Microsoft Q3 FY2017: Strong in cloud and productivity, but Surface revenue falls 26%

Microsoft has published its latest financial results, covering the third quarter of its 2017 fiscal year (the first quarter of the 2017 calendar year).

The company reported net income of $5.7 billion non-GAAP ($4.8 billion GAAP) for the three months ending March 31, 2017, on revenue of $23.6 billion non-GAAP ($22.1 billion GAAP). Diluted earnings per share stood at $0.73 non-GAAP ($0.61 GAAP).

Microsoft has invested heavily in its Intelligent Cloud services over the last few years, and along with rolling improvements to its Office platform and the addition of new productivity tools, its strong focus on business and enterprise customers is continuing to generate impressive results for the company. In the coming quarter, Microsoft is also expected to strengthen its efforts in the education sector, where it already has a decent foothold.

Over the last quarter, Server products and cloud services rose by 15% (16% in constant currency (CC)), while Azure revenue increased by 93% (94% CC). However, Enterprise Services revenue fell by 1% (1% CC) "with declines in custom support agreements offset by growth in Premier Support Services and consulting".

Overall revenue in its Productivity and Business Processes division soared by 22% (23% CC) to $8.0 billion, helped considerably by a 45% (45% CC) increase in Office 365 commercial revenue.

It was another strong quarter for Microsoft's Office consumer business too, with Office products and cloud services revenue up by 15% (14% CC). Office 365 consumer subscribers increased from a total of 24.9 million last quarter to 26.2 million.

Dynamics products and cloud services revenue was up by 10% (11% CC), while LinkedIn also contributed $975 million in revenue following Microsoft's completion of its $26.2 billion acquisition in December.

For another consecutive quarter, Microsoft's More Personal Computing division saw somewhat mixed results, with overall revenue falling by 7% (7% CC) to $8.8 billion "due to phone and Surface offset by growth in Windows, search and gaming." Microsoft also noted that "Phone contributed 8 percentage points of decline."

Windows commercial products and cloud services were up by 6% (6% CC), following similar growth last quarter. Windows OEM Pro revenue rose by 10% (10% CC), "ahead of the commercial PC market, mainly due to a higher mix of premium SKUs"; while non-Pro revenue fell by 1% (1% CC), although Microsoft pointed that this still "outperformed the consumer PC market".

However, after falling by 2% last quarter, Surface revenue dropped by a massive 26% (25% CC), which Microsoft attributed to "increased price competition in the premium 2-in-1 category and product end-of-lifecycle dynamics". Indeed, both the Surface Book and Surface Pro 4 are both 18 months old now, and the 'refreshed' Surface Book with Performance Base doesn't seem to have done enough to maintain Microsoft's hardware revenue. A new Surface Pro 5 is rumored to be launching in the coming weeks, but it's expected to be a modest refresh of its predecessor, rather than an all-new model.

Microsoft reversed two consecutive quarterly declines in its gaming revenue, with an increase last quarter of 4% (6% CC), "driven by growth in Xbox Live." Xbox software and services revenue rose by 7% (8% CC), "driven by continued adoption of digital distribution and a strong game lineup." Xbox Live monthly active users grew in number by 13% year-over-year, "with continued growth across Xbox One, Windows 10, and mobile platforms", although the current figure of 52 million active users is down from 55 million last quarter.

Search revenue, excluding traffic acquisition costs, also increased by 8% (9% CC), "driven by higher revenue per search and search volume".

To the surprise of no-one, it was another dreadful quarter for Microsoft's phone hardware business, with revenue falling by $730 million.

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