Today Microsoft also announced their earnings for the third quarter of their 2016 fiscal year. Revenue, income and earnings were all down compared to Q3 2015, with revenue for the quarter of $20.5 billion, which is down 6%. Operating income was $5.3 billion, down 20%, and net income was $3.8 billion, which is down 25%. Earnings per share were $0.47, down 23% compared to a year ago.

Microsoft Q3 2016 Financial Results (GAAP)
  Q3'2016 Q2'2016 Q3'2015
Revenue (in Billions USD) $20.531 $23.796 $21.729
Operating Income (in Billions USD) $5.283 $6.026 $6.594
Gross Margin (in Billions USD) $12.809 $13.924 $14.568
Margins 62.4% 58.5% 67.0%
Net Income (in Billions USD) $3.759 $4.998 $4.985
Basic Earnings per Share (in USD) $0.48 $0.63 $0.61

Microsoft also reported non-GAAP earnings, which exclude revenue deferrals and the impact of restructuring charges. On a non-GAAP basis, revenue was $22.1 billion, which is up 2% year-over-year. Operating income was $6.8 billion, up 1%, and net income was $5.0 billion, down 3%. Earnings per share were $0.62, which was flat year over year. In addition to non-GAAP metrics, Microsoft also added constant currency results due to the high US dollar, and based on constant currency (CC), revenue was up 5%, operating income was up 10%, net income was up 6%, and earnings per share were up 10%.

Productivity and Business Processes, which includes Office commercial and consumer, and Office 365 commercial and consumer, as well as Dynamics products, had revenue for the quarter of $6.52 billion, which was up 1% year-over-year, or 6% based on CC. However, the gross margin for this segment fell 4%, and operating income came in at $2.99 billion, which was down 7%. Microsoft attributes the lower margins due to higher numbers of people using cloud services, which means, at least for the moment, the cloud offerings from Microsoft are making them less money than the non-subscription model, which is pretty interesting. I would guess that a lot of that is due to the large spending that is taking place to constantly expand infrastructure to handle new clients, but that is only a guess.

Looking at the numbers of Office though are very interesting. The consumer version of Office 365 increased from 12.4 million a year ago to 22.2 million this year. That is an increase in seats of 79% year-over-year, which is extremely good. A few years ago, I don’t think a subscription version of Office would have worked, but clearly Microsoft has found a solid hook for consumers with the packages. Even more impressive is the commercial seats for Office 365 business. Microsoft doesn’t often announce their user base for this, but on the earnings call, CEO Satya Nadella announced that they have over 70 million monthly active users for Office 365 commercial, and that is an increase in seats of 57% year-over-year. Also good news for Microsoft is that they have seen a 35% quarter-over-quarter growth in their premium protection services offered as part of the higher tiers of Office 365, and a key driver is the new premium tier, Office 365 Suite E5. Not to be outdone by Office, Dynamics CRM Online has seen its seats more than double year-over-year, and 80% of new CRM customers are choosing the cloud version.

Next up is the Intelligent Cloud segment, which includes server and server products, as well as cloud infrastructure such as Azure. Revenue for the quarter was $6.10 billion, which is up 3% year-over-year, or 8% in CC. Gross margin declined 2% (up 3% CC) year-over-year, and once again due to a higher mix of cloud services. The infrastructure expenditure here is a lot, and operating expenses grew 13% with investments in cloud infrastructure. With the lower margins and higher expenses, operating income fell 14% to $2.19 billion. Server products and cloud services had revenue growth of 5% CC, which is pretty stable, but it is Azure that is the big growth here. Azure revenue grew 120% CC this quarter, compared to the same time last year. Azure compute usage and Azure SQL usage more than doubled, and the Enterprise Mobility customer install base grew almost four times.

AWS is still the king of cloud computing, but Microsoft continues to make big gains here. They also are the only major cloud company to offer a hybrid offering, both with the traditional Windows Server elements, as well as the Azure Stack which can be run locally. At Build, they emphasised that are pushing towards more services in Azure as well, rather than having to have companies do the traditional VMs in the cloud. They still have a long way to go to catch AWS, but they continue to show this is a strength going forward.

The final segment of Microsoft is More Personal Computing, and this includes Windows, Surface, Xbox, phone, and search. Phone has certainly been a sore spot for Microsoft, and they took some big write-downs last year to basically write off the entire Nokia acquisition. For this quarter, revenue for this segment was $9.46 billion, which is up 1% year-over-year, or 3% CC. The increase in revenue this quarter was attributed to search and Surface, but lower phone and Windows revenue were a negative impact. Gross margin was 2% higher, once again due to search and Surface, and operating expenses fell 14% with the lower spending on phone. Operating income grew 57% for the quarter, to $1.65 billion. On a revenue basis, this is the largest single segment in Microsoft, but the margins for consumer are a lot lower than the enterprise services.

