Microsoft's Q4 2017 Earnings: Year Over Year Gains Still Don't Catch Old-School Revenues

There were no real surprises in this most recent earnings report, unless you count the pleasant surprise of beating analyst estimates. The forecast earnings per share had been pegged to $0.71 per share, but thanks to a one-time tax write-off related to the shuttering of the smartphone business that boosted earnings by $0.23, plus steady growth in cloud-related businesses, Microsoft reported $0.98 profit per share.

(In other words, without the failing smartphone business, profits would have been only $0.76 per share.)

The company made $23.3 billion in revenue for the quarter. The three divisions broke out the revenue as follows:

Microsoft's growth trends stayed consistent with what we've seen this entire fiscal year: Double-digit quarter-over-quarter and year-over-year gains in any business division with cloud-based revenue, a slowly and steadily decreasing line of revenue in OEMs and personal computing, and continued, low-key growth in its search division. Here's what we can tell about the company based on where the money was made.

The team running Bing has developed a great deal of momentum. I've been charting the year-over-year growth (or decline) of the products Microsoft breaks out in its earnings reports, and Bing's string of double-digit revenue growth goes back at least four years now. And remember that in fiscal year 2016, Bing made Microsoft $5.3 billion in revenue. Given its steady growth of 8-10% every quarter, it's made at least $5.8 billion in annual revenue for Microsoft in fiscal year 2017.

Bing is basically the LinkedIn of the More Personal Computing division -- a low-key, steady source of revenue. This quarter, LinkedIn made Microsoft a cool billion thanks to revenue from its Talent Solutions services.

Subscribers, not hardware buyers, are what Microsoft credits for growing profits. The gaming revenue was up 3% year-over-year, and since Microsoft said that 3% was equal to $4 million, we've got to conclude that gaming revenue stood at $1.467 billion for the quarter. That growth was made possible by software and services. As Microsoft stated in its release:

Xbox software and services revenue increased 11%, primarily due to a higher volume of Xbox Live transactions. Xbox hardware revenue decreased 29%, driven by lower prices and a decline in volume of consoles sold.

Subscribers are also the reason for the increase in many billions of dollars made in the Productivity division and Intelligent Cloud division.

In the division that houses Office 365, Office Commercial revenue was $5.5 billion (up 20% year over year) thanks to a higher Office 365 subscriber count and Office 365 consumer growth helped drive the Office Consumer division to $761.5 million in revenue (up 13% year-over-year).

In Intelligent Cloud, the 21% growth to Server products and cloud services revenue clocked in a $5.093 billion (up 15%), driven by a 97% rise in Azure revenue and on-premises service license growth of 4%. 

Alas, Azure revenue is not broken out by a specific dollar figure. We only know that Azure revenue has either nearly-doubled or doubled, year-over-year, for eight straight quarters. So while that cloud growth may be impressive, the sum total of Azure revenue might be very small compared to what the on-premises server licensing and enterprise services & support revenue numbers are. We don't know because Microsoft has not offered hard numbers for any of those product lines, just revenue growth figures.

Bearing that in mind, let's take away a third conclusion from these earnings ...

Microsoft is really sticking to the narrative that the cloud is what drives growth and therefore future earnings are likely to be there. Again, a 97% growth in Azure revenue is great relative to what Azure revenue used to be, but what's the overall number?

And while the division that still deals in OEMs, mobile devices, gaming and computer sales continues its "Well, we lost a percentage or two compared to last year's sales" pitch, it's worth noticing that this non-growing division is still the biggest earner out of all three divisions.

The gulf between More Personal Computing and other two divisions may not be as wide as it is during any Q2 of any earning season -- Q2 results always reflect holiday sales, and hardware does very well then -- but it's there. That division outearns the Intelligent Cloud division by at least a billion dollars every quarter.

This isn't to bash the Intelligent Cloud division; every quarter in fiscal year 2017 was stronger than the preceding one. It's to point out that while we're looking at the growth story in Intelligent Cloud and its promise of potential markets, we shouldn't ignore where money is currently being made. And we should ask: If hardware sales continue to peel away, will the growth in cloud services for every type of customer be enough to cancel out the effects of that vanishing revenue?

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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, the FY 2017 Q3 release, and the FY 2017 Q4 release.