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What: Shares of Microsoft (NASDAQ:MSFT) jumped on Friday after the company beat analyst expectations for both revenue and earnings when it reported its fiscal-third-quarter results. The stock closed the day up about 10% from Thursday's close.
So what: Microsoft reported revenue of $21.73 billion for the quarter, up 6.5% year-over-year and $670 million above what analysts were expecting. The Devices and Consumer segment grew by 8%, driven by a sharp rise in sales of Microsoft's Surface tablets, 35% sequential growth in the number of Office 365 consumer subscribers, and sales from the phone hardware business. Weakness in Microsoft's consumer Windows licensing business was more than offset by growth in other areas.
The Commercial segment grew by 5%, driven by a doubling of Microsoft's commercial cloud revenue and 12% growth in server products revenue. Commercial cloud revenue, which includes Azure and software-as-a-service products like Office 365, has reached an annual run rate of $6.3 billion.
Microsoft reported EPS of $0.61 for the quarter, ten cents better than what analysts were expecting but 10% lower year-over-year. Weakness in the consumer licensing business, as well as the addition of the low-margin phone hardware business, helped drive earnings down compared to the same period last year.
Now what: Despite a severe decline in the consumer Windows and Office business, Microsoft seems to have performed far better than the market was expecting, sending the shares up considerably and adding around $40 billion onto Microsoft's market capitalization.
The rapid growth in Microsoft's cloud business, including a doubling of both Azure usage and commercial Office 365 revenue, is an encouraging sign that Microsoft's ongoing transition is taking hold. Weakness in the PC market is certainly taking its toll on Microsoft, but the upcoming release of Windows 10 could help reverse that trend. Overall, it was a solid quarter for Microsoft, one that investors are clearly happy with.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.