Microsoft Corporation (MSFT) Q1 2016: 57 Cent EPS Misses Wall Street Expectations

Microsoft on Thursday announced quarterly revenues of $20.4 billion, a 12 percent year-over-year decrease, with an operating income of $5.8 billion. For the period, the software maker posted earnings per share of 57 cents, missing analysts' expectations by a penny.

Despite the miss, one source of strength was the company's cloud offerings. Office 365 grew on the consumer side, gaining 3 million subscribers in the quarter to reach 18.2 million. Office 365 revenue grew almost 70 percent. Sales for Azure, Microsoft's cloud service, grew by 135 percent, and the company reported that year-over-year computer usage more than doubled. Revenue from server products and cloud services revenue grew by 13 percent.

“We’re seeing great traction with businesses who want to bring Microsoft’s cloud, mobile device management technology and data analytics together to improve security and productivity resulting in almost 70 percent year-over-year growth in our commercial cloud run rate,” said Kevin Turner, Microsoft's chief operating officer.

Phone division revenue, on the other hand, was down 54 percent. And Surface tablet sales declined 26 percent, which Microsoft said was due primarily to the release of the Surface Pro 3 in June 2014.

Microsoft made big announcements at the start of the month about its future direction, upcoming devices and how it positions itself for the consumer. The company debuted two products in its Surface line of laptop-tablet hybrids and two Lumia devices, but none of these products has started shipping yet.

This is also the first quarter that Windows 10 has been available. The software release is free to users of Windows 7 and 8.1 for the first year, meaning Microsoft will depend on hardware sales pushing Windows revenue now more than ever. Windows OEM revenue declined by 6 percent, but the company noted this means it is doing better than the PC market as a whole.

"We are making strong progress across each of our three ambitions by delivering innovation people love," said Satya Nadella, chief executive officer at Microsoft, in a statement. “Customer excitement for new devices, Windows 10, Office 365 and Azure is increasing as we bring together the best Microsoft experiences to empower people to achieve more."

Kim Forrest, VP and senior equity analyst at Fort Pitt Capital Group, questioned ahead of the call the strategy Microsoft has toward its PC industry partners. "They're frenemies. How did that happen?" she said.

David Lavenda, VP of product strategy at Microsoft partner harmon.ie, sees Microsoft's big switch toward Office 365 as "spot-on." Its two main competitors in this space are Dropbox and Google, two companies that claimed the cloud toward the end of Steve Ballmer's time as CEO.

"If there’s one thing Microsoft is good at, it’s playing catch-up," he said. "Remember the first Macintosh? Netscape? WordPerfect? History may just repeat itself."