Microsoft posts record Q1 on strong cloud, better than expected hardware

Microsoft logoIn the first quarter of its 2015 financial year, Microsoft sold more phones than expected and continues to do well in the cloud space, leading it to a record for Q1 revenue.

Revenue for the quarter was $23.20 billion, up 25.2 percent on the same quarter in the 2014 financial year. Operating income was down 7.9 percent, to $5.84 billion, and earnings per share were down 12.7 percent to $0.55.

The large drop in operating income was driven primarily by a $1.14 billion charge for "integration and restructuring." The majority of this, $1.05 billion, was made up of severance expenses and restructuring-related write-downs.

Device and Consumer (D&C) Licensing, spanning OEM and retail/consumer Windows and Office licensing, was down 8.7 percent to $4.09 billion. Gross margin was down 2.6 percent at $3.82 billion. Every constituent revenue source in this category was down; Windows OEM revenue dropped 2 percent, Windows OEM non-Pro revenue was down 1 percent, and Windows OEM Pro revenue was down 4 percent. Of the non-Pro revenue, Microsoft said that the number of licenses grew, driven by new cheaper price points, such as the zero-cost Windows 8 with Bing. The Pro revenue decline was in line with the business PC replacement cycle.

Perpetually licensed Office consumer revenue was down 5 percent, due to the continuing switch to Office 365 Home and Personal. Windows Phone revenue was down 46 percent, with IP licensing revenue dropping due to a greater number of low royalty devices.

Revenue next quarter is expected to be between $4.0 and $4.2 billion.

Computer and Gaming hardware revenue was up 74 percent to $2.45 billion, and gross margin was up 133 percent to $0.48 billion. Revenue for the Surface brand was $0.91 billion, a 127 percent increase year-on-year. The Surface Pro 3 has doubled the volume of Surface Pro 2s sold, and Surface as a whole had a positive gross margin. 2.4 million Xbox consoles (both 360 and One) were sold in the quarter, a quarter-on-quarter increase of 118 percent. With Xbox One both cheaper—thanks to the removal of the compulsory Kinect peripheral—and more widely available—thanks to expansion into China, among other markets—this growth is not entirely surprising.

Next quarter, revenue is estimated at $3.5 to $3.8 billion, reflecting the strong seasonal influence on hardware sales.

Phone hardware is a new segment, due to the purchase of Nokia's Devices and Services division. There are no year-on-year figures yet. On a quarterly basis, revenue is up 32 percent to $2.61 billion, and gross margin is up almost ten times, to $0.48 billion, due to "non-recurring items resulting from business integration efforts." Microsoft sold 9.3 million Lumia smartphones and 42.9 million non-Lumia phones. This represents a 5.7 percent increase in Lumia sales year-on-year.

The outlook for next quarter is revenue of $2.0 to $2.2 billion.

D&C Other revenue was up 16.4 percent to $1.81 billion, with operating margin down 3.7 percent to $0.31 billion. Office 365 Consumer now has 7.1 million subscribers, growing more than 25 percent quarter-on-quarter. Search advertising revenue is up 23 percent, due to both more searches and more revenue per search. Display ad revenue was, however, down 9 percent.

Revenue estimates for next quarter are $2.3 to $2.4 billion; this reporting segment includes certain Xbox game sales, and so it too has a significant seasonal element.

Commercial Licensing revenue was up 2.7 percent to $9.87 billion, with gross margin up 3.4 percent to $9.10 billion. Existing strong performers continued to be strong performers; Server product revenue was up 11 percent, with double-digit growth in SQL Server, System Center, and Windows Server. Windows volume licenses were also up by 10 percent, reflecting the continuing business PC replacement cycle. Perpetually licensed Office revenue was down 7 percent, due to migration to Office 365.

Revenue next quarter is estimated at $10.8 to $11.0 billion.

Commercial Other revenue was up 50.2 percent to $2.41 billion. Gross margin was up 194 percent to $0.81 billion. Of this, commercial cloud revenue was up 128 percent, due to a greater number of Office 365 subscribers and a greater proportion of premium Office 365 subscriptions. Azure revenue was up 121 percent. Enterprise Services revenue was up 13 percent.

Next quarter's revenue is estimated at $2.5 to $2.6 billion.

The cloud performance is perhaps no great surprise; Azure and Office 365 have been growing sequentially for several quarters, and Azure in particular is a highly compelling platform. The performance of Surface suggests that with Surface Pro 3, Redmond may finally have started to get the mix of features and price right. The hybrid device still isn't quite the laptop killer that the company positions it as, but it's a lot more useful to a lot more people, and businesses seem to be starting to notice. The modest Lumia growth suggests that the aggressive price range may also be carving out a niche for itself.

Looking forward, the company expects the restructuring costs to continue, with another $0.5 billion still to come in the remainder of the financial year. The integration of Nokia's devices business is also expected to cost another $0.1 billion per quarter over the same period.

Source: Ars Technica

Tags: Microsoft, report

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