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Microsoft financials show robust performance, Office in transition to subscription, both cloud and server growth

Microsoft released its financial results yesterday, for the quarter ending September 30th 2014. It was a good quarter in most respects, though consumer Windows and Windows Phone licensing are weak.

Good news outweighs bad though, particularly the company’s success in transitioning Office customers from perpetual licences to subscription, even in the consumer market. It also seems to be performing some magic in the server segment, growing both cloud and on-premises revenue, a trick CEO Satya Nadella attributes to the “unique hybrid and private cloud capabilities that are built into our Servers”.

Here is the segment breakdown, if you can make sense of Microsoft’s segments:

Quarter ending June 30th 2014 vs quarter ending June 30th 2013, $millions

Segment Revenue Change Gross margin Change
Devices and Consumer Licensing 4093 -391 3818 -102
Computing and Gaming Hardware 2453 +1044 479 +274
Phone Hardware 2609 N/A 478 N/A
Devices and Consumer Other 1809 +255 312 -12
Commercial Licensing 9873 +262 9100 +295
Commercial Other 2407 +805 805 +531

A few notable stats.

Devices and Consumer licensing is weak, in line with the PC market, a decline in Office consumer review (these figures exclude Office 365), and a 46% decline in Windows Phone revenue – the non-Nokia licensees.

Surface Pro 3 is a hit and brought in revenue of $908 million, “twice the [sales] rate of Surface Pro 2”, according to CFO Amy Hood. The gross margin on Surface is “positive this quarter”, said Microsoft, though it is undoubtedly negative over the lifetime of Surface.

2.4 million Xbox consoles were sold (including 360 as well as Xbox One), and overall revenue is up 58%; a decent performance considering that Sony’s PlayStation 4 is generally outselling Xbox One.

Windows Phone: Nadella reported “modest growth driven by sales in Europe, where we gained share with lower priced devices”. 9.3 million Lumias were sold overall. Non-Lumia devices are expected to decline; Microsoft is not interested in this business, though it said sales were “in line with the market for feature phones.” No mention of the mis-conceived Nokia X.

Devices and Consumer Other is where Office 365 consumer revenue lives. There are now over 7 million consumer subscribers and it grew 25% over the previous quarter (most comparisons are year on year). Microsoft’s ability to shift customers to a cloud-based subscription model is key, especially as more of them run Office on an iPad or Android tablet.

Windows Server, System Center and SQL Server grew revenue again; revenue from server products overall is up 13%

Cloud – Office 365, Azure and Dynamics – delivered revenue up by 128%. Nadella added in the webcast that a “major Azure service or feature” is added every three days.

From a financial perspective, Microsoft has an advantage over cloud rivals Amazon and Google, in that its customers are more likely to purchase licenses for products like SQL Server along with the commodity-priced cloud infrastructure.

A key comment from Nadella: “Our premium services on Azure create new monetization opportunities in media, data, machine learning, advanced analytics and enterprise mobility.”

Aside: Microsoft created its online slide deck using a beta PowerPoint add-in called Office Mix, which I had not seen before. It creates a video from a powerpoint deck, with the ability to insert audio, video and interactive content like quizzes, as well as screen capture. Then you can upload it to the cloud. It is mainly aimed at education, but might also be useful for, say, journalists doing product review.

Related posts:

  1. Microsoft Financials show cloud growth, Nokia loss
  2. Microsoft’s growth areas: Azure, Server with Hyper-V, Office 365, Windows Phone
  3. Microsoft financials: nearly a $billion lost on Surface RT but prospering in server and cloud
  4. Microsoft financials: Windows under stress, Server and Office making up
  5. Microsoft financials: Office and server dominate as Windows falters

1 comment to Microsoft financials show robust performance, Office in transition to subscription, both cloud and server growth

  • Tom

    Nadella stated during the earnings call that they actually saw Windows “unit growth” in the consumer market.

    The reason for the reduced revenues is Windows with Bing. Because the license fee is $0, D&C Licensing does not get a penny when they ship a license. However, over the life of that PC, all the ad revenue from Bing searches shows up in D&C Other.