Microsoft on Wednesday reported fiscal first-quarter results that topped Wall Street’s expectations, despite a marked slowdown in sales growth from its Azure cloud-computing service.
The company’s results were boosted by strong, double-digit growth from many of its core products, including its Office 365 productivity suite, LinkedIn, and its gaming division. The company’s gaming sales, for example, grew by 44% from the same period last year.
Indeed, all of the major portions of the company’s business posted sales that surpassed the Street’s forecasts, said Daniel Ives, a financial analyst who covers Microsoft for Wedbush.
CEO Satya “Nadella and company [delivered] a Picasso-like quarter,” Ives said in a “first-look” research note after the company posted its results.
Investors cheered the news, despite the disappointing Azure numbers. In recent after-hours trading, Microsoft’s shares were up $4.92, or 4.8%, to $107.24.
Here’s what it reported:
- Fiscal Q1 revenue: $29.1 billion. Analysts were looking for $27.92 billion. It posted $24.54 billion in the same quarter last year.
- Fiscal Q1 earnings per share (EPS): $1.14. Wall Street was expecting 95 cents a share. In its first quarter last year, the company earned 84 cents a share.
The company did not immediately offer a forecast for its second-quarter. Here’s what analysts projected before the report:
- Fiscal Q2 revenue: $32.26 billion. During last year’s holiday quarter Microsoft brought in sales of $25.83 billion.
- Fiscal Q2 EPS: $1.07. In its second quarter last year, Microsoft lost 82 cents a share, as it took a $13.8 billion charge related to the new federal tax law.
The company’s stock closed regular trading down $5.78 a share, or 5.4%, to $102.32.
Overall, Microsoft’s results were strong, but Azure’s growth slowed
All three of Microsoft’s major business segments posted double digit sales growth in the quarter. Its intelligent cloud business, which includes Azure, set the pace with 23.8% growth over the year-ago quarter. Its productivity and business processes group, which includes its Office products, grew at a 18.6% pace. And its more personal computing group, which includes Windows and its gaming products, saw sales go up 14.6%.
Among the individual products that helped drive the results were the commercial version of Office 365, which saw its sales grow at a 36% pace; LinkedIn, whose sales grew by 33%, the gaming business, and Xbox software and services, which grew by 36%.
Although the company’s overall results exceeded expectations, they included some disappointments. Most notably, revenue from the company’s Azure cloud-computing service grew at a 76% annual rate.
That might seem nothing to sniff at, but it represented a significant slowdown from the 89% pace in the company’s fourth quarter and was lower than many analysts were expecting. It was also the slowest growth rate for Azure in at least two years.
However, that pace was in line with what Microsoft was expecting, Mike Spencer, the company’s general manager of investor relations, told Business Insider. The company had forecast that Azure’s growth would decelerate. That slowdown is due simply to the law of large numbers not to any problems with the business, he said. The company’s cloud and server products, of which Azure is just one part, grew at a 28% annual pace overall in the quarter, he noted.
“We actually feel good” about that growth, he said.
The company also saw a significant slowdown in revenue from its company’s Dynamics 365 product line, which represents the cloud versions of its customer-relationship management and enterprise resource planning software. That business grew at a 51% clip in its first quarter; in the fourth quarter, Dynamics 365 grew at a 61% rate.
As with its Office productivity suite, Microsoft is trying to move customers who previously purchased periodic licenses for its Dynamics software to the new cloud versions, which it offers as a subscription service. So, even as the Dynamics 365 business is growing, its traditional Dynamics business is shrinking. All told, if you include Microsoft’s traditional, non-cloud versions of its Dynamic products, its Dynamics business grew at a 20% annual rate.
That’s “a really strong number,” Spencer said.
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