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Originally published October 24, 2013 at 1:26 PM | Page modified October 25, 2013 at 8:32 AM

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Microsoft’s results blast past estimates

The company says it was helped by strong results in sales to businesses and improving consumer demand.

Seattle Times technology reporter

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Coming off strong sales to businesses in its new fiscal year, Microsoft blew past analysts’ estimates in its first-quarter results.

The company on Thursday reported sales of $18.53 billion — a record for a first quarter — and earnings per share of 62 cents on profit of $5.24 billion for the quarter ended Sept. 30.

Wall Street analysts had expected Microsoft to report sales of $17.77 billion and earnings per share of 54 cents on profit of $4.51 billion.

That sent its stock price soaring. Microsoft’s shares closed Thursday at $33.72, down 4 cents. But in after-hours trading, shares were trading at $35.63, up nearly 6 percent to $1.91.

Microsoft attributed its good results to robust enterprise sales and improving consumer demand.

“It was a great beat,” said Lisa Nelson, a Microsoft director of investor relations. “Our enterprise [corporate-focused] business this quarter continued to just crush it. Across all the framework, we beat guidance.”

The PC market turned out better than the company had expected, said Amy Hood, Microsoft’s chief financial officer.

Hood also gave some detailed guidance for the second quarter, which encompasses the holiday shopping season.

Microsoft expects a “terrific holiday season,” she said, leading to a second quarter with expected revenue of $23.1 billion to $24.1 billion.

In the first quarter last year, the company reported revenue of $16.01 billion and earnings of 53 cents per share on profit of $4.47 billion.

In the second quarter last year, the company reported revenue of $21.5 billion and earnings of 76 cents per share on profit of $6.4 billion.

Analysts, however, differed on what the earnings report says about Microsoft’s strategy of providing devices and services (rather than just traditional software), and its companywide reorganization, which started last summer.

“Beating on revenue and earnings handily will boost confidence that the reorganization is pivoting them in the right direction, [that they are] executing on their strategic plans and perhaps will change the hearts and minds of investors,” said Todd Lowenstein, a portfolio manager with HighMark Capital Management. “Most impressive was the operating leverage displayed and operating margin improvement, a sign they are executing better and controlling costs.”

But David Mitchell Smith, an analyst with research firm Gartner, said he considered earnings to be a “trailing edge indicator. Enterprise — commercial — is strong but Microsoft needs to be more successful in consumer. Consumerization means that the enterprise will not remain a captive market. Microsoft realizes this and is continuing to invest in consumer but thus far the results are not there and the strategy is coming under more scrutiny.

“The push to services — cloud — is going well while the devices strategy struggles,” Smith continued.

This marked the first quarter Microsoft reported its results broken into five segments grouped largely into two categories: Devices & Consumer and Commercial.

(The new financial-reporting structure is intended to better reflect the company’s recent reorganization and its transition into focusing on devices and services.)

Here’s how the categories and segments did:

Devices & Consumer

Revenue was $7.46 billion, up 4 percent compared to the same quarter last year if it had been reporting in the way it’s doing now.

Here’s how Microsoft did in the segments within this category:

Licensing: (Windows device manufacturers, consumer Windows, Windows Phone, Office consumer, and patents): $4.34 billion revenue, down 7 percent.

Microsoft said revenue from Windows device manufacturers declined 7 percent. But Windows Pro (meaning Windows 7 Pro and Windows 8 Pro) revenue grew for the second consecutive quarter.

Hardware: (Surface, Xbox and Xbox Live subscriptions, second- and third-party video games, and other hardware): $1.49 billion in revenue, up 37 percent.

Surface revenue grew to $400 million, according to the company.

The cost of producing Surface was $645 million in the first quarter, Nelson said. That included everything from manufacturing and component costs to adjusting for the $100 discount on the price of the Surface Pro that the company started offering this summer.

Other: (Bing and MSN, Office 365 Home Premium, first-party video games, marketplaces such as Windows Store, Windows Phone Store and Xbox Live transactions as well as Microsoft retail stores): $1.64 billion revenue, up 17 percent.

Microsoft reported that search advertising revenue grew 47 percent.


Revenue was $11.2 billion, up 10 percent.

Within the category, here’s how the segments did:

Licensing: (Windows enterprise, Windows Server, SQL Server, Visual Studio, System Center, Office for businesses, Dynamics, unified communications including Skype, Windows Embedded): $9.59 billion revenue, up 7 percent.

SQL Server revenue showed double-digit growth and SQL Server Premium revenue grew more than 30 percent, Microsoft said.

Lync, SharePoint and Exchange collectively showed doubt-digit growth.

Other: (enterprise services, cloud services including Office 365 for businesses, Azure, Dynamics CRM Online): $1.6 billion revenue, up 28 percent.

Commercial cloud revenue grew 103 percent.

To ease the transition to the new financial-reporting structure, Microsoft also provided results based on its previous structure, which was divided into five segments corresponding with its old business divisions.

Here’s how Microsoft did in the first quarter, based on the old reporting segments:

Windows: $4.58 billion revenue, up 4 percent from the same quarter last year.

Server and Tools: $5.05 billion revenue, up 11 percent.

Online Services Division: $872 million, up 25 percent. This division, which includes Bing, continued to narrow its losses. Its operating loss for the quarter was $321 million, down from $364 million a year ago.

Business (including Office): $5.99 billion, up 5 percent.

Entertainment and Devices: $2.07 billion, up 6 percent. This division saw an operating loss of $15 million, compared with operating income of $21 million a year ago.

Janet I. Tu: 206-464-2272 or

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