Microsoft's Earnings: 6 Takeaways

Shareholders have questioned Microsoft's strategy. Will this week's strong earnings report persuade skeptics that the company is on the right track?
Microsoft on Thursday announced revenue of $18.53 billion for the quarter that ended September 30, a 17% improvement relative to the same period last year.

The company has weathered a tumultuous relationship with investors in recent months. Concerns have included slow Windows 8 sales, the crashing PC market, Microsoft's $900 million Surface write-down, and who will succeed retiring CEO Steve Ballmer. According to reports, several major investors have become so worried about the company's direction that they want founder and chairman Bill Gates off the company board.

But by posting a healthier-than-expected quarter, Microsoft may have appeased many of these skeptics -- at least for now. Microsoft's stock was up more than 6.6% Friday morning.

[ Microsoft's latest Windows Phone update aims to bolster app development. Read Microsoft Pushes Phablets, Windows Phone Development. ]

How did the earnings compel such optimism on Wall Street? Here are six takeaways.

1. Microsoft beat analyst expectations.

With $18.53 billion in revenue and $5.24 billion in net income, Microsoft posted earnings of 62 cents per share. This is up substantially from the 52 cents per share the company posted in the same quarter last year. It's also significantly higher than the 54 cents per share that analysts had expected, according to Thomson Reuters.

2. Microsoft's commercial business is strong, but its consumer business remains volatile.

In September, Microsoft execs told financial analysts that 55% of Microsoft's business comes from governments and large enterprises, and that only 20% comes from consumers.

The new earnings report reflects not only that Microsoft continues to make most of its money from businesses but also that its enterprise products are growing faster than its consumer ones. The company posted a 10% increase in commercial revenue, to $11.2 billion, but consumer revenue expanded a more modest 4%, to $7.46 billion.

Microsoft highlighted SQL Server, Exchange, Windows Azure and Office 365 as particular successes.

3. Bing is starting to pay off.

Bing has been a particular object of scorn among some Microsoft investors; the search engine has lost billions of dollars over the years but still has only a fraction of Google's market share.

That's starting to change. Bing revenue was up 47% in the quarter, and the product is playing an increasingly important role in Microsoft's integrated services. Examples include Bing Smart Search in Windows 8.1, a global search function that elegantly answers queries with not only locally stored files but also results from the Web.

4. Surface sales are slowly improving.

Microsoft introduced a new reporting structure this quarter that more transparently distinguishes its enterprise-oriented revenue streams from its consumer-oriented ones. This change resulted in more insight into Surface sales, which reached $400 million for the quarter. Microsoft said the cheaper RT model has outsold the costlier Surface Pro. Microsoft slashed prices across both tablet lines during the summer, which likely drove sales during the quarter.

5. The PC market is still a problem.

In September, Microsoft said nearly 20% of its revenue comes from Windows OEMs. It's consequently concerning that licensing revenue from manufacturing partners declined 7%.

Microsoft's decision to makes its own hardware has soured relationships with some of its OEMs, but the 7% setback has more to do with the larger PC slump. Revenue related to business PCs actually rose 6%, no doubt buoyed by companies moving off of the soon-to-be-retired Windows XP. But revenue from consumer PCs took a nosedive, down 22%.

6. Consumer revenue should grow in the current quarter.

Though Microsoft's consumer businesses are still finding their way, they should nonetheless grow during the coming holiday season. Major products include the Surface 2 and Surface Pro 2 tablets, the Xbox One, as well as new Windows Phone models with larger screens.

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