Microsoft's Q3 Earnings: Hardware Still Matters to the Bottom Line

It hurts not to have holiday sales every quarter. After a Q2 in which Microsoft Surface revenue accounted for $1.3 billion, Surface revenue dropped sharply to $831 million.  Surface was one of only two products or services to see a year-over-year revenue drop; the other was enterprise services:

Microsoft's overall quarterly results were $23.56 billion vs. the $23.62 billion analysts expected, and it made 73 cents a share, beating analyst estimates of 70 cents a share.

Here are the key takeaways from the quarterly earnings:

Bing Continues to Sing: We've kept an eye on the search engine revenue since the Q4 2016 report, where we learned that the company made $5.3 bil of search for the year (i.e. more than Yahoo's entire business). Although Microsoft declined to mention specific numbers, this is the third fiscal 2017 quarter to see revenue growth for Bing, with search revenue up 8% year-over-year. It'll be interesting to see what the 2017 totals are.

It Hurts Not to Have Hardware: The More Personal Computing division saw revenue drop 7% year-over-year to $8.8 billion, hampered by "lower phone revenue" and a 26% plunge in Surface sales.

For the past two years, Microsoft's released new Surface models in the fall -- the Surface Pro 4 and the Surface Book on October 26, 2015, and the Surface Studio and Surface Pro with Performance Base on October 26 2016 -- so it'll be interesting to see whether this release pattern holds or if fiscal Q4 2017 might be boosted by a hardware release.

Office 365 Sees Incremental Growth Quarter-Over-Quarter: Last quarter, Microsoft called out its consumer subscriber base of 24.9 million; this quarter, the consumer subscriber base reached 26.2 million users. That's a 5% increase quarter-over-quarter.

As far as year-over-year growth goes: Microsoft claimed 22.2 million subscribers at this time last year, so that gives the company an 18% increase in customers year over year. 

Here's How Each Division Did Relative to Q2 2017: Microsoft divides up its businesses into three divisions, and reported the following revenue for each. The number in parentheses next to the revenue number shows the increase or decrease relative to the prior quarter. 

Productivity and Business Processes made $8.0 billion, up from $7.4 billion (+ 8%)

Intelligent Cloud made $6.8 billion, down from $6.9 billion (- 1%)

More Personal Computing made $8.8 billion, down from $11.8 billion (- 25%)

All three divisions together made $23.6 billion, down from $26.1 billion (- 10%)

In other words, two out of three of Microsoft's divisions saw revenue dip over the last three months.

Here's the Year-Over-Year Comparison, Or How Each Division Did Relative to Q3 2016: Microsoft divides up its businesses into three divisions, and reported the following revenue for each. The number in parentheses next to the revenue number shows the increase or decrease relative to the prior quarter. 

Productivity and Business Processes made $8.0 billion, up from $6.5 billion (+ 23%)

Intelligent Cloud made $6.8 billion, up from $6.1 billion (+ 11%)

More Personal Computing made $8.8 billion, down from $9.5 billion (- 7%)

All three divisions together made $23.6 billion, up from $22.1 billion ( +7%)

So the company's showing growth relative to the year-ago numbers. 

Microsoft's Long-Term Strategy Of Building Out The Cloud Is Working -- For Now: Even as the division sees sales drop quarter-to-quarter and year-over-year, the fact remains that More Personal Computing still generated more revenue than either of the other two divisions did individually.  But let's keep an eye on whether the gains in the Productivity and Intelligent Cloud divisions to offset the losses in More Personal Computing.

This quarter, they did: the $700 million year-over-year revenue gains from the Intelligent Cloud division perfectly offset the $700 million revenue losses in the More Personal Computing Division. So the $1.5 billion increase in year-over-year revenue all came from the Productivity division.  

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To see Microsoft's earnings from Q1 2017, here's the link to the FY 2017 Q1 release, the FY 2017 Q2 release, and the FY 2017 Q3 release.