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Windows, Surface Surprise to the Upside in Microsoft Earnings

Microsoft reported surprisingly strong Windows and Surface revenues in a largely flat-to-declining PC market, but the company's third-quarter financial results seemed mainly powered by continuing cloud strength.

Microsoft reported overall earnings of $0.95 per share on revenues of $26.82 billion. The third-quarter (January through March) figures beat analyst expectations of $0.85 per share and revenues of $25.77 billion, but the company's stock still fell in after-hours trading following the news.

Revenue was up 16% and earnings per share (EPS) climbed 36%, although the EPS figure excluded certain items.

By broad business unit, Microsoft did $9 billion in revenues in Productivity and Business Processes, $7.9 billion in Intelligent Cloud, and $9.9 billion in More Personal Computing.

The 13% revenue gain in More Personal Computing included a 21% jump in Windows commercial products and cloud services revenue, and a 32% jump in Surface revenue. Microsoft attributed the Windows gain to an increased volume of multi-year agreements and to internal accounting reasons, with the mix of products sold carrying higher in-quarter revenue recognition than in the year-ago period.

As for Surface, Microsoft said the company's line of Microsoft-branded PCs had a favorable comparison against a year-ago period impacted by end-of-lifecycle dynamics.

Amy Hood, executive vice president and chief financial officer at Microsoft, said in the earnings news release that the company's performance across all segments was better than expected. "We delivered double-digit revenue and operating income growth driven by 58% growth in our commercial cloud revenue."

Microsoft CEO Satya Nadella chose to interpret the results as evidence of customer trust in the Microsoft cloud. "We are innovating across key growth categories of infrastructure, AI, productivity and business applications to deliver differentiated value to customers," Nadella said in a statement.

Revenues for the Productivity and Business Processes unit and the Intelligent Cloud unit, both of which include cloud products, were each up 17%. Those gains included growth of 42% in Office 365 commercial, 65% in Dynamics 365 and 93% in Azure.

Posted by Scott Bekker on April 26, 2018 at 2:27 PM