Microsoft reports $22.3 billion in Q1 2017 revenue: Surface up 38% and Phone down 72%

Microsoft today reported earnings for its first fiscal quarter of 2017, including revenue of $22.3 billion and earnings per share of $0.76. In Q1 2016, Microsoft saw $21.7 billion in revenue and earnings per share of $0.67.

Analysts had expected Microsoft to earn $21.71 billion in revenue and earnings per share of $0.68. In short, the company beat expectations. The company’s stock was down 0.49 percent in regular trading, but up some 5 percent in after-hours trading (expected, given the results). Microsoft said it returned $6.6 billion to shareholders in the form of share repurchases and dividends during the quarter.

“We are helping to lead a profound digital transformation for customers, infusing intelligence across all of our platforms and experiences,” Microsoft CEO Satya Nadella said in a statement. “We continue to innovate, grow engagement, and build our total addressable market.”

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Microsoft’s earnings results are broken into three operating groups. Let’s dive into the details.

Productivity and Business Processes

This segment, which includes results from Office and Office 365 (commercial and consumer customers), grew 6 percent to $6.7 billion.

Office 365 has now added less than 1 million subscribers for two quarters in a row. In Q1, 0.9 million subscribers were added to hit 24 million. Office commercial products and cloud services revenue grew 5 percent, with Office 365 revenue up 51 percent. The company’s subscription revenue stream continues to deliver, much like it did when Office was a traditional software business.

Intelligent Cloud

This segment, which includes results from server products and services (including Windows Server and Azure), grew 8 percent to $6.4 billion.

Server products and cloud services revenue grew 11 percent. But the big highlight as always was Azure revenue, which grew 116 percent, and usage of Azure compute, which more than doubled year over year once again.

Last quarter, Microsoft’s commercial cloud business exceeded a $10.0 billion annual run rate. The company is still projecting this number to hit $20 billion by 2018.

More Personal Computing

This segment, which includes results for Windows licensing and devices (Surface, phones, and Xbox), declined 2 percent to $9.3 billion.

Windows OEM Pro revenue increased 1 percent, while non-Pro revenue decreased 1 percent. Surface revenue increased 38 percent, from $672 million in Q1 2016 to $926 million in Q1 2017. The Surface Pro 4 and the Surface Book continue to chug along, but Microsoft still won’t break out exact numbers.

Phone revenue declined 72 percent. We continue to see the effects of Microsoft’s employee cuts and Nadella’s plan to focus on fewer devices.

Advertising revenue from search, excluding traffic acquisition costs, grew 9 percent. Microsoft has previously attributed this to Windows 10, which includes tighter Bing integration.

Gaming revenue declined 5 percent. This is despite winning U.S. market share from Sony.

This was another decent quarter for Microsoft. We’ll hear a lot more from the company soon, starting with the Windows 10 news next week.