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Originally published January 23, 2014 at 1:14 PM | Page modified January 24, 2014 at 2:00 PM

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Microsoft’s quarterly numbers spring past estimates

The company beat analyst estimates of earnings per share by 10 cents, as sales for the second quarter of fiscal 2014 exceeded $24.5 billion.

Seattle Times technology reporter

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Usually, it’s Microsoft’s corporate customers that help the company report solid financial results each quarter.

This time, Microsoft’s consumer and hardware customers pulled their weight, too.

On Thursday, Microsoft handily beat analysts’ estimates for its fiscal second quarter, which ran from October to December.

Microsoft reported sales of $24.52 billion, up 14.3 percent. Profit rose 2.8 percent to $6.56 billion, with earnings per share at 78 cents.

Wall Street analysts, according to a consensus estimate, had expected sales of $23.67 billion, profit of $5.74 billion and earnings per share of 68 cents.

Last year, Microsoft reported second-quarter revenue of $21.46 billion, profit of $6.38 billion, and earnings per share of 76 cents.

The company attributed the results to double-digit growth in both its Commercial (business-oriented) and Devices & Consumer segments.

Revenue in Devices & Consumer, which includes everything from Windows licenses sold to manufacturers to Surface, Xbox and Bing, grew 13 percent to $11.91 billion.

Though Windows revenue from manufacturers declined 3 percent, revenue from Surface — Microsoft launched the second generation of its Surface tablets in the quarter — doubled from the previous quarter.

Also launched in the quarter was the Xbox One console; Microsoft said it sold 3.9 million of the devices by Dec. 31.

On the Commercial side, revenue grew 10 percent to $12.67 billion, fueled primarily by double-digit growth in SQL Server and System Center sales.

“It was generally a good quarter,” said analyst Sid Parakh with investment firm McAdams Wright Ragen. “Enterprise [corporate] is still really strong and we did see an uptick in devices.”

The results come as CEO Steve Ballmer is expected to retire soon, once Microsoft’s board has named a successor. Ballmer announced in August his intention to retire within 12 months, after the job is filled.

There was speculation Microsoft might give a search update during the earnings report, but that did not happen. And financial analysts who were able to ask questions during the conference call did not ask about it.

Here’s a more detailed look at how the various groups within each of Microsoft’s two broad segments performed in the second quarter:

Devices & Consumer:

• Licensing (Windows device manufacturers, consumer Windows, Windows Phone, Office consumer, and patents): $5.38 billion revenue, down 6 percent.

Retail and other sales of Windows slid $264 million — or 69 percent — compared with a year ago, when Windows 8 first hit the market.

Revenue from Windows device manufacturers fell 3 percent, largely from continuing weak consumer demand. But that was partially offset by revenue from Windows Pro (Windows 7 Pro and Windows 8 Pro), which grew 12 percent, marking the third consecutive quarter of growth.

“Long term, the trend to watch is that operating-system revenue is going to continue to be impacted by tablets,” said Michael Yoshikami, a fund manager with Destination Wealth Management.

Consumer Office revenue declined $244 million, or 24 percent, as Microsoft increasingly focused on shifting customers to its cloud-based Office 365 Home Premium service.

Windows Phone revenue rose $340 million, or 50 percent, attributable to higher sales of Windows Phone licenses as well as increased revenue from licensing its patents to makers of Android phones.

Microsoft did not specify what percentage of Windows Phone’s revenue comes from the royalties paid by Android makers. Microsoft’s lead attorney has said in the past that $5 per device seemed fair, while other estimates have placed the royalty at $8 per device.

• Hardware (Surface, Xbox and Xbox Live subscriptions, second- and third-party video games, and other hardware): $4.73 billion in revenue, up 68 percent.

Surface revenue for the quarter was $893 million, which Microsoft said was up $400 million from the first quarter.

The company did not provide a comparison with figures from a year ago, when the original Surface tablets first came on the market.

That the Surface seems to be gaining traction is encouraging for Microsoft, especially since its first-generation Surface devices didn’t sell well, leading the company to take a $900 million writedown on one version.

But the flip side is that it cost Microsoft $932 million in the second quarter to make and sell Surface.

“They’re still losing money on every [Surface] device they sell,” Parakh said, “though their primary goal is not necessarily to make money on the device at this point. They need to establish a footprint of users — market share.”

Indeed, as Microsoft works on transforming into a devices-and-services company, its gross margins will be increasingly under scrutiny.

Gross margins for hardware are typically far lower than they are for software products. Microsoft’s gross margin for its Devices & Consumer Hardware division fell $351 million, or 46 percent.

Chief Financial Officer Amy Hood said Surface has “made a big leap” from version 1 to version 2.

“We’ve learned a lot over the course of this journey. And we have to make more meaningful progress,” focusing on price point and gross margin, Hood added.

The other hardware revenue generator was Xbox One, which launched in October. Microsoft said it sold 3.9 million Xbox One consoles in the second quarter, topping the 3.5 million Xbox 360 consoles sold in the quarter.

Microsoft said the Xbox platform’s cost of revenue increased $1.6 billion.

Hood said gross margins for new consoles like the Xbox One tend to be negative at first but should grow over time.

“But it’s never going to be an 83 percent gross margin,” she said. “It’s just a different business, even for the market leader, and even successfully generating cash.”

• 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): $1.79 billion revenue, down 10 percent from the year-ago period when Halo 4 launched.

Microsoft reported Bing grew its search share to 18 percent and that search ad revenue grew 34 percent.

The number of Office 365 Home Premium users grew to 3.5 million, up from the 2 million figure announced in September at Microsoft’s financial analysts meeting.


• Licensing:(Windows enterprise, Windows Server, SQL Server, Visual Studio, System Center, Office for businesses, Dynamics, unified communications including Skype, Windows Embedded): $10.89 billion revenue, up 7 percent.

SQL Server and System Center revenue both showed double-digit growth, Microsoft said.

Gross margin grew $751 million, or 8 percent.

• Other (enterprise services, cloud services, including Office 365 for businesses, Azure, Dynamics CRM Online): $1.78 billion revenue, up 28 percent.

Microsoft attributed the growth mainly to higher revenue from cloud services and enterprise services, with commercial cloud-services revenue more than doubling and customers for both Office 365 commercial and Windows Azure growing in the triple digits.

Gross margin grew $199 million or 92 percent. Revenue growth outpaced the increase in cost of building data centers to accommodate Microsoft’s growing cloud services business.

Microsoft shares closed regular trading at $36.06 and in after-hours trading was up 3.6 percent, to $37.35.

Janet I. Tu: 206-464-2272 or On Twitter @janettu.

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