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Microsoft Beats Street's Expectations In Q2 As Booming Surface, Azure Sales Lead The Way

Microsoft, in its fiscal 2016 second quarter, said Azure, Office 365 and Surface products are driving healthy revenue, including growing sales of premium offerings.

Microsoft exceeded Wall Street's forecasts for its fiscal 2106 second quarter Thursday, with Azure, Office 365 and Surface products all continuing to see healthy sales growth.

For the quarter ended Dec. 31, Microsoft reported adjusted earnings per share of 78 cents on revenue of $25.69 billion. Wall Street analysts were expecting 71 cents per share on revenue of $25.2 billion.

Although Microsoft's revenue was down from the $26.4 billion it reported for last year's second quarter, investors appeared pleased with the results, as shares jumped around 4 percent in after-hours trading to $54.10.

Microsoft changed its financial reporting last September around three business segments:

  • Intelligent Cloud, which includes Azure, Windows Server, System Center and SQL Server
  • Productivity and Business Processes, which includes Office and Office 365 for commercial and consumer customers, Dynamics and CRM Online
  • More Personal Computing, home to Windows, Surface and Xbox

[Related: Microsoft Delivers Long-Awaited Office 365 E5]

This quarter, Microsoft's Intelligent Cloud segment saw revenue jump 5 percent year over year to $6.3 billion. Azure was especially strong during the quarter, with revenue growing 140 percent in constant currency compared to last year's quarter.

On the earnings call, CEO Satya Nadella said Microsoft is seeing "network effects" in its cloud business; for example, some customers are using Azure to funnel Office 365 data into other apps, he said.

"One thing we're noticing is that with anyone who moves to the cloud, there is a real opportunity for us to expand to multiple workloads over time," said Nadella on the call.

Microsoft made "significant progress" in boosting its gross margins for Azure and Office 365, and its addition of premium-level offerings in Azure and Office 365 have helped on that front, CFO Amy Hood said on the call.

Microsoft's Office 365 E5 offering, which launched in December, is expected to continue this trend, Hood said.

Overall, Microsoft said its commercial cloud business is now on a $9.4 billion annualized run rate; Nadella has said it's on track to hit the $20 billion mark in 2018.


Microsoft's Productivity and Business Processes segment saw revenue drop 2 percent year over year to $6.7 billion, but its Office 365 revenue grew close to 70 percent in constant currency. Microsoft said it now has 20.6 billion Office 365 subscribers.

In the More Personal Computing segment, Microsoft's quarterly revenue fell 5 percent to $12.7 billion. Surface products were a bright spot, as sales jumped 29 percent year over year to $1.35 billion. But Windows Phone revenue fell 49 percent during the quarter, and Microsoft's overall devices revenue dropped 22 percent.

Microsoft also returned $6.5 billion to shareholders during the quarter via share repurchases and dividends.

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