Microsoft’s Revenues Grew 11 Percent, But Windows Stumbles

Microsoft beat expectations in a tough quarter, delivering a net income of $17.1 billion on revenues of $50.1 billion, a year-over-year gain of 16 percent in the quarter ending September 30. But that was its slowest growth since March 2017, and Windows took a big hit.

“In a world facing increasing headwinds, digital technology is the ultimate tailwind,” Microsoft chairman and CEO Satya Nadella said. “In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.”

Microsoft’s Intelligent Cloud business grew 20 percent YOY to revenues of $20.3 billion thanks to strong growth for both Azure and Server. But its other two major business units struggled. Productivity and Business Processes delivered $16.5 billion in revenues, with growth of just 9 percent. And More Personal Computing, the home of Windows, Xbox, and Surface, saw revenues decline slightly to $13.3 billion.

Despite the gains, Microsoft’s cloud revenues were less than expected, though Azure missed the mark by only a small margin: the consensus estimate on Azure growth was 36.7 percent; Azure grew 40 percent in the previous quarter.

Productivity and Business Processes growth was driven by Office 365, with Office commercial products and cloud services seeing revenue growth of 7 percent. Office 365 commercial revenue was up 11 percent, and Office commercial products revenue fell 28 percent as Microsoft’s customers continued their migration to subscription services. Office consumer was up 7 percent, with the subscriber base growing 13 percent to 61.3 million.

Of course, all eyes are on More Personal Computing and Microsoft’s Windows and Xbox businesses. Both did horribly.

After CFO Amy Hood had predicted that Windows revenues from PC makers would decline in the “high single digits” this quarter, the drop-off was worse than expected, at 15 percent. Windows commercial products and clouds services revenues grew 15 percent, but declines in Windows were enough to drag down the entire business unit, with Microsoft citing “continued deteriorations in the PC market.”

Xbox content and services revenues fell 3 percent YOY, though gaming revenue overall was up slightly. Xbox hardware revenue was up 13 percent.

Surface and other devices revenue was up 2 percent. Revenues had experienced double-digit growth in the prior two quarters.

I’ll take a closer look at these earnings in Short Takes on Petri.com tomorrow.