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Originally published October 23, 2014 at 1:21 PM | Page modified October 24, 2014 at 6:54 PM

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Microsoft results top forecasts, helped by cloud, consumer hardware

Microsoft handily beat Wall Street expectations in its fiscal first-quarter earnings, reported Thursday.


Seattle Times technology reporter

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Microsoft beat Wall Street expectations for its fiscal first-quarter earnings with a combination of solid strength among its corporate customers, a fast-growing cloud business, and surprising progress in the consumer-hardware market.

For the quarter ended Sept. 30, Microsoft on Thursday reported revenue of $23.2 billion, profit of $4.54 billion and earnings per share of 54 cents.

Wall Street was expecting revenue of $22 billion, a profit of $4.34 billion and earnings per share of 49 cents, according to a consensus of analyst estimates compiled by Bloomberg.

Microsoft’s server business continued solidly. And its commercial cloud business logged triple-digit revenue growth.

Its Surface tablet, meanwhile, tallied a positive gross margin for the first time. And its Xbox One consoles logged solid sales, especially after Microsoft began selling in June a version of the console that did not include the Kinect sensor for $100 less.

“The devices and consumer business was not as weak as people expected,” said Norman Young, an analyst with Morningstar.

For the year-ago quarter, Microsoft reported sales of $18.53 billion, profit of $5.24 billion and earnings per share of 62 cents.

This reporting period covers the first waves of layoffs to eliminate 18,000 jobs by July 2015. Microsoft has already cut about 15,000 people.

The layoffs as well as the continuing integration of Nokia’s phone business were reflected in the lower profit and earnings per share figures.

The 54 cents earnings per share included 11 cents of restructuring and integration charges related to the layoffs and the Nokia integration, said Chris Suh, Microsoft’s general manager of investor relations. Excluding that, earnings per share would have been 65 cents, up 5 percent from a year ago.

For the quarter, the company incurred about $1 billion in restructuring charges, which included severance expenses and costs primarily associated with consolidating facilities.

“We’re off to a great start in the year,” CEO Satya Nadella said in a conference call with analysts.

“We would characterize this as a solid performance and [it] should add to the goodwill Nadella is being given by the Street since taking the reins in Redmond,” Daniel Ives, an analyst for FBR Capital Markets, said. “Cloud continues to put fuel in the engine for Microsoft as Nadella looks to steer this company toward its next chapter of growth. While challenges remain (especially on the consumer front), we believe this quarter was another step in the right direction for Microsoft.”

Here’s how the various groups within each of Microsoft’s two broad segments performed in the first quarter, according to its news release:

Devices & Consumer

Overall, this segment reported revenue of $10.96 billion, up 47 percent from the year-ago quarter, due primarily to the acquisition of Nokia’s phone business, and higher revenue from Xbox and Surface.

• Licensing: (Licenses from Windows device manufacturers, consumer Windows, Windows Phone, Office consumer, and patents): $4.09 billion revenue, down 9 percent.

The decline in revenue was caused, in part, by Microsoft’s acquisition of Nokia, which meant Microsoft no longer collects licensing revenue from the Finnish company. (That revenue was worth about $650 million in the second quarter of last fiscal year, according to Amy Hood, Microsoft’s chief financial officer.)

In addition, many phone manufacturers that use Android are producing lower-end phones, which means Microsoft collects less royalty per device from those manufacturers. (Microsoft, which contends that certain features in Android use patented Microsoft technology, collects royalties from Android device manufacturers.)

The decline also reflects the continuing slump in the PC market. Though the precipitous fall in PC sales appears to have stabilized, worldwide PC shipments during this quarter were still less than a year ago.

• Computing and gaming hardware (Surface, Xbox and Xbox Live subscriptions, second- and third-party video games, and peripherals. This category was previously called “Hardware.”): $2.45 billion, up 74 percent.

Surface revenue was $908 million, up 127 percent, driven largely by the June release of Surface Pro 3. Cost of revenue for Surface was about $802 million — a combination of the $645 million cost of revenue the company stated in the year-ago quarter and the $157 million increase in cost of revenue Microsoft reported this quarter.

Total Xbox platform sales grew 102 percent to 2.4 million units.

• Phone hardware (Windows Phone): $2.61 billion. There is no comparable figure from a year ago since this was a new category established after the closing of the Nokia acquisition in April.

Cost of revenue was $2.1 billion.

Microsoft said it sold 9.3 million Lumia phones and 42.9 million non-Lumia phones in the quarter, with gross margin of $478 million.

• Other (Bing and MSN, Office 365 Home and Office 365 Personal, first-party video games, marketplaces such as Windows Store, Windows Phone Store and Xbox Live transactions, as well as Microsoft retail stores): $1.81 billion, up 16 percent.

The higher revenue was due largely to higher online advertising, Office 365 consumer subscriptions and first-party video games revenue.

Office 365 Home and personal subscribers grew 25 percent from the previous quarter to reach 7 million in the first quarter.

Commercial

Overall, this segment reported revenue of $12.28 billion, up 10 percent, due mainly to growth in Microsoft’s commercial cloud and on-premises licensing businesses.

• Licensing (Windows enterprise, Windows Server, SQL Server, Visual Studio, System Center, Office for businesses, Dynamics, Skype, Lync, SharePoint, Exchange, Windows Embedded): $9.87 billion, up 3 percent.

Server products and services revenue grew 13 percent. There was double-digit growth for SQL Server, System Center and Windows Server.

Windows volume licensing revenue increased 10 percent.

Lync, SharePoint and Exchange collectively grew double digits.

• Other (enterprise services, cloud services, including Office 365 for businesses, Azure, Dynamics CRM Online): $2.41 billion, up 50 percent.

Commercial cloud revenue grew $662 million, or 128 percent, driven by Office 365, Azure and Dynamics CRM.

Microsoft declined to say how many commercial Office 365 subscribers there are, but noted Office commercial products and services revenue grew 5 percent.

Microsoft shares closed Thursday at $45.02 and were up 3 percent in after-hours trading.

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



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