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Microsoft: Cloud-o-bile still only small slice of softening revenue pie
New areas show growth, but still just 13 per cent
Microsoft reported revenues that beat estimates for Q1 of fiscal 2015, boosted by strong growth in cloud and mobility. But its solid-looking numbers belied ongoing softness in its traditional core markets.
Total revenues for the three months ending on September 30 were $23.20bn, a 25 per cent year-on-year increase but flat from the previous sequential quarter. Earnings were $0.54 per diluted share.
Net income, on the other hand, was $4.54bn, down 13 per cent from the year-ago period. But that shortfall was mainly due to $1.14bn in expenses related to Microsoft's restructuring plan – including CEO Satya Nadella's promised 18,000 layoffs – and the ongoing integration of Nokia's devices and services business. Without those costs, net income would have been up 8 per cent.
About those revenues, though. Microsoft crowed that revenues from its Consumer divisions were up 47 per cent, year-over-year, to $10.96 billion. But $2.61bn of those were from the Phone Hardware subdivision, which didn't exist in the year-ago quarter. Ignoring those ex-Nokia sales, Consumer revenues were only up 12 per cent.
Predictably, the weak link of the Consumer group was Devices and Consumer Licensing, the subdivision that recognizes sales of Windows and Office to consumers, among other things. Sales were $4.10bn, down 6 per cent from the year-ago quarter and down 13 per cent from the previous sequential quarter.
Windows sales to businesses weren't so hot, either. The all-important Commercial Licensing subdivision – which includes volume sales of client-side Windows, Windows Server, and Windows Embedded, plus various tools and server software – saw revenues of $9.87bn, which was up just 3 per cent from last year's quarter and down 12 per cent sequentially.
Windows? Office? Who needs 'em?
Leaving Windows and on-premises Office aside, however, it was the areas where Microsoft is often regarded as playing catch-up – including cloud, mobility, and even hardware – that showed the most encouraging trends this quarter.
Redmond said revenues from its commercial cloud offerings were up 128 per cent, driven by Office 365 business subscriptions, the Azure cloud platform, and Dynamics CRM. And the company's overall Commercial Other subdivision, which covers all of the above plus Bing and some other online services, saw its revenues up 50 per cent from the year-ago period, to $2.41bn.
Revenues from the Devices and Consumer Other category – which includes Office 365 Home Premium subscriptions, plus advertising, retail, and sales from Microsoft's various online stores – were also up 11 per cent, to $1.81bn.
Redmond devoted $1.28bn to "additions to property and equipment" in the first quarter, which is a fair indicator of how much it's spending to build out its data centers and other infrastructure, and was consistent with the year-ago quarter.
But the real eye-opener was the Devices and Consumer Hardware division. Xbox console sales grew 102 per cent to 2.1 million, with Xbox One launching in 28 new markets during the quarter. And for once, sales of Microsoft's much-maligned Surface tablets were up – way up, 127 per cent to be precise – with $908m in revenues, driven mostly by the Surface Pro 3.
Don't expect those Surface sales to translate into big profits, though. Redmond said its cost of revenue for Surface increased by another $157m or 23 per cent during Q1, meaning the line is probably still in the red.
And therein lies the problem. For all its successes in the new markets that it's pursuing, they're markets that simply aren't (yet) as profitable for Microsoft as its core software business. Of the $14.93bn in gross margin that Microsoft booked in the first quarter, fully $12.92bn or 87 per cent of it came from traditional software licensing. And as we saw earlier, sales of traditional software licenses are essentially flat.
So while Microsoft may be a different company under Satya Nadella than it was under previous CEO Steve Ballmer, Nadella hasn't yet found a way to turn that new way of thinking into the engine that will keep Redmond profitable for years to come.
Microsoft shareholders seemed pleased by its otherwise solid results, however, and sent the software giant's shares up 3 per cent in after-hours trading. ®