Microsoft's weak phone sales drag down its Surface and cloud wins

Cloud growth is the brightest spot in the company's quarterly earnings report

microsoft stock campus building

A building on the Microsoft campus.

Credit: Stephen Brashear/Getty Images for Microsoft

Microsoft's acquisition of Nokia is proving to be quite the albatross around the company's neck. The company has stepped away from focusing on phones, and its handset sales revenue fell by almost half in the first quarter.

Microsoft sold only 2.3 million Lumia phones during the quarter, 73 percent fewer units compared with the first quarter of 2015. That meant Lumia handset revenue fell 46 percent. This dragged down the company's overall device revenue despite major gains in its Surface business. 

Sales of Surface tablets and the Surface Book touchscreen laptop brought in $1.1 billion for Microsoft during the last quarter, compared with $713 million during the same period last year. That's good news for the company's future, but it's being hurt by the present state of the phone business.

Overall, the company's revenue continued to shrink slightly, with total revenue in the first quarter reaching $20.5 billion compared with $21.7 billion a year earlier. Microsoft's profit also shrank from almost $5 billion in the first quarter of 2015 to just under $3.8 billion in the first quarter of this year.

For the most part, Microsoft's story this quarter is similar to what the company has been doing for a while. Its cloud services are driving growth, while traditional parts of the company's business are shrinking alongside the PC market. A key part of the trend is Azure revenue, which grew 110 percent year over year.

Meanwhile, server software products like Windows Server and SQL Server logged year-over-year declines.

Similar to Azure, Office 365 continued to grow, reaching 22.2 million consumer subscribers, up from 12.4 million a year earlier. The number of Office 365 Commercial seats sold in the quarter grew by 57 percent, but Microsoft didn't say how many seats it has sold on that side of the business. 

What will be interesting to see from Microsoft is whether the company's cloud growth will ever bring it back to its previous financial highs. 

Shop Tech Products at Amazon