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Microsoft Shares Soar As Profits Climb Thanks To Cloud, But Surface And Lumia Revenue Still Down

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Microsoft has posted a 2 percent increase in quarterly net income for the first fiscal quarter of 2016, sending stocks soaring by nearly 8 percent to $51.88 in after-hours trading as profit grew from last year's $4.54 billion to $4.62 billion or 57 cents per share.

The growth in profit comes even as revenue fell from $23.2 billion in the same period in 2014 to $20.38 billion thanks to the increasing strength of Microsoft's Azure cloud and Windows Server offerings. Wall Street has forecasted cloud computing to be the next major arena for technology firms, and positive growth for Azure signifies that Microsoft is future-proofing itself and its investors.

In particular, Microsoft's cloud business saw its compute usage more than double year-over-year, sending revenue up by 8 percent to $5.9 billion. During the earnings call Thursday, CEO Satya Nadella said Microsoft was running on an $8.2 billion annual revenue rate and on pace to hit its $20 billion target for its cloud business.

"Cloud continues to be the Rock of Gibraltar for Microsoft," says Daniel Ives, analyst at FBR Capital Markets. "This was a source of strength yet again in the quarter."

Microsoft's productivity business also saw a strong quarter as it shifts into a subscription-based business model. Office 365 subscriptions were up by 19.7 percent, adding 3 million new subscribers to amount to 18.2 million total subscriptions. Paid products brought in a good 70 percent growth in revenue for Office 365 and 5 percent growth for other Office cloud services.

However, a number of sore spots remain for Microsoft as Surface revenue saw a huge drop from $908 million last year to $672 million, although Microsoft is waiting out for a bright future ahead with the upcoming launch of the Surface Pro 4. Its Lumia business also unexpectedly tanked, with revenue taking a 54 percent nosedive as Microsoft turns its focus toward more lucrative businesses. This comes just after Microsoft laid off another 1,000 employees in its phone division, according to a report by the New York Times.

Windows OEM earnings also dropped 6 percent, but Microsoft says its PC business is faring better than the overall PC industry, which, according to figures by IDC, saw an 8 percent drop in shipments from last year. Xbox hardware was also down 17 percent, but Xbox Live saw its membership base grow to 39 million, which is the driving force behind the 6 percent increase in gaming revenue. Microsoft also predicted better growth for Xbox with the impending launch of Halo 5: Guardians next week.

The full details of Microsoft's earnings report can be accessed on its website

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