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1/24/2014
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Microsoft's Strong Quarter: 5 Key Facts

Microsoft's enterprise sales are booming, but Surface is still no match for the iPad.

7 Mistakes Microsoft Made In 2013
7 Mistakes Microsoft Made In 2013
(Click image for larger view and slideshow.)

Microsoft handily beat Wall Street estimates Thursday, announcing revenue of $24.52 billion for its second fiscal quarter, which ended Dec. 31. The highest-grossing quarter in company history, Microsoft's second quarter, was up from $21.5 billion in the same quarter last year. Net income was $6.6 billion, which translated to 78 cents per share.

Analysts had expected net income of $5.8 billion and revenue of $23.7 billion, according to Thomson Reuters.

If Thursday marked the last earnings report for outgoing CEO Steve Ballmer, he will have exited on a high note. Since announcing his retirement plans in August, Ballmer has been a punching bag in the press, with reports not only critiquing his previous leadership but also implying that he and Bill Gates have become impediments to the search for Ballmer's successor. But since bottoming out in July, when the company took an embarrassing $900 million write-down on unsold Surface inventory, the company has exceeded expectations in consecutive quarters.

[Did Microsoft make the right move by purchasing Nokia? Read Nokia Smartphone Sales Dip Ahead of Microsoft Buyout.]

Microsoft's good news includes caveats, though. The company made progress in its quest to woo consumers, but don't let headlines about "doubled Surface revenue" mislead you; Microsoft's tablets are still losing money. What were the highs and the lows for Microsoft? Here are five key takeaways from the company's strong earnings.

1. Microsoft's enterprise business is booming
Microsoft's consumer-oriented efforts grab a lot of press, but it's making its most rapid progress with business customers. Overall commercial revenue grew 10% to $12.67 billion. SQL Server achieved double-digit revenue growth and cloud services revenue more than doubled, with particularly strong growth in both Office 365 and Windows Azure. Windows revenue from enterprises was also up, propelled partially by companies migrating off of Windows XP.

2. Microsoft made restricted progress among consumers
Some Ballmer critics argue that Microsoft should spin off its consumer businesses and focus on lucrative enterprise products. Thanks to strong Xbox sales, the most recent quarter makes this argument a little less tenable. Microsoft sold 7.4 million Xbox consoles in the second quarter, including 3.9 million units of the new Xbox One. Sony's PlayStation 4 has reportedly edged out the Xbox One in overall sales, but demand for both units has been more robust than many commentators had expected.

Microsoft also reported that more than 3.5 million people have subscribed to Office 365 Home Premium, up from around 2 million last fall. Other consumer-related highlights included a 34% increase in revenue from Bing.

Microsoft CEO Steve Ballmer
Microsoft CEO Steve Ballmer

3. Consumers are still indifferent to Windows 8.1
Surface revenue reached $893 million, more than doubling the $400 million Microsoft earned from its tablets in the first quarter. But according to the company's most recent SEC filing, Microsoft is still losing money on the devices -- around $40 million in quarter two.

More to the point, revenue of $893 million implies Surface sales of fewer than 2 million devices, especially since the company has already said holiday sales were biased toward the discounted Surface RT. For context, analysts expect Apple to announce it sold around 25 million iPads over the holidays.

The Surface wasn't the only Windows 8.1 device that earned consumer shrugs; slumping PC sales continued to eat into Microsoft's bottom line as well. Windows OEM revenue was down only 3% year-over-year, but that was thanks largely to a 12% boost in revenue from the professional-oriented Windows OEM Pro. With PC shipments off 10% last year, the worst slide on record, Microsoft conceded that Windows revenue from consumers was "soft."

4. The PC slump is affecting consumer Office sales too
With consumers spending more time on tablets and going longer between PC upgrades, Office revenue from consumers declined $244 million, or 24%. Microsoft said some of the decline was offset by the aforementioned increase in Office 365 Home Premium subscribers.

5. With no news on the CEO front, Microsoft still faces questions
By any standard, Microsoft's quarter exceeded expectations. But the company's next CEO will face tough questions. The company's enterprise businesses are performing well, but its consumer businesses aren't generating cash at nearly the same rate. Even when devices sell well (and many of Microsoft's still don't), they can't generate the same margins that software can. That's one reason Microsoft's profits were up only 3% even though revenue was up 14%.

The company undeniably made inroads with consumers during the most recent quarter, and with BYOD becoming more mainstream, it's easy to see why Microsoft feels compelled to pursue the market. But with Microsoft still lacking a strong foothold in mobile, and consumer PC sales still declining, time will tell if Ballmer's replacement sticks with the current strategy.

Michael Endler joined InformationWeek as an associate editor in 2012. He graduated from Stanford in 2005 and previously worked in talent representation, as a freelance copywriter and photojournalist, and as a teacher.

Incidents of mobile malware are way up, researchers say, and 78% of respondents worry about lost or stolen devices. But while many teams are taking mobile security more seriously, 42% still skip scanning completely, and just 39% have MDM systems in place. Find out more in the State Of Mobile Security report (free registration required).

