Microsoft financials: strong quarter especially in cloud services. We have a very different way to think about Windows says Nadella

Microsoft has released its financial results for the first quarter of 2014. The year on year segment figures look like this:

Quarter ending March 31st 2014 vs quarter ending March 31st 2013, $millions

Segment Revenue Change Gross margin Change
Devices and Consumer Licensing 4382 +30 3906 -23
Devices and Consumer Hardware 1973 +571 258 -135
Devices and Consumer Other 1950 +294 541 +111
Commercial Licensing 10323 +344 9430 +345
Commercial Other 1902 +453 475 +211

The “Gross margin” figures above do not tell us much other than for hardware, since Microsoft no longer allocates its research and development costs against specific segments.

Overall revenue is slightly down year on year but only because of a $1778 million decline in the “corporate and other” segment. This means it was a better quarter than the overall revenue suggests.

So what is notable? Windows OEM revenue is up, but only thanks to the business market, and partly thanks to upgrades driven by the end of support for Windows XP. Consumer OEM Windows is down by 15%.

Xbox revenue is up 45% thanks to the launch of Xbox One (and I have a hunch we will see less positive figures in future since Sony’s PS4 seems to be winning the console wars).

Surface (Microsoft’s own-brand tablet) revenue is up by over 50% year on year, to $494 million. It is a significant business, though apparently not a profitable one. Cost of sales was $539 million, says Microsoft in its notes.

Windows volume licensing, which accounts for most enterprise usage, is up 11%, also no doubt influenced by the end of XP support. SQL Server revenue is up by 15%, though in relation to server products Microsoft notes the impact of “the transition of customers to Cloud Services.”

The big winner is cloud services. Microsoft says:

  • Office 365 revenue grew more than 100%
  • Microsoft Azure revenue grew more than 150%
  • Cloud services revenue grew $367 million or 101%

These sums are a little puzzling. If growth was 101% overall, and Office 365 grew by more than 100%, where is the Microsoft Azure growth hiding, or was it from a very small base?

Note that consumer Office 365 is accounted for separately, it seems, as part of “Devices and Consumer other”. There are now 4.4 million Office 365 Home subscribers, growing by around 1 million in this quarter.

Questioned in the earnings call, CEO Satya Nadella talked about mobile-first and cloud-first, adding that the strategy goes across “devices some ours, some not ours.” He also mentioned how the advent of Universal Apps means that “we have a very different way to think about [Windows].” That is partly wishful thinking of course: the Universal App framework is still in preview and targets a still unreleased update to Windows Phone (8.1). Still, that is the strategy, even if it means giving Windows away on smaller devices – we have “monetization on the back end,” said Nadella, presumably thinking of Office 365 subscriptions and the like.

On the business and enterprise side (where Microsoft can be more confident) Nadella also spoke of the synergy between Office 365 and Azure; every Office 365 sign-up enables Azure as a business cloud platform, thanks to Azure Active Directory and other integration points.

Microsoft’s segments summarised

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.

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