Microsoft posted revenue of $20.4 billion in the first quarter of its 2016 financial year, down 12 percent from the same quarter a year ago. Operating income was $5.8 billion, down 1 percent, and net income was $4.6 billion, up 2 percent. Earnings per share were $0.57, a six percent increase.
The company attributed much of the decline to the strong dollar. The dollar value of prices charged outside the US has declined as the dollar has grown stronger, and with much revenue coming from beyond America's borders, this is having a material effect on earnings. This effect reduced revenue by some $1.2 billion, operating income by $0.69 billion, and net income by $0.65 billion.
The quarter also saw the introduction of a new reporting structure just a couple of years after the last change to the reporting structure. The company is now divided into three reporting segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Productivity includes Office, both retail licensed, volume licensed, and Office 365 subscribed, related products such as Skype, Exchange, and SharePoint, and the Dynamics range. Intelligent Cloud encompasses Azure, Windows Server, SQL Server, and System Center, and Visual Studio. This segment also includes Enterprise Services. More Personal Computing spans retail, OEM, and volume licensed Windows licensing, patent and Windows Phone licensing, all hardware devices, all Xbox and gaming revenue, and all advertising and search revenue. Microsoft provided equivalent numbers for the same quarter last year as the basis of comparison.
Productivity and Business Processes posted revenue of $6.3 billion with operating income of $3.1 billion, representing 3 percent and 7 percent declines. Office Consumer revenue was down 13 percent, with 9 percent of that due to the strong dollar; the rest was due to declines in the consumer PC market, partially offset by growth from Office 365. About 3 million consumer Office 365 subscribers were added in the quarter, for 18.2 million total. Office Commercial revenue was down 2 percent, with a similar pattern as in the consumer space: a big part of the decline was due to currency impact, and perpetually licensed Office sales bundled with PCs were down, but corporate Office 365 subscription revenue was up, with both an increase in subscribers and a skew toward more expensive subscription plans. Dynamics revenue was up 3 percent.
Intelligent Cloud posted revenue of $5.9 billion with operating income of $2.4 billion, increases of 8 and 14 percent respectively. This came in spite of a 6 percent hit due to the strong dollar. Server product revenue was up 6 percent, Azure revenue was up 121 percent. Compute usage of Azure has doubled year-on-year.
More Personal Computing saw revenue of $9.4 billion and an operating income of $1.6 billion, down 17 and 4 percent, respectively. This included a 4 percent currency hit. Device revenue was down a significant 49 percent, with revenue of both phones and Surface computers dropping. Lumia sales were down to 5.8 million from 9.3 million in the respective period last year, reflecting Microsoft's even further reduced ambitions in the market and a product line-up that still has massive gaps. Surface revenue was down 26 percent, largely attributed to the June 2014 launch of Surface Pro 3 making the same quarter last year a bumper one.
Windows revenue was down 7 percent, thanks to lower OEM revenue and patent license fees. Windows OEM revenue of Pro SKUs was down 7 percent, slightly ahead of the declining business PC market. OEM revenue of non-Pro Windows SKUs was down 4 percent, outperforming the declining consumer PC market.
Search advertising revenue was up 23 percent, driven by higher search volume and higher revenue per search. On its earnings call, Microsoft said that Bing had made an operating profit, with quarterly revenue of more than $1 billion. This is a significant milestone for the search engine that is increasingly being integrated into Microsoft's other products, most visibly as Cortana. In September, some 20 percent of search revenue was driven by Windows 10 devices.
Gaming revenue was up slightly. Xbox Live revenue was up 17 percent, with more transactions and more revenue per transaction. Game software revenue was up 66 percent, largely because this quarter included Minecraft sales, whereas the corresponding quarter last year did not; Minecraft developer Mojang was bought in November 2014. Xbox hardware revenue, however, was down 17 percent, attributed mainly to lower sales of the Xbox 360.
A further $1.2 billion of revenue has been deferred due to the Windows 10 upgrade program. Excluding that deferral, revenue was $21.6 billion, beating estimates of $21.0 billion. Similarly excluding the deferral, earnings per share of $0.67 beat the estimated $0.59.
Looking forward, the company estimated that second quarter Productivity and Business Processes revenue would be $6.6 to $6.7 billion, Intelligent Cloud revenue would be $6.2 to $6.3 billion, and More Personal Computing revenue would be $12.0 to $12.4 billion. The strong dollar is expected to continue to have a negative impact.
These results and estimates have been warmly welcomed by Wall Street, with the share price up 6.95 percent in after hours trading to a 15 year high of more than $51. While the consumer story continues to show weaknesses that Microsoft is struggling to resolve, the enterprise business is proving resilient, and the cloud migration is continuing apace.
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