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Microsoft today reported earnings for its second fiscal quarter of 2017, including revenue of $26.1 billion, net income of $6.5 billion, and earnings per share of $0.83. In Q2 2016, Microsoft saw $25.7 billion in revenue, net income of $6.3 billion, and earnings per share of $0.78.

Analysts had expected Microsoft to earn $25.3 billion in revenue and earnings per share of $0.79. In short, the company beat expectations as well as results in the last year’s quarter. The company’s stock was up 0.93 percent in regular trading, but was relatively flat in after-hours trading (likely due to the poor results for devices). Microsoft said it returned $6.5 billion to shareholders in the form of share repurchases and dividends during the quarter.

“Our customers are seeing greater value and opportunity as we partner with them through their digital transformation,” Microsoft CEO Satya Nadella said in a statement. “Accelerating advancements in AI across our platforms and services will provide further opportunity to drive growth in the Microsoft Cloud.”

Microsoft’s earnings results are broken into three operating groups. Let’s dive into the details.


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More Personal Computing

This segment, which includes results for Windows licensing and devices (Surface, phones, and Xbox), declined 5 percent to $11.8 billion.

Windows OEM revenue increased 5 percent. Breaking that down further, Pro revenue was up 6 percent and non-Pro revenue was up 5 percent.

Surface revenue decreased 2 percent, from $1.35 billion in Q2 2016 to $1.32 billion in Q2 2017. The Surface Pro 4 and the Surface Book continue to chug along, but releasing the Surface Book i7 unsurprisingly didn’t move the needle as much as a Pro 5 and a Book 2 would have.

Phone revenue declined 81 percent. We continue to see the effects of Microsoft’s employee cuts and Nadella’s plan to focus on fewer devices.

Advertising revenue from search, excluding traffic acquisition costs, grew 10 percent. Microsoft has previously attributed this to Windows 10, which includes tighter Bing integration.

Gaming revenue declined 3 percent. This isn’t surprising given that many are waiting for Project Scorpio.

Intelligent Cloud

This segment, which includes results from server products and services (including Windows Server and Azure), grew 8 percent to $6.9 billion.

Server products and cloud services revenue grew 12 percent. But the big highlight as always was Azure revenue, which grew 93 percent, and usage of Azure compute, which more than doubled year over year once again.

Two quarters ago, Microsoft’s commercial cloud business exceeded a $10.0 billion annual run rate. The company is still projecting this number to hit $20 billion by 2018.

Productivity and Business Processes

This segment, which includes results from Office and Office 365 (commercial and consumer customers), grew 10 percent to $7.4 billion.

Office 365 has now added less than 1 million subscribers for three quarters in a row. In Q2, another 0.9 million subscribers were added to hit 24.9 million. Office commercial products and cloud services revenue grew 5 percent, with Office 365 revenue up 47 percent. The company’s subscription revenue stream continues to deliver, much like it did when Office was a traditional software business.

Microsoft also broke out revenue from LinkedIn, which it acquired for $26.2 billion last month. The social network contributed $228 million in revenue and lost $100 million during the period beginning on December 8, 2016.

This was a strong quarter for Microsoft, but investors clearly want to see more from the company’s devices. 2017 will see a lot of focus on new Surface and Xbox products, while Phone remains a big question mark.

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