Microsoft Posts Solid Quarter, Makes Some Hardware Gains

Microsoft Posts Solid Quarter, Makes Some Hardware Gains

Putting the "mobile" in "mobile first, cloud first"

Microsoft announced that it earned an operating income of $5.84 billion on revenues of $23.20 billion for the quarter ended September 30, 2014, citing strong performance across both business and consumer segments. But the big surprise, perhaps, is that Surface and Windows Phone combined to deliver almost $4 billion in revenues in the quarter.

"We are innovating faster, engaging more deeply across the industry, and putting our customers at the center of everything we do, all of which positions Microsoft for future growth," Microsoft CEO Satya Nadella said in a prepared statement. "Our teams are delivering on our core focus of reinventing productivity and creating platforms that empower every individual and organization."

Operating income was down 8 percent, year-over-year: The firm earned almost $7 billion in the same quarter last year. But revenues were up a whopping 25 percent. Microsoft noted that it returned $4.6 billion in cash to shareholders in the quarter as well.

Some of the highlights Microsoft noted for the quarter include:

Surface success. Thanks to Surface Pro 3 "momentum," Surface hit revenues of $908 million in the quarter. More important, Surface is in the black: Gross margins were positive in the quarter.

Windows in flux. While consumer Windows licensing drove unspecified "positive unit growth," non-Pro OEM licensing declined 1 percent—about the same as PC sales in the quarter, incidentally—and Windows Pro OEM revenue was down 4 percent. Windows volume licensing was up 10 percent.

Windows Phone hardware is big, but mixed. Microsoft's phone hardware business provided $2.6 billion in revenues, sold 9.3 million Lumia smart phones, and gained share, especially in lower-priced devices. But Microsoft added that revenues were down 46 percent: Nokia's comparable Devices and Services business posted almost $4 billion in revenues in the same quarter a year ago. According to the firm, the shortfall is due partially to a higher mix of "low royalty devices."

Office 365 consumer is up and down. Microsoft experienced more than 25 percent sequential growth in consumer Office 365 subscriptions and now has over 7 million Office 365 Home and Personal subscribers. But Office consumer revenues dropped 5 percent in the quarter.

Office for businesses is down. Microsoft saw business revenues in Office fall 7 percent in the quarter, as customers transition to Office 365.

Xbox One continues to struggle. Total Xbox sales—i.e. Xbox 360 and Xbox One—were 2.4 million units in the quarter, up 102 percent from the same quarter last year.

Server is strong. Microsoft's server product revenues were up 13 percent with double-digit growth for SQL Server, System Center and Windows Server.

Huge growth in business cloud services. As you might expect of a new business, Microsoft's business cloud services—Azure, Office 365, and Dynamic CRM delivers strong growth of 128 percent in the quarter.

Search. Revenue in search was up 25 percent, thanks to higher revenue per search and search volume. Bing's market share in the US is now almost 20 percent.

I'll have more analysis of the earnings—based on information that will arrive in the post-earnings conference call—in tomorrow's Short Takes.

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