Update: Microsoft Q1 sales jump, but Nokia drags down earnings

The company beat Wall Street expectations for sales and earnings in the first quarter

Microsoft
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Microsoft revenue leaped 25 percent in the first quarter but profit dropped, dragged down by expenses tied to its ongoing wave of layoffs and to the integration of Nokia's phone business.

Revenue hit $23.2 billion in the quarter ended Sept. 30, easily exceeding the $22 billion consensus expectation from analysts polled by Thomson Reuters.

Meanwhile, net income was $4.54 billion, or $0.54 per share. That exceeded analysts' expectations by $0.05, but represented a drop of 13 percent in earnings per share compared with last year's first quarter.

Profit was hurt by $1.14 billion of integration and restructuring expenses, which had a negative impact equivalent to $0.11 per share, resulting from the massive round of layoffs the company began to carry out in July and from the ongoing meshing of the Nokia Devices and Services business, whose $7.2 billion acquisition closed in April.

Microsoft CFO Amy Hood characterized the results in a statement as "a strong start to the year," saying Microsoft benefited from continued "momentum" in sales of its cloud computing products, and from "meaningful progress" across its devices businesses.

"We are innovating faster, engaging more deeply across the industry, and putting our customers at the center of everything we do, all of which positions Microsoft for future growth," said Satya Nadella, Microsoft CEO.

Microsoft, which splits its business into two main segments, grew its Devices and Consumer revenue by 47 percent to almost $11 billion, while its Commercial group revenue rose 10 percent to $12.3 billion.

In the Devices and Consumer business, the company highlighted 25 percent sequential growth in subscribers for Office 365 Home and Personal from the fourth quarter, Surface Pro 3 sales of about $900 million and a 102 percent increase in Xbox console unit sales. Phone hardware revenue -- the Nokia business -- topped $2.6 billion.

In Commercial, Microsoft trumpeted that sales of its on premise server products, like SQL Server, System Center and Windows Server, grew 13 percent, while sales of cloud computing software and services, such as Office 365, Azure and Dynamics CRM, shot up 128 percent. Windows volume licensing grew 10 percent.

Microsoft announced in July its intention to lay off 18,000 employees, or about 14 percent of its workforce, the largest staff reduction in its history. The company has already cut about 15,100 positions in two layoff rounds. It's not clear when it will eliminate the other 2,900 jobs, but the plan is to do so before the current fiscal year ends in June.

Performance in the Devices and Consumer business, which Microsoft breaks down into four sub-segments, was unequal.

The Licensing sub-segment had a 9 percent revenue drop year-on-year, down almost $400 million. The biggest tumble was Windows Phone revenue, which cratered 46 percent because Microsoft sold fewer smartphones. Also down were sales of its traditional Office software suite, which fell 5 percent, cannibalized by sales of the subscription-based Office 365 Home and Personal. And Windows sales to hardware makers fell 2 percent.

The Computing and Gaming Hardware sub-segment picked up part of the slack with a 74 percent revenue bump, driven by Surface sales, which more than doubled thanks to interest in the latest Surface Pro 3. Xbox platform revenue also helped, increasing 58 percent.

The third sub-segment, Phone Hardware, generated $2.6 billion in revenue, as Microsoft sold 9.3 million Lumia smarphones and almost 43 million feature phones. The final sub-segment, known as Other, grew its revenue 16 percent, helped by Office 365 consumer sales, which were up by almost $90 million [m], Bing search ad revenue, and sales of Microsoft-owned video games.

Meanwhile, the performance in the Commercial business reflected massive but low-growth sales of traditional on-premises software, and eye-popping growth from cloud computing applications and services. On-premises licensing inched up 3 percent to almost $10 billion, with strong sales of servers and tools, as well as of Windows licenses to businesses, which were up 10 percent. Sales of conventional perpetual-license Office suites dropped 7 percent, hurt by Office 365.

On the other hand, sales of Azure infrastructure- and platform-as-a-service cloud products, and of Office 365 cloud suites, along with enterprise IT professional services, like consulting, grew 50 percent.

During a conference call to discuss the results, Nadella said he was happy not only with the business performance but with a changing corporate culture he described as "fast, innovative, partner friendly and customer-obsessed."

He said demand for Microsoft's cloud products has been growing fast among consumers and businesses, so Microsoft is expanding its data center capacity and constantly adding features to its Azure services and cloud applications.

"One major Azure service or feature is released every three days on average," he said.

At the same time, sales of on-premise server software remain solid, partly because of Microsoft's hybrid strategy to let them run applications on premise and in the cloud, according to Nadella.

The Windows franchise, which has been on a bumpy road due to the mixed reception for Windows 8, is benefitting from the decision this year to give away licenses to makers of small devices -- those with screens 9 inches and lower, he said. This has led to sub-$200 Windows devices.

He was also bullish about Windows 10, which is in a public testing period now and should be launched by mid-2015.

"Windows 10 will deliver a single unified application development platform: one way to write a universal app across the entire family of Windows devices, and one store with a unified way for applications to be discovered, purchased and updated across all of these devices," he said.

Nadella also called out Surface, highlighting the increased sales and improved "business economics" of the product, which Computerworld estimated had lost about $1.7 billion between its launch in 2012 and August this year.

In Gaming, Nadella highlighted the $2.5 billion acquisition of Minecraft-maker Mojang, expected to close next month, because it "extends our ecosystem and community across multiple platforms" and strengthens Microsoft's roster of video games.

Juan Carlos Perez covers enterprise communication/collaboration suites, operating systems, browsers and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.

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