Strong performance in Microsoft’s Azure cloud computing and Xbox video game businesses helped boost the company’s revenue in the second quarter (ended Dec. 31), according to CEO Satya Nadella.
“Our results this quarter speak to us picking the right secular trends and markets, and following that up with focused innovation and execution,” he said Jan. 31 on an earnings call with analysts. “Azure growth accelerated,” while Xbox is “reaching new customers with new offers,” he said, referring at least in part to the new Ultra High-Def (UHD) Xbox One X console that went on sale this past holiday season.
Intelligent Cloud revenue grew 15% from the same quarter a year ago, to $7.8 billion, Microsoft said in its earnings news release. Of that, server products and cloud services revenue increased 18%, “driven by Azure revenue growth” of 98%, while enterprise services revenue grew 5%, it said.
Commercial cloud revenue jumped 56% to $5.3 billion and Microsoft saw “broad-based growth across geographic markets and customer segments,” CFO Amy Hood said on the call. Gross margin “increased by 7 points to 55 percent, in line with seasonal trends,” she said, adding: “We improved gross margin percentage in each cloud service, and Azure again saw the most significant margin improvement this quarter.” Server products and cloud services revenue grew 18%, with “another quarter of double-digit annuity revenue growth,” she said.
Surface revenue inched up 1%, meanwhile, as Microsoft “continued to transition our portfolio towards” the Surface Laptop, Pro with LTE and new Surface Book 2, she said.
Gaming revenue, meanwhile, increased 8% in the quarter, “driven by Xbox hardware revenue growth” from the Xbox One X launch, Microsoft said.
The Xbox One X was the “top-selling premium console this holiday” season in the U.S., and “we saw strong sales” of the Xbox One S console also, Nadella told analysts on the call, referring to the slim version of the Xbox One that launched in 2016 offering 4K UHD Blu-ray and movie streaming, but not the 4K gaming provided by the Xbox One X.
“We will continue to innovate in console to attract high value gamers who want immersive, 4K experiences, to build a broader subscription service with Game Pass, and to extend our services to all the devices in our customers’ lives across console, PC and mobile,” Nadella said. He added that the company’s “decision to release exclusive game content on Xbox Game Pass simultaneous with global release increases the value of the subscription for members and our partners, and we are off to a good start.”
Microsoft also “grew gamer engagement again this quarter with 59 million monthly active Xbox Live members, record usage of our Xbox Live services, record viewers of our new streaming service, Mixer, and record Minecraft users,” he said.
The company also recently acquired cloud-based gaming platform PlayFab, which, he said, “serves more than 700 million gamers with more than 1,200 games from companies like Disney, Rovio and Atari.” PlayFab offers a “complete backend platform for mobile/PC/console game developers to build, launch, and scale cloud-connected games, extending our investments in Azure to provide a world-class cloud platform for the gaming industry,” he said.
Xbox software and services revenue grew 4% in the quarter, with “continued monetization growth partially offset by prior year first party triple-A title launches,” Hood told analysts.
Microsoft’s “real strategy going forward” when it comes to gaming is “not only to do great work on the console, but to complement that with the work we’re doing on the PC,” Nadella said, calling PC gaming a “growth market.” Microsoft won’t stop there, but will move on “to other devices,” including mobile ones, he said.