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Microsoft's Q1 Earnings in 7 Quotes

A strong earnings report from Microsoft on Thursday shot MSFT shares to record levels, largely on cloud growth and revenues. The investor call after the release had some interesting nuggets for Microsoft partners. Some of the key quotes from Microsoft CEO Satya Nadella and CFO Amy Hood:

1. "Surface continues to drive category growth and more commercial customers are choosing to deploy Surface, with deals of five hundred devices or more increasing 70 percent year-over-year. And we are reaching more commercial customers of all sizes with the support of our channel partners." --Nadella

For the first quarter, Microsoft Surface revenues increased 38 percent to a reported $926 million. Those are great numbers for the category-creating devices, and Microsoft is pointing to the channel and to substantial enterprise deals for the strength. There are a lot of comparisons out there to Apple iPad sales, but it's a complicated comparison. Surface Pro 4 competes with iPad Pro, which is a fraction of all iPad sales. On the other hand, the Surface Book, which is included in the Surface revenues, competes more with other PCs and with Macs.

Even with the expected launch of more Surface devices soon, don't look for similar good news in Q2. Hood warned that Microsoft expects Surface revenues to decline in the current quarter.

2. "Our commercial cloud annualized revenue run rate now exceeds $13 billion, and we remain on track to achieve our goal of $20 billion in fiscal year '18." --Nadella

The $20 billion cloud run rate was a big promise, and it's a strong sign for the channel that Microsoft is still discussing that goal as a realistic number that it is still aiming to hit. For the record, Microsoft says it calculates that run rate by multiplying revenue for the last month of the quarter by 12 for Office 365 commercial, Azure, Dynamics online and "other cloud properties."

Boosting the run rate were a 116 percent improvement in Azure revenues, a 20-point year-over-year gain in the percentage of Fortune 500 companies running at least three of Microsoft's cloud offerings (now 60 percent). Not to mention the Office 365 commercial cloud...

3. "Monthly active users of Office 365 commercial are now over 85 million, up more than 40 percent year-over-year. Office 365 commercial seats were also up 40 percent year-over-year, and revenue up 54 percent in constant currency." --Nadella

For partners wondering where the baseline is -- that's it. Microsoft is growing seats by 40 percent and growing revenues by 54 percent. The revenue growth has to do with revenue-per-seat improvements by moving customers to multiple workloads and into higher SKUs like E3 or E5.

4. "Dynamics CRM Online paid seats more than doubled year-over-year. And customers increasingly prefer our cloud solutions, with more than 70 percent of new Dynamics CRM and ERP enterprise customers choosing Dynamics online." --Nadella

The new customer addition number is interesting and helps explain Microsoft's huge launch of Dynamics 365 next month. Don't be surprised to see a tail-off in these numbers in Q2, due to widespread confusion in the channel about the pricing cutover to Dynamics 365 on Nov. 1 and some gaps in product availability in the early rollout phase.

5. "More than half of the Fortune 500 have our Enterprise Mobility services, up more than 20 points year-over-year. ... And we crossed three-quarters-of-a-billion unique user identities in Azure Active Directory." --Nadella

In short, enterprise mobility, still a focus.

6. "We continue to see strong interest in the preview for SQL Server on Linux with 19,000 customers registered, including more than half of the Fortune 500. It's opening conversations with customers spanning their entire data estate both on-premises and in the cloud." --Nadella

SQL Server on Linux is only one of the Linux and open source projects Nadella mentioned. He also talked about open sourcing Windows PowerShell and Azure Service Fabric on Linux. Especially for enterprise partners, being part of the open source conversation is becoming key.

7. "As expected, Enterprise Services revenue growth slowed this quarter to 1 percent and 2 percent in constant currency, largely due to a decreasing volume of support agreements associated with Windows Server 2003 end-of-support." --Hood

The ebb and flow of Microsoft's services efforts are always of interest to partners concerned about conflict with Microsoft's internal services arm. From an earnings perspective, it's looking like an ebb period.

Posted by Scott Bekker on October 21, 2016


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