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Microsoft's Office 365 now earns more than on-prem Office

Does Redmond's latest quarter show a turning point in its cloud transition?

Microsoft Sign

Microsoft's cloud hit a turning point in the tech giant's latest financial quarter, with Office 365 sales overtaking sales of traditional on-premise licenses for the first time.

Redmond recorded a 13% year-on-year growth in revenue for the three months ending June 2017, the tech giant's fourth quarter and end of its financial year, bringing its quarterly revenue to $23.3 billion.

Much of that surge in growth was derived from a 43% year-on-year jump in Office 365 commercial revenue, which contributed to a total of $8.4 billion in revenue for Microsoft's Productivity and Business Processes division - which is now pulling in more money than on-premise Office products.

"For the first time, Office 365 commercial revenue surpassed revenue from our traditional licensing business," CFO Amy Hood said in a conference call transcribed by Seeking Alpha.

Dynamics, Microsoft's CRM arm, increased 7% - thanks to revenue growth of 74% in Dynamics 365.

Azure, Microsoft's cloud platform, basically doubled, recording 97% growth, though again Microsoft did not provide exact revenue for the cloud service, simply stating that it helped its Intelligent Cloud division grow 11% to rake in $7.4 billion.

Hood provided some more details on the call, saying: "We closed the highest number of multi-million-dollar Azure deals to date. our commercial cloud annualized revenue run rate exceeded $18.9 billion this quarter, growing 56%. We finished the year with nearly $15 billion in commercial cloud revenue."

The scale of Microsoft's cloud success reflects the company's ongoing shift to focus on selling cloud subscriptions at the expense of traditional on-premise Enterprise Agreements, with its Enterprise Services division falling 3%.

CEO Satya Nadella told media on the conference call: "This quarter's cloud growth puts us squarely on track to reach the goal we set a little over two years ago, of $20 billion in commercial cloud in fiscal [year] 2018. More than ever before, customers are placing their trust in the Microsoft cloud.

"CIOs and business decision makers increasingly prefer Azure as they make decisions about their cloud strategy. They value our hybrid consistency, developer productivity, AI capabilities, and trusted approach."

He added that Windows 10 experienced a 33% surge in enterprise and education deployments over the quarter.

Microsoft felt the impact of lower phone revenue on its $8.8 billion Personal Computing division, which declined 2%, but after Surface revenue plunged 26% during its last quarter, it fell just 2% this time around, which Microsoft blamed on product lifecycle refresh cycles.

Nick McQuire, VP of Enterprise Research at CCS Insight, said: "As expected, Microsoft posted solid results and continues to fly on all cylinders, especially across its cloud business. Azure's meteoric rise in particular has been key to Microsoft's success in 2017 and notably, the grounds for the firm's recent restructuring. Azure is on track to become the dominant enterprise cloud platform in the industry over the next several years."

He added: "Last quarter, Microsoft has had to weather the storm of poor performances in its devices business. But the launch of new Surface models this quarter as a much-needed portfolio refresh have helped it improve results and regain some ground against Apple."

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