Microsoft recovers from Surface debacle with strong Q1 earnings

Microsoft Q1 2014 Earnings

Microsoft’s last earnings report was not the company’s brightest hour. Not only did it miss analysts’ expectations with fiscal fourth-quarter earnings of $0.59 per share on $19.89 billion in sales, but it also had to write off a $900 million loss related unsold Surface tablet inventory. The Street’s expectations were more tempered this time around, with the consensus forecast projecting EPS of $0.54 on revenue of $17.8 billion in Microsoft’s first fiscal 2014 quarter as the company looks to find its footing in the mobile market. The company on Thursday beat expectations when it announced a Q1 2014 profit of $0.62 per share on revenue that totaled $18.53 billion. Microsoft’s shares surged by more than 6% in after-hours trading immediately after the news. 

The big takeaway from this quarter’s earnings report is that it marks a real transition for Microsoft from a company that deals primarily in selling software to one that makes its money from devices and services. For example, the company’s revenue from OEMs licensing its Windows software declined by 7% but its revenue generated from Surface sales grew to $400 million. Overall Microsoft said that its consumer devices revenue grew by 4% to $7.46 billion on the quarter.

Microsoft’s press release follows below.

Microsoft Reports Record First-Quarter Revenue of $18.53 Billion

Robust enterprise sales and improving consumer demand drive broad-based growth 

REDMOND, Wash. — October 24, 2013 — Microsoft Corp. today announced revenue of $18.53 billion for the quarter ended September 30, 2013. Gross margin, operating income, net income, and diluted earnings per share for the quarter were $13.42 billion, $6.33 billion, $5.24 billion, and $0.62 per share.

These financial results reflect the deferral of $113 million of revenue primarily related to Windows 8.1 Pre-sales. All growth comparisons in the press release relate to the corresponding period in the last fiscal year, unless otherwise noted.

The following table reconciles these financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. We have provided this non-GAAP financial information to aid investors in better understanding the company’s performance.

 

Three Months Ended

September 30,

Percentage Change

(In millions, except per share amounts and percentages)

Revenue

Operating income

Diluted EPS

Revenue

Operating income

Diluted EPS

2012 As reported (GAAP)

$16,008

$5,308

$0.53

Revenue deferred for Windows Upgrade Offer, Windows 8 Pre-sales, and Office Offer

$1,356

$1,356

$0.13

2012 As adjusted (non-GAAP)

$17,364

$6,664

$0.65

2013 As reported (GAAP)

$18,529

$6,334

$0.62

16%

19%

17%

Revenue deferred primarily related to Windows 8.1 Pre-sales

$113

$113

$0.01

2013 As adjusted (non-GAAP)

$18,642

$6,447

$0.63

7%

(3)%

(3)%

“Our devices and services transformation is progressing and we are launching a wide range of compelling products and experiences this fall for both business and consumers,” said Steve Ballmer, chief executive officer at Microsoft. “Our new commercial services will help us continue to outgrow the enterprise market, and we are seeing lots of consumer excitement for Xbox One, Surface 2 and Surface Pro 2, and the full spectrum of Windows 8.1 and Windows Phone devices.”

“We saw strong focus across our teams, generating record first-quarter revenue even as we navigate a fundamental business transition. Our enterprise renewals were very healthy and our devices and consumer business continued to improve,” said Amy Hood, chief financial officer at Microsoft. “We are making strategic investments in areas like technological innovation, supply chain management, and global cloud operations to build for the future and create long-term shareholder value.”

Devices and Consumer revenue grew 4% to $7.46 billion.

  • Windows OEM revenue declined 7%; Windows Pro revenue grew for the second consecutive quarter.
  • Surface revenue grew to $400 million with sequential growth in revenue and units sold over the prior quarter.
  • Search advertising revenue grew 47% driven by an increase in revenue per search and volume.

Commercial revenue grew 10% to $11.20 billion.

  • SQL Server revenue grew double-digits, with SQL Server Premium revenue growing more than 30%.
  • Lync, SharePoint, and Exchange, our productivity server offerings, collectively grew double-digits.
  • Commercial cloud revenue grew 103%.

“We continue to execute well across our businesses and we are seeing robust demand for our enterprise products and cloud services. Strong customer adoption of Office 365, Azure, and Dynamics CRM Online is accelerating our business transition to the cloud,” said Kevin Turner, chief operating officer at Microsoft. “Our investments in SQL database platform, Hyper-V, System Center, and Lync are driving market share gains as these comprehensive solutions enable customers to increase their insight and efficiency.”

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