Microsoft Posts Solid Quarter Despite Nokia Hit

Microsoft Posts Solid Quarter Despite Nokia Hit

Especially strong on the commercial side

Microsoft earned a net income of $6.48 billion on revenues of $23.38 billion for the quarter ending June 30, in-line with expectations. But an operating loss of $692 million on Nokia's devices and services businesses dragged down stronger-than-expected results from Windows and Office.

"We are galvanized around our core as a productivity and platform company for the mobile-first and cloud-first world, and we are driving growth with disciplined decisions, bold innovation, and focused execution," Microsoft CEO Satya Nadella is credited with saying in a prepared statement. "I'm proud that our aggressive move to the cloud is paying off. Our commercial cloud revenue doubled again this year to a $4.4 billion annual run rate."

As has been the case since its corporate reorganization, Microsoft offered only cherry-picked milestones for a handful of products. These include:

Windows. OEM (meaning PC maker) revenue actually grew 3 percent in the quarter—the first time it did all fiscal year, I believe—bolstered in part by 11 percent growth in Windows OEM "Pro" revenue. (Non-pro OEM licensing was down 9 percent.) Windows volume licensing revenue grew 11 percent as well.

Office. There are now over 5.6 million Office 365 Home and Personal subscribers, a figure that is over 1 million higher than the previous quarter. Office consumer revenue was up 21 percent, and Office commercial revenue was up 4 percent.

Windows Phone. Nokia's acquired hardware business contributed $1.99 billion to current year revenue. (but was also responsible for the aforementioned $692 million operating loss, driving down profits obtained elsewhere by the company). The firm sold 5.5 million Lumia handsets, well below the 7.4 million Nokia sold in the same quarter a year earlier, though this year's results are for a period of time three weeks shorter because of the acquisition.

Surface. Surface revenue was $409 million, driven by previous generation devices and Surface Pro 3. Interestingly, Microsoft noted that "cost of Surface revenue included Surface inventory adjustments related to a decision to not ship a new form factor." In other words, Microsoft just confirmed my report that they built Surface mini and that it is sitting in warehouses unsold.

Xbox. Microsoft sold 1.1 million Xbox consoles in the quarter but did not differentiate between Xbox One and Xbox 360.

Bing. Bing search advertising revenue grew 40 percent. And Bing's share of the U.S. search market hit 19.2 percent in the quarter.

Cloud. Commercial cloud revenue grew 147 percent with an annualized run rate that exceeds $4.4 billion. That's right: Microsoft's business-oriented cloud offerings are now a $4+ billion business in their own right.

Server. Server products revenue—which curiously includes Azure—grew 16 percent, with double-digit growth for SQL Server and System Center.

Of course, many are wondering how the recently announced layoffs will impact the company financially. According to Microsoft, the pre-tax costs associated with the layoffs will be between $1.1 billion and $1.6 billion and will be recorded in fiscal year 2015, "substantially in the first half of the fiscal year." That means during the current and next quarter, or by the end of calendar year 2014.

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