High technology giant Microsoft Corporation (MSFT – Free Microsoft Stock Report) reported revenue and earnings of $29.1 billion and $1.14 a share for its fiscal first quarter, which ended September 30th. This was a strong financial performance and easily eclipsed our estimates of $27.5 billion and $0.95 a share. Although strength was evident across each of its three business segments (Productivity and Business Processes, Intelligent Cloud, and More Personal Computing), the company's continued success in the cloud arena was a common theme. Investors greeted the latest results warmly, with MSFT shares poised to advance based on pre-market trading.
On the commercial side of Microsoft's business, bookings advanced 15%, benefiting from larger and longer-term customer commitments to Azure, the company's cloud platform. Meanwhile, commercial cloud revenue came in at $8.5 billion in the September period, an increase of 47%, reflecting continued strong interest in Office 365 commercial, Azure, LinkedIn, and Dynamics 365. In addition, the gross margin in Microsoft's commercial business moved up to 62% (versus 58% in the first quarter last year). The improvement resulted from a wider range of higher-valued products being sold on the company's cloud platform and an increase in operating leverage as more workloads move onto Azure. We note that Microsoft continued experiencing good demand for traditional server products, with customers focusing on premium versions and hybrid products.
Elsewhere, Office consumer products and services revenue progressed 16% in the quarter, with the number of Office 365 subscribers moving up to 32.5 million and registering a similar advance. Windows 10 and the associated ecosystem once again contributed nicely, as businesses continue embracing the system. The company's gaming business also remains vibrant, and it seems well positioned for a good holiday season.
Meanwhile, the latest financial and operating results demonstrate that Microsoft is executing well and that its customers are finding value in its products and services as they make the move to cloud architecture and cloud services. Moreover, Microsoft stands in contrast with some of its major competitors, as it primarily sells technology products and does not compete with its customers. That said, we do not diminish the competition that Microsoft faces in the cloud business. Rather, we again note that the company's business is advancing rapidly, particularly for an organization of its size, and management, though usually somewhat constrained relative to future prospects, seems optimistic.
For their part, Microsoft shares have come off their 52-week high, reflecting the stock market's general decline in recent weeks. Nevertheless, MSFT shares are still not trading at bargain prices, so those considering making new commitments should do so carefully. Finally, subscribers that had enough foresight to take positions in MSFT shares shortly after Satya Nadella took on the CEO position in February, 2014 have done quite nicely. For those, and others that have a relatively low cost basis of ownership, we would suggest that the best course of action is to continue to hold the shares.
About The Company: Microsoft Corp. is the largest independent maker of software. It develops and sells products for a wide range of computing devices. The company also sells the Xbox video game console and offers cloud services.
- Charles Clark
