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Microsoft proves resilience with bumper quarter, but is not yet a devices and services business

Microsoft delivered record revenue of $18.53 billion in the quarter ended September 30th 2013 – which might come as a surprise if you have been focusing on the companies failings in tablets and smartphones versus Apple and Android, the steep decline in PC sales, and its small market share in search versus Google, but less so if you have been watching the advance of products like Office 365, Windows Azure, SQL Server and Windows Server, all of which have been making good progress.

In its report, the company says the Windows OEM revenue declined 7% (reflecting PC malaise) but Surface revenue grew to $400 million. Search advertising revenue grew 47% reflecting some degree of success for Bing.

SQL Server “grew double digits”, as did “Lync, SharePoint and Exchange.”

Commercial cloud revenue grew 103%, though bear in mind that Microsoft is not telling us the absolute figures; you can easily grow fast if you start from a small number.

Microsoft has changed the way it segments its revenue, making it difficult to track, especially with large sums of money ($1.6 billion) reported as “Commercial Other”. Here is how the new segments look:

Quarter ending September 30th 2013 vs quarter ending September 30th 2012, $millions

Segment Revenue Change Profit Change
Devices and Consumer Licensing 4343 -335 3925 -178
Devices and Consumer Hardware 1485 +401 206 -242
Devices and Consumer Other 1635 +235 352 -10
Commercial Licensing 9594 +645 8801 +618
Commercial Other 1603 +355 275 +170

Now, how to make sense of this? The segment changes are detailed here (Word document). In summary:

Devices and Consumer Licensing: non-volume and non-subscription licensing of Windows, Office, Windows Phone, and “ related patent licensing; and certain other patent licensing revenue” – all those Android royalties?

Devices and Consumer Hardware: the Xbox 360, Xbox Live subscriptions, Surface, and Microsoft PC accessories.

Devices and Consumer Other: Resale, including Windows Store, Xbox Live transactions (other than subscriptions), Windows Phone Marketplace; search advertising; display advertising; Office 365 Home Premium subscriptions; Microsoft Studios (games), retail stores.

Commercial Licensing: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and Windows Embedded; volume licensing of Windows, Office, Exchange, SharePoint, and Lync; Microsoft Dynamics business solutions, excluding Dynamics CRM Online; Skype.

Commercial Other: Enterprise Services, including support and consulting; Office 365 (excluding Office 365 Home Premium), other Microsoft Office online offerings, and Dynamics CRM Online; Windows Azure.

From this you can see that despite 103% growth, Azure and Office 365 remain relatively small, many times exceeded by the on-premise software licensing which is mainly in “Commercial Licensing”. However Microsoft is reporting a contribution to profits from this segment, though with smaller margins than from software licensing.

Simple addition also tells us that consumer revenue ($7,463 million) is less than business revenue ($11,197 million).

Overall it is obvious that Microsoft is not yet a “devices and services” company even if it has set that as its goal. Most of its revenue comes from traditional software licensing. Can it ever make that transition without shrinking in the process? A good question, and despite excellent figures, one that will ensure Microsoft’s future remains the subject of intense debate.

Related posts:

  1. Microsoft financials: strong quarter especially in cloud services. We have a very different way to think about Windows says Nadella
  2. How will online services impact Microsoft’s partner business?
  3. Resilience is not backup: how Codespaces.com lost its data and its business
  4. Two spins on Microsoft’s excellent quarter
  5. The cloud permeates Microsoft’s business more than we may realise

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