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Satya Nadella’s move towards subscription business model pays off, but profits still slide

Microsoft’s attempt to focus less on one-time sales of its Office and Windows cash cows, and more towards cloud and subscription-based deals, seems to be paying off for the software giant.

Redmond recorded yet another profit slide due in part to the sluggish PC market, currency issues, and increased costs. But on the upside, good performance for Surface tablets, coupled with Lumia smartphones and the cloud, all boosted Microsoft in the last quarter.

Profit Slide

Microsoft is undergoing a period of transition at the moment. It was last year when CEO Satya Nadella began to aggressively cut costs at the company, as he pledged to turn Microsoft into a “mobile-first, cloud-first” organisation going forward.

As part of that drive it was announced last July that 18,000 staff would lose their jobs, mostly from the Nokia handset division. And Microsoft is still feeling the financial impact of this redundancy program.

Indeed, subsequent quarterly results have bared witness to Microsoft’s transition and increased restructuring and R&D costs. Indeed, the latest third quarter results continue this trend. For the period ending 31 March, Microsoft posted a net profit down nearly 12 percent at $4.99bn (£3.3bn), from $5.66bn (£3.7bn) in the same year-ago quarter.

But there was better news on the revenue side, as sales rose approximately 6.5 percent to $21.7bn (£14.4bn) from $20.4bn (£13.5bn) a year earlier. Microsoft has been helped by the inclusion of the mobile phone business from Nokia, but its cloud offerings have also helped.

There have Lumia-930-goldenbeen a number of operational positives for Microsoft lately. Its ‘Devices and Consumer revenue grew 8 percent to $9bn (£6bn). This was helped by a 35 percent sequential rise in Office 365 Consumer subscribers, as well as 21 percent rise search advertising revenue (Bing now holds a 20.1 percent US market share).

The arrival of the Surface Pro 3 helped Surface revenue grow 44 percent to $713m. And Microsoft sold 8.6 million Lumia units that helped Phone Hardware pull in $1.4bn.

Cloud Growth

But the business side also prove helpful, as ‘Commercial revenue’ grew 5 percent to $12.8bn (£8.5bn).

This was aided by a tremendous 106 percent rise in commercial cloud revenue, driven by Office 365, Azure and Dynamics CRM Online, to $6.3bn (£4.2bn). Server products and services revenue grew 12 percent, but Office Commercial products and services revenue declined 2 percent, and Windows volume licensing revenue also declined 2 percent.

“Customers continue to choose Microsoft to transform their business and as a result we saw incredible growth across our cloud services this quarter,” said Satya Nadella.

“Next week at Build we’re excited to share more about how we’re empowering every individual and organization on the planet to achieve more with the next generation of our platforms,” he added.

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Author: Tom Jowitt
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