Intelligent Cloud Stands Out in Microsoft Q1 Results

Of Microsoft's three main business units, Intelligent Cloud accounted for slightly less revenue than either of the other two units, but still generated some of the most interesting activity this quarter.

Microsoft on Wednesday reported results for the first quarter (July-September) of its fiscal 2020. The company beat Wall Street expectations on both earnings and revenues, although the stock barely moved. Compared to the year-ago quarter, revenues were up 14% to $33 billion and earnings per share were up 21% to $1.38.

Microsoft's three business units all brought in roughly similar amounts of revenue for the quarter. More Personal Computing saw revenues of $11.1 billion, Productivity and Business Processes also had $11.1 billion, and Intelligent Cloud was $10.8 billion.

By revenue growth, Productivity and Business Processes, which includes Office, LinkedIn and Dynamics, was closest to the top-line growth revenue percentage at 13%. Intelligent Cloud, which includes Azure, server products and services, grew revenue at about twice the rate of the rest of the company -- 27%. More Personal Computing lagged the company's overall revenue growth, with a 4% increase.

In his prepared statement for the earnings release, CEO Satya Nadella highlighted Intelligent Cloud. "The world's leading companies are choosing our cloud to build their digital capability," Nadella said. He also pointed to the continuous rollout of more services and capabilities across Microsoft's cloud services stack.

Azure is the strategic tent pole of the division, and the results for Azure for the quarter were strong. Microsoft does not reveal Azure revenue figures, but the company details Azure growth rates every quarter.

While growth in Azure is slowing as the business gets larger, it remains robust and consistently compares favorably to segment leader Amazon Web Services' growth rates. Microsoft reported a 59% growth rate for Azure in Q1. A year ago that rate was 76%, and it has been slowly dropping in the interim quarters. For the record, Microsoft did say that Azure revenues grew at a 63% rate in the most recent quarter in constant currency.

In a positive note for Microsoft's unique hybrid cloud narrative, the server products, which include on-premises systems, had a surprising surge in the quarter. A year ago, server products grew at a 10 percent rate and had fallen to 5% growth in Q4 of 2019. Yet in Q1 2020, server products were up 12%. Microsoft attributed some of the growth to demand related to SQL Server 2008 and Windows Server 2008 end of support.

Other notable highlights in the quarterly results included:

• Revenues for the Microsoft Surface line of 2-in-1s and laptops dropped 4%.
• Dynamics 365 had a strong quarter with revenue growth of 41%.
• Office 365 Commercial revenue shot up 25%.
• Windows OEM revenue was up 9% as the January 2020 support deadline for Windows 7 approaches.
• LinkedIn revenue was up 25%.
• Enterprise Services revenue was up 7%.
• The Xbox unit was flat.

Posted by Scott Bekker on October 23, 2019