Surface Devices Sales Dip Accounts for Microsoft Stock Hit, Not Surprisingly

Microsoft Earnings Surface revenue decline Q3 2017

Microsoft just reported its earnings for the financial quarter ended March 31, and there has been a slight setback. As of writing this article, Microsoft stock dipped about 4 percent. Not surprisingly, the culprit was More Personal Computing, which not only includes older revenue streams like Windows licensing, but also hardware in the form of Surface device sales. The real surprise, however, was that Windows isn’t the reason for the revenue decline.

While one would have expected Windows licensing revenue decline to account for the revenue miss, which was minimal – Microsoft reported quarterly revenues of $22.08 billion (GAAP) against an analyst consensus estimate of $22.09 billion (GAAP) – Windows OEM licensing actually grew year-over-year. The culprit was Surface revenues, which declined 26 percent this quarter compared to the prior period.

The good news for investors is that Microsoft’s cloud businesses continue to grow, contributing to an overall revenue jump of 8 percent over Q3 2016.

The biggest piece of news is that their commercial cloud annualized revenue run rate is now in excess of $15.2 billion, a significant increase over the $14 billion Microsoft reported in Q2 2017.

That sequential jump in cloud revenue run rates is a strong indication of the health of their cloud business, validated by the 45 percent growth in Office 365 commercial revenue growth.

Despite the slight revenue miss, this has been a great quarter for Microsoft, based on the fact that their growth in key forward areas such as cloud infrastructure (Azure grew 93 percent once again) and SaaS delivered solid numbers.

Interestingly, even Windows OEM revenues increased by 5 percent this quarter, something we were hoping would happen in order to allow Microsoft to further build out its cloud portfolio.

That building out is also showing in the form of Dynamics 365 revenues, which grew by 81 percent.

All of that, combined with the fact that Microsoft did face some economic headwinds from overseas revenues, shows us that Microsoft is clearly tracking growth once again.

The Surface revenue decline of 26 percent was only to be expected. The devices are extremely popular and in high demand, but there is a tougher market to face now in the form of competition in the 2-in-1 hybrid tablet market. There was no new Surface product of note released this year to the consumer market, which is one major reason that competition stifled Surface growth.

The other “non-surprise” is that phone revenue was cited as the primary reason for the 7 percent decline in the More Personal Computing segment.

What that points to is how critical it is for Microsoft to release the Surface Pro 5 as soon as possible. Now, with news that their “Cellular PC” based on the concept behind Surface Phone is expected to be launched in the fourth quarter 2017 (per Qualcomm CEO Steve Mollenkopf), and the Surface Pro 5 expected any time now, we should see More Personal Computing bounce back up, provided Microsoft can hold on to its Windows OEM licensing revenues for a few more quarters.

MUST-SEE: First Steps Towards Surface Phone, Windows 10 Cellular PC Coming in Q4 2017

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