Windows 10 is now on over 270 million monthly active devices, but Windows OEM Pro declined 11% this quarter, which was worse than the commercial PC market. Revenue for non-Pro though grew 15%, which is quite a bit better than the PC market as a whole did, due to a bigger ratio of higher priced devices being sold. Windows volume licensing grew 6% CC.

On the devices side, revenue for devices fell 9% CC, and this is due to Lumia phone sales dropping off a cliff. Revenue for Lumia fell 46% year-over-year. This negative marred a great performance by the Surface line, and Surface had a 61% CC increase in revenue to $1.111 billion for the quarter, which is the second straight quarter where Surface was over $1 billion in revenue. Sales of the Surface Pro 4 and Surface Book are doing well.

Microsoft no longer breaks out sales numbers for Xbox, but gaming revenue grew 6% CC for the quarter. Microsoft is seeing an increase in Xbox Live transactional revenue, and they have a 26% increase in Xbox Live users compared to a year ago. Video game revenue was up 11% CC, and I would imagine a good chunk of that is still Minecraft. Xbox hardware revenue declined, with less sales of the Xbox 360 which is now officially out of production.

Search revenue, excluding traffic acquisition costs, grew 18% CC. Microsoft is getting more revenue per search, and search volume is also up. As a tidbit, they said that 35% of search revenue in the month of March was on Windows 10 devices.

Microsoft Q3 2016 Financial Results (GAAP)
  Productivity and Business Processes Intelligent Cloud More Personal Computing
Revenue (in Billions USD) $6.52 $6.10 $9.46
Operating Income (in Billions USD) $2.99 $2.19 $1.65
Revenue Change YoY +1%, +6% CC +3%, +8% CC +1%, +3% CC
Operating Income Change YoY -7% -14% +57%

Microsoft paid $6.4 billion back to investors in Q3 2016, with $3.6 billion in share buybacks and $2.8 billion in dividends. Looking ahead to Q4, Microsoft expects revenues to be between $21.7 billion and $22.4 billion.

The company continues to move from a traditional software company to a cloud infrastructure player, and with the results today we can see some big gains there. It was great to get an updated number for Office 365 commercial seats, which are now at over 70 million monthly users, and the growth in Azure is very large. Microsoft missed the boat on mobile, but are making up for it with platform agnostic solutions, and they are looking heavily towards conversations-as-a-service with bot integration in Skype and more. The Surface lineup is now very strong, when only a few years ago it had to endure a massive write-down. Phones, on the other hand, were basically non-existent and the acquisition of Nokia seems to be all for naught.

Source; Microsoft Investor Relations

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  • maximumGPU - Friday, April 22, 2016 - link

    I spent 3+ years on windows phone, firmly sticking around and refusing to believe i was missing out on much. I somehow reluctantly switched to android a few months back. What an eye opener that was! There's absolutely nothing i miss from widows phone. In fact the gap (not just apps) now looks bigger than ever. They over-promised and under-delivered massively on mobile, i doubt there's coming back from it to be honest, and the numbers reflect that.
  • damianrobertjones - Friday, April 22, 2016 - link

    Don't you find Android to be a shiny version of Windows mobile 6.5? It's just clunky and all over the place (IMO).
  • maximumGPU - Friday, April 22, 2016 - link

    I'm using stock android, so can't comment on other skinned ones from manufacturers. Yes i find some of the settings a bit all over the place. But other than that, i don't really have any complaints. App number and quality is there (the same apps on windows phone had in general less features and less updates), speed is there, widgets are great (better than live tiles imo).. All around a solid experience so far for me.
    For the curious i was on a lumia 930 and moved to a nexus 5X.
  • BurntMyBacon - Friday, April 22, 2016 - link

    @maximumGPU: "App number and quality is there (the same apps on windows phone had in general less features and less updates)"

    Agree with the app numbers argument, but I suppose there isn't much of a difference in quality for the apps I've tried. They do get updated less often than on my Android tablet, but the android updates often seem to be bug fixes and stability issues that aren't always present on their Windows Phone counterparts. Another update I could definitely do without are advertisement platform updates. Frankly, most updates don't bring new features. Granted, their are a few apps I've used that are legitimately second class on Windows Phone, and I've found alternatives. For instance, I like the metronome and tuner apps I've found (Windows Phone only) better than the ones I've used on Android. My experience will obviously be different than yours, but it is easy to just update without looking at what is updated, so you may have missed that part.

    @maximumGPU: "... , speed is there, ..."

