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Microsoft's Cloud Business Booms, But Windows Takes Beating In Mixed Q3

Microsoft's Azure and Office 365 businesses continued to rake in the cash during its fiscal third quarter, but the trusty steed known as Windows saw a pronounced slowdown.

Microsoft's fiscal third quarter earnings call Thursday was a mixed bag, as its cloud and Surface businesses grew like gangbusters, but Windows sales to both businesses and consumers dropped significantly.

For its fiscal third quarter ended March 31, Microsoft's overall revenue grew 6 percent year-over-year, to $21.7 billion, but profit dipped 12 percent, to just under $5 billion, or 61 cents per share. Wall Street analysts were expecting revenue of $21 billion and earnings of 53 cents per share.

Microsoft investors seemed relieved with these numbers, as shares rose more than 3 percent, to $44.64, in Thursday after-hours trading.

[Related: What Will Amazon's Q1 Earnings Reveal About AWS? Partners Place Their Bets]

The software giant's commercial cloud business, which includes Azure, Office 365 and CRM Online, saw revenue jump 106 percent compared with last year's quarter. This business grew 114 percent last quarter and is now on a $6.3 billion annualized run rate.

Microsoft CEO Satya Nadella didn't focus just on cloud sales. He also cited numbers to show how much customers are using certain services. For example, more than 50 trillion objects are now stored on Azure, and Office 365 has more than 50 million active business users every month, he said on the call.

With these numbers, Microsoft is looking to show Wall Street that its cloud sales figures are more than theoretical, and don't include free trials and products sold -- but not used -- in volume licensing agreements.


This is also why Microsoft has been taking on a bigger role in "onboarding" customers to Office 365, a move that has caused friction with some channel partners that sell onboarding services.

During Q&A, Nadella was asked if there are similarities between Microsoft's cloud business and that of Amazon, which earlier published cloud revenue figures for the first time. Amazon Web Services raked in more than $1.5 billion this quarter and is a $5 billion-plus business, Amazon said.

Nadella said it's tough to compare the two clouds because Microsoft is more diversified across SaaS, IaaS and PaaS than AWS is. This diversity is part of the "unique value" Microsoft offers customers, he said.

Microsoft's Surface business was another bright spot, with revenue jumping 44 percent year-over-year, to $713 million, during the quarter.

However, Windows sales to businesses dropped 19 percent and Windows consumer sales dropped 26 percent compared with last year's quarter. Microsoft said these figures stem from the waning Windows XP upgrades and the ongoing decline of the business PC market, and free Windows on low-cost devices.

Microsoft's Commercial division revenue rose 5 percent during the quarter, to $12.8 billion. In that unit, server software and services rose 12 percent compared with last year's quarter, but Office sales to businesses dropped 2 percent.

Windows volume licensing also dropped 2 percent year-over-year during the quarter.

Microsoft's Devices and Consumer unit revenue rose 8 percent year-over-year, to $9 billion. Microsoft grew its Office 365 Consumer subscriber base by 35 percent year-over-year during the quarter and now has more than 12.4 million subscribers.

PUBLISHED APRIL 23, 2015

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