Microsoft Surges In Q1 On Surface Tablet Sales, Enterprise Licensing Growth

Microsoft, in its fiscal first-quarter earnings Thursday, delivered results that were solid on the enterprise side and better than expected on the consumer side -- and that includes healthy sales of Surface tablets.

For the quarter ended Sept. 30, Microsoft reported a profit of $5.24 billion, or 62 cents a share, up 11 percent year-over-year. Revenue came in at $18.53 billion, up nearly 16 percent from last year's quarter. Wall Street analysts were expecting Microsoft to earn 54 cents a share on $17.8 billion in revenue.

While Microsoft has delivered jaw-dropping profit and revenue results in the past that have failed to wow investors, this time was different, as Microsoft shares rose nearly 6 percent to $35.80 in after-hours trading.

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This was the first quarter in which Microsoft broke out revenue for its Surface tablets. They generated $400 million in sales during the quarter, and Microsoft sold twice as many of them as it did during its previous quarter, Microsoft CFO Amy Hood said in the company's earnings call.

"We did see a lot of progress in sales execution for Surface this quarter," Hood said during a Q&A session, adding that Microsoft is confident this will carry over to its current quarter, which includes the all-important holiday season.

Despite the issues people have had with Windows RT, most notably its inability to run regular Windows apps, Microsoft is also seeing some buyers choose this version of Surface. "Surface RT did do quite well this quarter, and I look forward to seeing that continue with Surface 2 this holiday season," Hood said.

Andrew Brust, CEO of Microsoft analyst firm Blue Badge Insights, New York, told CRN that while the Surface RT "underwhelmed," the Surface Pro "is a good converged solution for people who had been going around with a Windows laptop and an iPad in tow."

That said, "I still think they are way too expensive," Burst said.

Meanwhile, Microsoft's enterprise business continues to chug healthily along, with "high renewal rates" for its Enterprise Agreement volume licensing contracts, according to Hood.

Microsoft this quarter also debuted its new reporting structure from its company re-organization in July. Revenue for the new Devices and Consumer segment was $7.46 billion, up 4 percent from last year. The new Commercial segment saw revenue jump 10 percent to $11.2 billion.

Microsoft's Commercial Licensing unit, which includes Office and the old Server and Tools business, rose 7 percent during the quarter. Within that unit, Lync saw the biggest sales increase, rising 30 percent year-over-year.

Microsoft's Commercial cloud revenue increased 103 percent compared to last year. "Our enterprise cloud strategy is starting to resonate with customers," Hood said.

There were even encouraging developments in Microsoft's Windows business, which has seen several consecutive quarters of dwindling sales due in part to the popularity of tablets and smartphones.

Windows sales to OEMs dropped 7 percent after falling 15 percent the previous quarter. Hood said Microsoft was actually expecting to see a double-digit drop in OEM sales, so this exceeded its forecast.

OEM sales of Windows Professional rose 6 percent, while sales to consumers dropped 22 percent, Hood said.

For its current quarter, Hood said Microsoft is expecting revenue of between $23.1 billion and $24.1 billion. Wall Street analysts had been expecting $22.9 billion in revenue.

PUBLISHED OCT. 24, 2013