    Smoothness and UI responsiveness has always been better on Windows Phone for both myself and a fairly sizable (though statistically insignificant) crowd of people I know who have used them. That said, more than a few review sites have talked about UI smoothness and general responsiveness as a weakness of Android, so it's not surprising. Though, in my opinion, it did get better when they release Android RunTime (ART).

    maximumGPU: "... , widgets are great (better than live tiles imo), ..."

    Given that I don't much care for either, I'll go with the one that is less resource intensive. So I guess we'll just have to disagree here.

    @damianrobertjones: "Don't you find Android to be a shiny version of Windows mobile 6.5? It's just clunky and all over the place (IMO)."

    I feel like neither Android nor iOS could figure out how to get away from the whole desktop icon system that started way back in the 90s. The organization is a bit different and they don't have start menus per say, but you are right. There is a striking resemblance to Windows Mobile once you take the makeup off. Admittedly the first attempt at tiles seemed a little kindergarten in the looks, but it was still a pretty effective method to work with. Now that they have transparency tiles on user selected backgrounds, the looks are quite good IMO.

    I'm not saying android can't provide a solid experience or that your move to android wasn't positive. Certainly Nexus devices can be extremely good with few compromises to privacy, the ability to uninstall carrier loaded junk, and the promise of security updates well beyond the time frame that other android manufacturers have been willing to do. Though I do wish they'd do more with expandable storage.

    @maximumGPU: "For the curious i was on a lumia 930 and moved to a nexus 5X. "

    Good Job :)

    I will, however, say that your experience is not universal. My time spend on a Lumia 920 has not left me wanting and having several android tablets and my wife's android phone (mine until I went back) to deal with, I know what the other side of the fence looks like. Certainly, there are benefits to be had, but Windows Phone is not without its advantages. It just depends on what is important to you. A third major player would be good for the industry as well, but most people don't buy a phone to support the industry.
  • maximumGPU - Friday, April 22, 2016 - link

    linkedin, whatsapp, facebook, ebay to name just a few of the big ones that are better (in some cases dramatically so) on Android. Then you've got all the bank apps that pulled out or don't bother.
    Then it's a questions of the apps that matter to you. (i use Synology apps, few productivity ones, spotify, games) and all of them were of higher quality on my nexus. And i certainly do not miss the "resuming..." or "loading..." pages.

    It's as you say dependent on use cases, and maybe yours is not that sensitive to app quality. But other than a cool looking tile interface (with reduced functionality compared to widgets), i couldn't find a compelling reason to stay.
  • Alexvrb - Friday, April 22, 2016 - link

    I have heard that the banks are working on UWP Win10 versions instead. So they'll have one codebase for desktop down to smartphone, and that means less for them to maintain.
  • FrozenGiraffe - Friday, April 22, 2016 - link

    There is a bank in 2016 that is building a desktop application?
  • jasonelmore - Monday, April 25, 2016 - link

    UWP allows it to run on the desktop even it it wasn't their intentions.
  • nikon133 - Wednesday, April 27, 2016 - link

    Well, I'm still on Lumia 920 (and Lumia 830 for my work phone) and really like it. I hd opportunity to replace 830 with Galaxy S6... tried Galaxy for a few days and went back to 830.

    Not to be taken wrong, S6 is higher-end phone... but I just preferred how Win Phone works. A habit, to a degree... but I love minimalist GUI that follows default Win apps.

    I'm also finding quite interesting to follow Win 10 development on phone. Have been running preview on 830 for some time, and not long ago upgraded to full release. It is developing nicely - from number of bugs and glitches, I'm aware of only one at the moment - my phone's screen will blink rarely, maybe once a week? for no obvious reason. Eventually it might be something with my phone, but it never happened under 8.1.

    I must say, I'm very undemanding on apps - I'm surrounded with computers and tablets both at work and at home, so I rarely need phone to be my alpha device... and what I need is there - and works good for me. SMS, email, calendar, FB, maps & nav, weather, KeePass, Skype, Viber... that would be it. Rarely a game, and a simple one... sort of like while waiting wife to finish her shopping.

    On a side note: comparing my Lumias to wife's iPhone 5s... her phone does freeze/blackscreen on occasion and needs soft reset. Maybe once a month? Right now her internet access (over cellular) does not work... though this might be due to maintenance local Vodafone is doing. Even if both my Lumias are on the same provider. Anyway, my Lumia 920 froze once in the past 2.5 years, and twice I had to reboot because it was running hot and wasting battery... and all those incidents happened in the 1st year of ownership. From my personal experience, Windows phone turned out more stable and reliable platform than iOS, and judging from my Android using friends experience, than Android too.

    Looking forward Surface phone.
  • Donkey2008 - Sunday, May 1, 2016 - link

    So your entire opinion of iOS is based on a broken iPhone? Honestly, that made me laugh.

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