Cloud Revenues Boost Microsoft Earnings

Matt Broersma is a long standing tech freelance, who has worked for Ziff-Davis, ZDnet and other leading publications

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Stong demand for cloud-based products helped Microsoft post a stronger-than-expected quarter, as consumer Windows sales continued to decline

A jump in cloud revenues helped Microsoft to offset declining PC sales as the company reported its first quarter under new chief executive Satya Nadella after the close of trading on Thursday.

Under Nadella, the company is focusing on mobile devices and cloud technologies to compensate for what is seen as a long-term decline in computer shipments as users shift to devices such as tablets and smartphones.


Mobile strategy

As part of this strategy, Microsoft is in the process of acquiring Nokia’s mobile handset unit, a $7 billion(£4.4bn) deal expected to close on Friday. Other key parts of this plan include the cloud-based Office 365, the Azure cloud computing service, the Bing search engine and Microsoft-branded devices such as the Surface tablet. Nadella himself is an engineer with a background in Microsoft’s cloud products.

Azure saw its revenue grow 150 percent during the quarter, while Office 365 Home added 1 million users for a total of 4.4 million subscribers during the same period, Microsoft said. Revenue from Bing search rose 38 percent year-on-year and now holds 18.6 percent of the US search market. The company sold 1.2 million Xbox One gaming consoles during the quarter.

Backed by this growth, Microsoft reported net profits of $5.66 billion for the quarter, of 68 cents per share down from the $6 billion (72 cents per share) for the same period last year but better than financial analysts’ expectations of 63 cents per share.

Revenues stood at $20.4 billion, in line with expectations and flat year-on-year. Microsoft said the figure represents an 8 percent increase on the same period last year after adjusting for various factors including a $733 million fine levied in March 2013 by the European Commission over the company’s failure to provide a browser selection screen on European PCs.

‘Good progress’

“We are making good progress in our consumer services like Bing and Office 365 Home, and our commercial customers continue to embrace our cloud solutions,” stated Nadella, who took over as chief executive in February.

Windows Phone handsets, including the flagship models made by Nokia, held less than 5 percent of the US market, and Surface tablets have yet to gain significant share: sales increased by 50 percent to a total of $494 million. The Devices and Consumer division generated $8.3 billion in revenues during the quarter, 12 percent higher than the same period last year, while the commercial unit posted $12.23 billion in revenue, 7 percent up year-on-year.

Windows Server, Office Commercial and SQL Server revenues were up 10 percent, 6 percent and 15 percent.

Declining consumer Windows sales

Meanwhile, sales of Windows operating system software to consumer manufacturers, a traditional strength for the company, continued to decline, dropping by 15 percent. Despite this, Windows OEM revenues overall grew 4 percent thanks to a 19 percent increase in Windows OEM Pro sales as companies invest in newer Windows systems due to the end of support for Windows XP.

Windows volume licence sales rose 11 percent, and Microsoft said that nearly 90 percent of enterprise systems now run Windows 7 or 8. Sales to developed markets were particularly strong, according to Microsoft. There are some signs that the decline in PC shipments may be reaching a plateau, with IDC reporting this month that PC shipments for the first quarter fell 4.4 percent year-on-year, lower than the 5 percent decline that had been estimated.

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