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Microsoft beat revenue and profit expectations for its first fiscal quarter, as revenue from its Office 365 and Windows Azure cloud computing offerings helped to compensate for ongoing sluggishness in the Windows PC market.

The company reported $21.66 billion in revenue this afternoon for its first fiscal quarter, down 7 percent for the quarter, after adjusting for the deferral of revenue related to the Windows 10 launch. Analysts polled by Thomson Reuters were expecting the company to post $20.98 billion in quarterly revenue, down 10 percent.

Microsoft CEO Satya Nadella
Microsoft CEO Satya Nadella

Profits were $5.38 billion, down slightly from the same quarter a year ago, after adjustments, but the company’s earnings per share of 67 cents were well ahead of the 58 cents per share expected by analysts polled in advance of the release.

Microsoft said commercial cloud revenue is now at an annual run rate of more than $8.2 billion. Office 365 consumer subscriptions reached 18.2 million, an increase of about 3 million subscribers during the quarter.

Revenue from sales of Windows to computer makers fell 6 percent, but Microsoft said that was better than the PC market overall, as the Windows 10 launch prompted a bigger mix of Windows sales for premium computers. Revenue from Microsoft’s Surface devices fell to $672 million from $908 million in the same quarter a year ago. (Note: Surface revenue number corrected since original post.)

Meanwhile, revenue from phone hardware sales declined about $1.5 billion, or 58 percent, reflecting the company’s decision to narrow its focus to fewer premium devices. That was a big reason for the company’s overall decline in revenue for the quarter.

“We are making strong progress across each of our three ambitions by delivering innovation people love,” said Microsoft CEO Satya Nadella in a news release. “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.”

Update: In its 10Q regulatory filing, Microsoft said it sold 5.8 million Lumia phones, down from 9.3 million in the same quarter a year ago.

Microsoft is no longer breaking out Xbox unit sales on a quarterly basis. However the company said Xbox Live active users grew 28 percent to 39 million.

On a conference call with analysts, Nadella reiterated his recent comments about Amazon and Microsoft emerging as the No. 1 and No. 2 players in public cloud computing. “We push each other and we each have a unique approach,” he said, citing Microsoft’s additional focus on “reinventing servers at the edge of the cloud,” to create hybrid systems, which he called “clearly a structural advantage.”

Notably, he cited two Microsoft cloud customers, Walmart and Jet.com, who are e-commerce and retail rivals of Amazon.

Amazon reported its own quarterly results this afternoon, including Amazon Web Services revenue of more than $2 billion, up 78 percent.

Here are more notes on Microsoft’s quarter, as reported in the company’s earnings release.

Revenue in Productivity and Business Processes declined 3% (up 4% in constant currency) to $6.3 billion, with the following business highlights:

• Office commercial products and cloud services revenue grew 5% in constant currency with Office 365 revenue growth of nearly 70% in constant currency and continued user growth across our productivity offerings
• Office 365 consumer subscribers increased to 18.2 million, with approximately 3 million subscribers added in the quarter
• Dynamics revenue grew 12% in constant currency, with the Dynamics CRM Online enterprise installed base growing more than 3x year-over-year

Revenue in Intelligent Cloud grew 8% (up 14% in constant currency) to $5.9 billion, with the following business highlights:

• Server products and cloud services revenue grew 13% in constant currency, with revenue from premium products and services growing double-digits
• Azure revenue and compute usage more than doubled year-over-year
• Enterprise Mobility customers more than doubled year-over-year to over 20,000, and the installed base grew nearly 6x year-over-year

Revenue in More Personal Computing declined 17% (down 13% in constant currency) to $9.4 billion, with the following business highlights:

• Windows OEM revenue declined 6%, performing better than the overall PC market, as the Windows 10 launch spurred PC ecosystem innovation and helped drive hardware mix toward premium devices
• Phone revenue declined 54% in constant currency reflecting our updated strategy
• Search advertising revenue excluding traffic acquisition costs grew 29% in constant currency with Bing US market share benefiting from Windows 10 usage
• Xbox Live monthly active users grew 28% to 39 million

This is the first quarter for a new financial reporting structure at Microsoft, which narrows the company’s divisions from six to three for purposes of financial reporting. Here are the trends by division.

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Microsoft’s earnings conference call begins at 2:30 p.m. Pacific time.

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