months old now; this long after their launch, they seem to be holding up pretty well in terms of sales.

Perhaps of slightly greater concern is that Microsoft's overall gaming revenue fell for a second consecutive quarter, dropping by 3% (1% CC), "driven by lower Xbox console pricing and lower console volume." But Xbox software and services revenue rose by 18% (21% CC), "with digital transactions reaching $1 billion this quarter from continued adoption of digital distribution and a strong game lineup".

Xbox Live monthly active users grew in number by 15% year-over-year to a record 55 million, "with growth across Xbox One, Windows 10, and mobile platforms".

Search revenue, excluding traffic acquisition costs, also increased by 10% (11% CC), "driven by higher revenue per search and search volume".

But unsurprisingly, it was another disastrous quarter for Microsoft's phone hardware business, with revenue falling by 81% (81% CC).

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