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Microsoft’s Q3 Results Miss Estimates, Cloud Business Hits $10 Billion Annual Run Rate

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Microsoft has announced results for its third quarter of fiscal 2016 (company follows a June fiscal ). And this quarter, the Redmond giant has missed analyst estimates, recording $22.1 billion and earnings per share(EPS) of $0.62 billion against the Wall Street expectations of $22.09 billion revenue and $0.64 EPS.

As a result of this, shares of Microsoft fell nearly by 5% in the after-hours trading. However, Microsoft attributes high income tax rates behind the reason of low EPS and said that EPS would have been $0.04 higher and beaten the expectations in the absence of those extra expenses on tax.

Some of the key stats at the glance are:

  • Revenue was $20.5 billion GAAP, and $22.1 billion non-GAAP
  • Operating income was $5.3 billion GAAP, and $6.8 billion non-GAAP
  • Net income was $3.8 billion GAAP, and $5 billion non-GAAP
  • Earnings per share were $0.47 GAAP, and $0.62 non-GAAP

Microsoft continues its trend of reporting its financial results under three categories- Productivity and Business Processes (PBP), which includes Office and Office 365 (commercial and consumer); Intelligent Cloud(IC) division that includes Azure cloud, services, and non-cloud related servers; and the biggest division,i.e.,  More Personal Computing (MPC), which contains Windows, Devices, Gaming and Search.

In PBP category, Microsoft witnessed an increase of 1% in revenue reaching $6.5 billion but saw aa decline in operating profits which dropped 7%. Office 365 added 1.6 million subscribers to reach 22.2 million with revenues climbing by nearly 63%. Office commercial products and cloud services also saw an increase in revenue by 7%.

Cloud business of Microsoft continue to show positive signs  with Azure revenue growing by 120 percent, and usage of Azure compute and Azure SQL database more than doubling  year over year. The overall segment grew by 3% with revenue reaching $6.1 billion.

Another thing revealed by Microsoft in this segment was that its commercial cloud business exceeded a $10.0 billion annual run rate. And the company expects it to hit $20 billion by 2018.

Microsoft CEO Satya Nadella said in a statement,

Organizations using digital technology to transform and drive new growth increasingly choose Microsoft as a partner. As these organizations turn to us, we’re seeing momentum across Microsoft’s cloud services and with Windows 10.

However, the core offering of Microsoft in personal computing section continued to slow down with an overall decline in PC market globally. The MPC segment revenues fell by 1 percent to $9.5 billion. However, operating profits in the segment grew by  57 percent to reach $1.65 billion.

A pattern which was repeated this quarter as well was the performance of Microsoft phones as phone revenue declined by 46%. An even bigger drop was observed in the number of units sold as Microsoft sold just 2.3 million Lumia devices in Q3 2016, a decrease of 73% from 8.6 million in Q3 2015.

However, Surface revenue increased by 61% y-o-y  growing from $713 million in Q3 2015 to $1.11 billion in Q3 2016. This was encouraging signifying the better sales performance of Surface Pro 4 and the Surface Book.

Windows OEM was also down by 2% though the company said that it still outperformed the PC market. Search advertising revenue grew by 18% owing to tighter Bing integration with new Windows 10 devices.

XBox Live monthly users, although grew by 26% year over year,  the number of players fell to 46 million players from the record 48 million in last quarter.

Overall one could say this quarter was a rather mixed one for the Redmond giant with a downfall in Windows and phones business whereas steady growth of business across cloud and services segment.

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