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SachinEE
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SachinEE,
User Rank: Ninja
1/30/2014 | 12:46:55 AM
Re : Microsoft's Strong Quarter: 5 Key Facts
@ Thomas Claburn, it is really difficult to predict whether Microsoft will take IBM's path or not because IBM has never been a match for Microsoft in the first place. Secondly, as all these figures in this article show, Microsoft has a lot of money to play with. Low performance in one product can be neutralized by better performance in others which gives Microsoft the leverage to experiment for a much longer time with its new products.
SachinEE
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SachinEE,
User Rank: Ninja
1/30/2014 | 12:46:36 AM
Re : Microsoft's Strong Quarter: 5 Key Facts
@ melgross, you are absolutely right, it becomes really difficult for companies to cope with such situations like keeping the quality high and prices down. But considering that Microsoft is subsidizing its tablets with money earned from other enterprises, it had better introduced Surface tablets at a much lower price to get its tablets some foot in the market. Prices could be adjusted later on when we have produced a fairly considerable consumer base.
rradina
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rradina,
User Rank: Ninja
1/25/2014 | 7:27:12 AM
Re: Surface 2 million + OEM tablets = ????
The entire conversation is a supposition.
melgross
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melgross,
User Rank: Ninja
1/25/2014 | 6:01:10 AM
Re: Is it all bad for Surface?
If, as it seems, the majority of those sales were of the heavily, and money losing, discount ted older models, then it proves very little. A problem Microsoft has here, is no different than what any company has when selling product below production cost. If potential customers now expect those lower prices, and the same quality, then it becomes impossible for the company to ever make a profit on the product in the future. If they lower the quality, then customers will complain. What do they do! This is a very difficult cycle to get out of. People obviously don't think these tablets are worth what Microsoft is charging. That's a basic problem. They can't both be the quality leader in Win 8 tablets, and be the low cost provider.
melgross
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melgross,
User Rank: Ninja
1/25/2014 | 5:54:32 AM
Re: Surface 2 million + OEM tablets = ????
If they included a good keyboard, you mean. I'm sorry, but I've used both keyboards, and neither one qualifies as being good. The type keyboard, the better one, is barely acceptable on a table, and unacceptable on my knees. The combo of the tablet and keyboard doesn't compare to a notebook such as a better quality Ultrabook or Macbook Air.
melgross
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melgross,
User Rank: Ninja
1/25/2014 | 5:49:28 AM
Re: Surface 2 million + OEM tablets = ????
It's quite a stretch to believe that third parties sold 8 million Windows tablets. Where do you get that number from? We don't really know if Microsoft actually sold 2 million Surface tablets—it could have been a lot less.
Gary_EL
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Gary_EL,
User Rank: Ninja
1/24/2014 | 7:10:15 PM
Re: Early "All-In" Bet is paying off.
It's hard to imagine Microsoft doing what IBM did, because Microsoft's beginnings were with the consumer, or maybe it might even be more correct to say with the hobbyist. Maybe Microsoft will decide to exit the hardware business, but I think the consumer is just part of Microsoft's corporate DNA.
Thomas Claburn
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Thomas Claburn,
User Rank: Author
1/24/2014 | 4:30:18 PM
Re: Early "All-In" Bet is paying off.
Does Microsoft have to remain a hybrid consumer-enterprise business or can it take the path of IBM and sell its consumer assets to focus on more lucrative corporate sales?
rradina
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rradina,
User Rank: Ninja
1/24/2014 | 3:14:37 PM
Re: Surface 2 million + OEM tablets = ????
They should have decent margins in their holiday sales.  Wasn't the discontinued RT discount probably covered by the $900M accounting adjustment?  It seems like they have a simple volume problem.  The promotional deal with the NFL must have been expensive given the frequency that Surface logos "surface" during games.  Advertising, building their retail stores and tooling Best Buy probably weren't cheap either.  These costs are the same regardless of whether they sell Surface or iPad volumes.  If they can increase to 3M units/quarter, the strategy might be self-supporting.

Regarding the keyboard -- couldn't agree more!  At least include the touch cover keyboard.  If someone wants the type cover, let them upgrade for a reasonable fee.

I'd also like to see Microsoft engineer an upgradable Surface.  After years of buying upgradable hardware, I'd like to be able to buy an entry-level Surface and then incrementally upgrade it.  

Perhaps I have an out-of-band perspective but when purchasing my current 2 year old laptop, physical dimensions, weight, screen, keyboard, battery and touch pad were far more important than RAM, storage and wireless options.  I knew I could add more RAM, swap out the storage and replace the mini-PCI wireless card.  Over the past two years, I have done all those things.
Michael Endler
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Michael Endler,
User Rank: Author
1/24/2014 | 2:56:37 PM
Re: Early "All-In" Bet is paying off.
Great point, Doug. As much as Ballmer gets slammed for missing mobile, he also oversaw the company as it made aggressive and well-executed moves to become a force in both public and private clouds.
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