Microsoft Surface sales slump amid revamped competition

Bengaluru — Microsoft slightly missed Wall Street’s average revenue estimate for the latest quarter on Thursday, as sales of its Surface tablets and laptops slumped in the face of revamped competition in the PC market. Shares of the world’s largest software company fell 0.6% to $67.85 in trading after the bell.

Under CEO Satya Nadella, who took the helm in 2014, Microsoft has sharpened its focus on the fast-growing cloud computing unit to counter a prolonged slowdown in the PC market, which has weighed on demand for its Windows software.

That transition remained on track, with cloud margins improving and the company’s annual commercial cloud revenue run rate — a bespoke metric closely watched by analysts — reaching $15.2bn, a 50% year-on-year improvement. It marks good progress toward its goal of pushing the figure to $20bn by 2020.
Nadella said Microsoft reached 100-million monthly active users for Office 365 Commercial, the firm’s flagship cloud productivity software, the first time Microsoft has given such a figure.

 

For the fiscal third quarter, ended March 31, overall revenue on an adjusted basis climbed 6% to $23.56bn, but missed analysts’ average estimate of $23.62bn.
Revenue from Microsoft’s personal computing unit, its largest by revenue, fell 7.4% to $8.84bn. Analysts on average had expected revenue of $9.22bn, according to research firm FactSet StreetAccount.

The business includes Windows software, Xbox gaming consoles, online search advertising and Surface devices. Surface revenue plunged 26% to $831m, down from $1.3bn in the year-ago quarter.

Popular high-end computers from other makers, along with many Surface products having been on the market for many months, hurt Surface sales, said Zack Moxcey, an investor relations director for Microsoft.

The lower-than-expected revenue in the personal computing division came amid an up-tick in the broader PC market. Worldwide, PC shipments rose 0.6% in the first quarter of 2017, seeing growth for the first time in five years, market research firm IDC said earlier this month.
Microsoft’s Windows OEM revenue, a measure of the company’s licence revenue from computer makers such as Dell Technologies and HP, rose 5%. Dell, in particular, reported strong increases in computer sales driven by high-end laptops.
Cloud soars
Revenue from the unit that Microsoft calls "Intelligent Cloud", which includes server products and the company’s flagship cloud computing platform, Azure, jumped about 11% to $6.76bn in the quarter. Azure revenue soared 93% in the quarter. The service competes with Amazon.com’s Amazon Web Services, the market leader in cloud infrastructure, as well as offerings from Alphabet’s Google, IBM and Oracle.

 

Microsoft’s commercial cloud gross profit margin reached 51%, up from 48% the previous quarter. Microsoft has been emphasising higher-margin premium products such as databases and has recently started building its own servers rather than relying on HP, driving the cloud margins higher, analysts said.

Microsoft also, for the first time, reported a revenue growth rate for Dynamics 365, its competitor to Salesforce.com’s online sales software. Revenue grew 82% in constant currency, though the firm did not give an absolute dollar total. "They are focused on taking the user data on LinkedIn and integrating it in a way that it conforms to privacy concerns and user concerns and makes their [sales software] systems highly competitive to what Salesforce offers," said Shannon Cross, an analyst with Cross Research.
Microsoft said LinkedIn, which it bought for about $26bn, contributed $975m in revenue in the quarter, $25m more than analysts had expected. The company’s net income rose to $4.80bn, or 61c a share, in the quarter, from $3.76bn, or 47c a share, a year earlier.

Excluding one-time items, Microsoft earned 73c a share. Analysts on average had expected 70c a share, according to Thomson Reuters, Microsoft’s shares had risen 9.9% this year up until Thursday, eclipsing the 7% gain in the broader S&P 500.

Reuters