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Microsoft Earnings: 7 Essential Facts

Microsoft's Q3 beat expectations. Strong performers include cloud products and Xbox, but Surface and consumer PC sales still pose a problem.

Microsoft pulled off a neat trick Thursday: It disclosed a year-over-year drop in third-quarter revenue, yet still managed to elate investors. Shareholders sent the company's stock, mired between $20 and $40 for the last decade, above $41 in after-hours trading Thursday.

Wall Street's approval owed partly to growth in Microsoft's key cloud and enterprise software businesses and partly to continued enthusiasm for new CEO Satya Nadella, whose early victories include the successful Office for iPad launch, a number of well received Azure and Windows Phone product announcements at Build, and the company's new big data strategy.

[Planning to install the latest version of Windows? Read Windows 8.1 Update: 8 Tips to Avoid Headaches.]

How did Microsoft's quarter break down? Here are seven essential facts.

1. Microsoft's third quarter: Not spectacular overall, but peppered with bright spots.
Microsoft reported that net income for the third quarter, which ended March 31, declined 6.5% from the year-earlier quarter, to $5.66 billion, or 68 cents per share. Revenue in the quarter declined slightly, to $20.4 billion. The revenue number roughly matched analysts' expectations, and the profit number exceeded the consensus of 63 cents per share.

Microsoft CEO Satya Nadella
Microsoft CEO Satya Nadella

Moreover, the revenue decline is misleading. Last year, Microsoft included $1.66 billion in deferred revenue in its third-quarter results. When that sum is excluded, Microsoft's revenue in the most recent quarter actually grew 8% year-on-year. The company's unearned revenue, which derives from multiyear deals, exceeded analyst estimates by roughly $1 billion.

2. Windows was a mixed bag.
Pointing to a 4% uptick in Windows OEM revenue, Microsoft execs touted Windows as the clear choice of organizations worldwide. Revenue for Windows OEM Pro, which comes installed on business PCs and tablets, drove most of the growth, improving 19%. Windows volume licensing grew 11%.

But the Windows outlook is less rosy than those figures suggest. Revenue from the consumer version of Windows dropped 15%, suggesting that individuals are buying iPads and Android devices at the expense of new Windows PCs and tablets. Furthermore, the rise in enterprise Windows revenue might not be sustainable. It was driven partly by Windows XP's end-of-life deadline and partly by planned hardware refreshes.

Microsoft announced earlier this month that its Windows licenses for phones and most tablets are now free. In a Q&A after the earnings call, CEO Nadella was asked how the new licensing model will help Microsoft adapt to the changing computing market. He pointed out that Microsoft used to aim Windows at PC customers, but now addresses a much wider audience, ranging from tablet users to those building systems for the Internet of Things. To make Windows as ubiquitous as possible, Nadella said, different versions must carry different prices.

3. Microsoft's enterprise software and cloud businesses are booming.
Microsoft posted double-digit revenue growth in its SQL Server, System Center, Windows Server Premium, and Lync businesses. Revenue from Azure, Microsoft's cloud platform, rose 150%, driven mainly by strong Office 365 sales.

4. Surface sales are still lousy.
Amy Hood, Microsoft executive VP and CFO, said customer purchases of second-generation Surface devices have had a "positive impact on margins." Nevertheless, Microsoft's tablet sales are nothing to boast about. Third-quarter Surface revenue totaled just $500 million, down from $893 million in the previous quarter, but up 50% year-over-year. The second- to third-quarter drop was expected, given that the second quarter included the holiday uptick. The numbers still peg Surface as a niche product.

5. Aside from Surface, Microsoft's other consumer properties improved.
Microsoft sold more than 2 million Xbox consoles to retailers during the third quarter, and it has now sold more than 5 million Xbox One units in total. The company said

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Michael Endler joined InformationWeek as an associate editor in 2012. He previously worked in talent representation in the entertainment industry, as a freelance copywriter and photojournalist, and as a teacher. Michael earned a BA in English from Stanford University in 2005 ... View Full Bio

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Shane M. O'Neill
Shane M. O'Neill,
User Rank: Author
4/25/2014 | 11:57:57 AM
Re: renaissance
You can see from Nadella's decisions so far that he doesn't want to be in the hardware business. Yet the Nokia monkey sits firmly on his back. It's a bit alarming that they don't have any concrete plans about Nokia phone integration. But at least Nokia Windows Phones are in an explosive smartphone market, and have a chance as a solid No. 3. Surface, on the other hand, is is really up a creek. It hasn't been able to compete in the tablet market, and the tablet market itself is starting to cool.

Microsoft's way forward is through enterprise tools, cloud with Azure, Office 365, Lync, and spreading out Windows to new devices beyond PCs and tablets. And Nadella gets it.
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