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Microsoft's Strong Quarterly Growth Shows Early Success of Ballmer's 'One Microsoft'

Microsoft's stellar financial results for the second quarter suggest outgoing CEO Steve Ballmer's devices and services strategy and his "One Microsoft" corporate philosophy is working.

The company stunned Wall Street analysts yesterday with better-than-forecasted results for its second fiscal quarter. The company's $24.5 billion in revenues for the period ended Dec. 31 were $800 million higher than the projected figures. Earnings came in at a whopping 76 cents a share, 8 cents higher than the 68 cents anticipated.

The surprise uptick was the result of an increase in sales of its Surface devices, which last year was a black eye for the company. Also, a large uptake for Office 365 (with 3.5 million subscribers) and high demand for the company's new Xbox One game console helped to spur the growth. Even so, traditional Office revenue declined 24 percent to $244 million, as reported by Redmond's Kurt Mackie.

Microsoft CFO Amy Hood said on last night's earnings call that the quarter's results validate its transition to a devices and services company. Revenues of $11.9 billion were up 13 percent.  In an indication Microsoft may be turning the corner with its Surface devices, the company said revenues doubled last quarter over the previous one to $893 million. The increase is the result of the newly released Surface 2 and Surface Pro 2, which received more favorable reviews and a higher level of consumer interest over the previous generation devices.

"We feel good about the progress we have made over the past couple of quarters, and are enthusiastic about the overall opportunity ahead with Surface," Hood told analysts yesterday on the earnings call. "The Windows ecosystem as a whole is also making important progress."

To that latter point, that progress remains incremental at this point.

With Surface devices ranging in price from $449 to $1,799, depending on model and configuration, Reuters estimated Microsoft sold 2 million Surfaces. As a comparison it is estimated Apple will announce that  20 million iPads sold during the same period.  

Still, Microsoft's advantage over Apple and Google is the fact that despite its consumer push, it's still primarily an enterprise company, as Mary Jo Foley points out in her All About Microsoft blog. Commercial revenues of $12.7 billion were up 10 percent. And as noted by The Wall Street Journal, commercial sales account for two thirds of Microsoft's gross profit.

Hood said commercial bookings grew 12 percent, while license renewal rates were healthy among its key enterprise products, despite a large number of license agreements expiring. Renewals increased 12 percent and contracted (but unearned) revenue came in at a record $23 billion, Hood said. "To me this is important as these long-term commitments demonstrate the confidence customers have in our product roadmap and where we are investing in key areas such as big data, infrastructure management and cloud computing," she told analysts.

Microsoft did not use the earnings release to discuss its search for a new CEO but the latest results suggest whoever gets the nod will have to make a strong case to make any dramatic changes in strategy. That doesn't mean one can't and won't make such a case. But the next CEO could also look to find better ways to execute on the existing plan.

Posted by Jeffrey Schwartz on 01/24/2014 at 12:02 PM


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