Microsoft earnings soar on the wings of Azure, Office

Driven by the ever-increasing user demand for the online version of Office and interest in migrating on-premises workloads to Azure, Microsoft revenue soared again. The company reported first-quarter revenue of $45.3 billion, a 22% increase, and net income rising 48% compared with the year-ago quarter.

Microsoft's cloud revenue for the quarter surpassed $20 billion for the first time, rising some 36% over last year's first quarter. Office commercial products and cloud services grew by 18% thanks largely to Office 365 commercial revenue, which jumped 23%. Microsoft expanded its 365 consumer edition subscriptions by 15% to 54.1 million. Microsoft Dynamics products and cloud services increased by 31%, boosted mainly by Dynamics 365's revenue growth of 48%.

Speaking to financial analysts, Microsoft CEO and Satya Nadella said digital transformation projects were a major factor in the quarter's results, as more users begin to clearly see the financial benefits of moving their workloads from on-premises environments to the cloud.

Satya Nadella

"The case for digital transformation has never been more urgent," Nadella said. "Digital technology is a deflationary force in an inflationary economy. Businesses small and large can improve productivity and the affordability of their products and services by building tech in density."

Server products and cloud services revenues rose 35% primarily on the strength of Azure and other cloud services revenue growth of 50%. Personal computing offerings also made notable gains, up 12% to $13.3 billion, with Windows OEM revenues up 10%, despite many OEMs constrained by supply chain shortages. Windows commercial products and services increased 12% year-over-year.

"Despite ongoing supply chain constraints, our Windows OEM performance was better than expected in what is still a growing PC market," Nadella said. "There has been a structural shift in PC demand emerging from this pandemic, and we are delighted with the early response to Windows 11."

While sales of PCs remain strong, Microsoft reported sales of its own Surface device fell 17% compared with last year's first fiscal quarter due to supply chain shortages.

Nadella said the company is working with a variety of OEM partners and hopes to offer a wide selection of Windows 11 devices "at every price point and form factor" by the end of this year. Likewise, the company is working with a wide range of software developers to create a "new class" of Windows 11-based applications that take advantage of the edge and AI capabilities.

Azure remains at the heart of Microsoft's success in the cloud market, as it steadily closes the gap with archrival's Amazon's cloud business. Amazon leads the worldwide infrastructure as a service (IaaS) market with 41% market share and $26.2 billion of revenue in 2020, compared with Microsoft's $12.7 billion in revenue that year, according to data reported in June by IT research firm Gartner.

Nadella said key to that success has been building "many more" data center regions and partnering with the mobile operations of AT&T and Verizon in the US, the European-based Telefonica and British Telecom and Telstra and Singtel in Asia Pacific.

"Every organization will need a distributed computing fabric across the cloud and the edge to rapidly build and deploy applications," Nadella said. "That's why we are positioning Azure to be the world's computer."

The only potential hiccup for Microsoft could be slowing PC sales due to supply chain shortages.

By investing aggressively in new regions and rolling out additional data centers, Microsoft is putting its money where its mouth is, said Gordon McKenna, CTO of public cloud at Ensono, an IT services provider.

"The only potential hiccup for Microsoft could be slowing PC sales due to supply chain shortages," McKenna said. "But they are focusing on Azure and Teams, and so should continue to grow in sectors that are currently dominating the remote work era."

In other highlights, Microsoft reported that revenue for LinkedIn increased 42%, fueled by the 61% growth of the company's Marketing Solutions group.