This afternoon, Microsoft had its earnings announcement for the second quarter of their 2017 fiscal year. The results for this quarter are the first to contain results from their acquisition of Linkedin, which Microsoft purchased for $26.2 billion. For this quarter, the Non-GAAP results reflect an exclusion of the LinkedIn results, to better compare the rest of Microsoft’s earnings year-over-year, in addition to another set of Non-GAAP results which do include the LinkedIn results.

But on a GAAP basis, the numbers from LinkedIn are reported. Looking at the GAAP results, Microsoft had revenue for Q2 of $24.1 billion, up 1% from a year ago. Gross margin was 58.9%, up 0.4%, and operating income came in at $6.2 billion, up 3%. Net income for the quarter was $5.2 billion, up 4%, and earnings per share were $0.66, up 6%.

Microsoft typically defers the revenue from Windows 10 licenses over the life of the computing device, to adhere to current revenue recognition accounting guidance. Previously, a sale of Windows would be a sale of Windows, with all of the revenue for that license being accounted for right away. Microsoft is moving its guidance on this to recognize the revenue at the time of billing, rather than over the life of the device, but has not yet adopted this accounting practice, so the Non-GAAP results this, with $2.0 billion in Windows 10 revenue deferrals.

On a Non-GAAP basis, revenue was $26.1 billion, up 2%, or 4% in constant currency (CC – excluding the effect of foreign currency rate fluctuations). Excluding LinkedIn resulted in $25.8 billion, up 1%, or 3% CC. Gross margin for the quarter was 62%, up 0.7%, and excluding LinkedIn, it was 62.1%, up 0.8%. Operating income for the quarter was $8.2 billion, up 5%, and 8% CC, and excluding LinkedIn resulted in $8.4 billion, up 8% and 11% CC. Net income was $6.5 billion, up 6%, and 10% CC, with the exclusion results of $6.6 billion. Earnings per share came in at $0.83, up 9%, and 13% CC, and the results were $0.84, up 11%, and 15% CC, if you exclude LinkedIn.

Luckily, Microsoft is not expecting to break out the LinkedIn results in Non-GAAP results in the future, but for this quarter, there is quite a few extra numbers to evaluate. LinkedIn itself had $228 million in revenue for Q4, with an operating loss of $201 million, with the sale closing on December 8, 2016.

 Microsoft has shuffled their product groups around a bit for reporting, and they now have three groups named Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. For those that are interested, LinkedIn results will be in the first group.

Productivity and Business Processes is a big part of Microsoft, with revenues of $7.38 billion, up 10%, but this is a high margin business, featuring Office commercial and cloud products, Office 365 commercial and consumer, as well as Dynamics and now LinkedIn. This segment had an operating income of $3.26 billion for the quarter, down 1%. Microsoft gained 37% more Office 365 commercial seats this quarter, and 900,000 more Office 365 consumer subscribers. Microsoft doesn’t always give out the total seats for Office 365, but they did announce they were over 70 million seats in May of 2016, and Q2, so expect them to be closing in on 100 million seats. Dynamics is another key to this group, and the Dynamics products had 7% growth year-over-year, with Dynamics 365 growing over 200% year-over-year as people switch to the cloud version of Dynamics.

Intelligent Cloud is Microsoft’s server products, both on premise and cloud products. This segment had revenues of $6.86 billion, up 8% from a year ago. Operating income for this segment was $2.4 billion, down 7% from a year ago. Server products and cloud services saw revenue grow 12% year-over-year, but enterprise services fell 4%.Azure revenue was up 93% compared to the same time last year, and Microsoft has seen over double the use of Azure compute.

More Personal Computing continued to have the highest revenue per segment, at $11.82 billion, but it fell 5% compared to the same time last year. Margins are also not as high in this segment, with an operating income of $2.5 billion for the quarter. Microsoft has seen growth in its key areas though, despite the dip in revenue. Windows OEM Pro revenue was up 6%, and non-Pro was up 5%. Windows commercial products and cloud services had revenue gains of 5%. Surface revenue was down 2%, which is actually quite good considering Microsoft had launched the Surface Pro 4 and Surface Book in Q2 2016, so being almost flat year-over-year, when the product has not been refreshed, is decent. Surface had revenue of $1.3 billion for the quarter. Gaming revenue for the quarter was down 3%, to $3.595 billion. Lower console pricing, and lower console sales, contributed to the decline. Microsoft has found strong growth in their digital ecosystem though, with Xbox software and services growing revenue by 18%, and for the first time, digital transactions reached $1 billion for the quarter. Xbox Live active users grew 15% to 55 million as well, across all of Microsoft’s platforms. Search revenue was also up 10%.

The big hit to More Personal Computing continues to be the loss in revenue from the phone division, which was shuttered. Phone revenue was down 81% as Microsoft phases out of this market.

Overall it was a strong outing by Microsoft. They continue to advance their cloud platforms, and recently announced Microsoft Teams as a Slack competitor which is bundled with Office 365. The competitive pricing is likely going to win them a lot of customers with this new tool, and it will just be part of Office 365. They have continued to add value to this, on both the commercial and consumer lineup, and their work here has paid off well. Their move to the cloud has mostly overshadowed the client computing side, as far as on the financials, but More Personal Computing also had some strong growth, if you exclude the phones.

Source: Microsoft Investor Relations