Microsoft 4Q17: Office 365 revenue surpasses traditional licenses

Microsoft 4Q17: Office 365 revenue surpasses traditional licenses

In the fourth quarter of its 2017 financial year, Microsoft posted revenue of $23.3 billion, up 13 percent on a year ago, with an operating income of $5.3 billion (up 73 percent), a net income of $6.5 billion (up 109 percent), and earnings per share of $0.83 (up 112 percent on the same quarter last year).

For the full 2017 financial year, revenue was $90.0 billion (up 5 percent on 2016), operating income was $22.3 billion (up 11 percent), net income was $21.2 billion (up 26 percent), and earnings per share were $3.31 (up 29 percent).

Microsoft currently has three reporting segments: Productivity and Business Processes (covering Office, Exchange, SharePoint, Skype, and Dynamics), Intelligent Cloud (including Azure, Windows Server, SQL Server, Visual Studio, and Enterprise Services), and More Personal Computing (covering Windows, hardware, and Xbox, as well as search and advertising).

As was the case last quarter, Microsoft is including its LinkedIn results in the Productivity group, as well as breaking them out independently. Revenue for the social network was $1.1 billion, with operating expenses of $1.0 billion and cost of revenue of $0.4 billion, for a total operating loss of $0.4 billion.

The Productivity group reported revenue of $8.5 billion, up 21 percent year on year, with operating income of $2.8 billion, down 8 percent. LinkedIn was responsible for much of the growth in revenue and the decline in operating income. Office 365 commercial revenue was up 43 percent, with seats growing 31 percent and the rest coming from increased revenue per user. Traditional commercial Office licensing was down 17 percent, as Office users migrate from perpetual and Software Assurance licensing to Office 365 subscriptions. Office 365 consumer seats have grown to 27 million. Microsoft CFO Amy Hood said that this transition had reached a key tipping point: Office 365 revenue surpassed license revenue for the first time.

Cloud group revenue was $7.4 billion, up 11 percent, with operating income up 15 percent to $2.5 billion. Server product and cloud revenue both grew 15 percent, with Azure revenue up 97 percent, and compute usage growing by more than double. Enterprise Services revenue, however, fell 3 percent, as Windows Server 2003 support contracts ended.

Microsoft’s total commercial-cloud annualized run rate is now $18.9 billion, and it should hit $20 billion in the next financial year.

More Personal Computing revenue dropped 2 percent to $8.9 billion, with operating income up 68 percent to $1.8 billion. The decline in revenue was due to the evaporation of Microsoft’s phone presence—revenue was essentially zero, just as it was last quarter—along with a 2-percent drop in Surface revenue. For most of the quarter, Microsoft was continuing to sell some old, rather stale systems; the new Surface Pro and Surface Laptop were only available for two weeks of the period.

On the other hand, Windows revenue was surprisingly strong; OEM Pro revenue was up 3 percent, ahead of corporate PC market, due to a greater shift to high-end systems and SKUs. OEM non-Pro revenue was flat, though this still outperformed the consumer PC market, again due to the shift toward premium devices. Search revenue was up 10 percent, thanks to more searches and more revenue per search.

Gaming revenue was up 3 percent, with an 11 percent increase in Xbox software and services revenue. Xbox Live monthly active users was also up, to 53 million.

Overall, then, the quarter showed some familiar strengths and weaknesses. The transition to Office 365 is, for Microsoft, an enormous success story, showing that not only can the company change its business, distribution, and development models, but that, with perseverance, it can bring customers along for the ride.

But the Surface and phone stories show that the company still has difficulties in some segments and that it still hasn’t really resolved how those segments are going to be handled. If Microsoft wants to be in hardware seriously, then the delays to updating its lines—and the substantial revenue hit that came with those delays—have to end. If, on the other hand, it’s content to merely dabble then it should probably make this clearer to the businesses that are buying Surface machines for their fleets. Right now, Microsoft still isn’t acting like a real PC hardware company, but it’s not not acting like one either. It’s time to, uh, commit, or get off the pot.

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