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Originally published April 24, 2014 at 8:04 PM | Page modified April 25, 2014 at 7:08 PM

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Microsoft shows solid consumer, cloud-services growth

Microsoft CEO Satya Nadella especially touted the growth of the company’s commercial cloud services.


Seattle Times technology reporter

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Even amid the decline in the PC market and an underdog status in certain consumer-device markets, Microsoft posted solid earnings Thursday in its fiscal third quarter, beating Wall Street expectations.

Buoyed, as usual, by its corporate customers, but also by consumers this time, Microsoft reported earnings per share of 68 cents on sales of $20.40 billion and profit of $5.66 billion in the quarter ended March 31.

Analysts had expected 63 cents a share on sales of $20.38 billion, with profit of $5.26 billion, according to Bloomberg.

“Today’s results demonstrate the breadth and strength of our overall business,” Microsoft CEO Satya Nadella said Thursday during a conference call with Wall Street analysts.

This was Nadella’s first earnings call since he became CEO in February — and it didn’t sound like it would be his last. His predecessor, Steve Ballmer, rarely took part in the calls.

“From my first day, I’ve said I’m committed to ongoing dialogue with investors,” Nadella said. “Joining these investor calls, going forward, will be a big part of that.”

Nadella especially touted the growth of the company’s commercial cloud services. Windows Azure, the company’s cloud platform, posted 150 percent revenue growth, and Office 365, the online subscription version of Microsoft’s productivity suite, saw its revenue more than double.

He called Office 365 “the core engine that’s driving a lot of our cloud adoption.”

“Cloud is clearly their No. 1 maniacal focus right now,” said Redmond-based analyst Al Hilwa with research firm IDC, who called the 150 percent growth of Azure remarkable.

The adoption of Office — both the traditional local-PC version and the Office 365 subscription version — grew among consumers as well.

Revenue from sales of Windows licenses to PC manufacturers grew slightly.

“Windows was decent,” said analyst Sid Parakh with Seattle-based investment firm McAdams Wright Ragen, who added that that development counted as a “big improvement” compared with declines in recent quarters as PC sales dropped.

Nadella and Chief Financial Officer Amy Hood talked only briefly about the company’s acquisition of Nokia’s handset business, which is expected to close Friday.

Nadella said the addition of Nokia employees’ expertise and experience will enhance Microsoft’s capabilities in building devices — part of his vision of a “mobile first, cloud first” world.

Hood said that until the deal closes, Microsoft is not allowed the type of deeper access to Nokia’s accounting systems and projections the company would need to give clear guidance.

Overall for the third quarter, earnings per share were down 6 percent from the same quarter last year, while revenue was down 0.4 percent and profit declined 7 percent.

In the year-ago quarter, Microsoft posted earnings per share of 72 cents on revenue of $20.49 billion, with profit of $6.06 billion.

But those figures for last year got a boost from recognition of previously deferred revenue related to Windows, Office and “Halo 4” video-game upgrades.

Adjusting for that, revenue for the third quarter last year was $18.83 billion, with earnings per share of 65 cents.

Comparing that to fiscal 2014’s third-quarter figures, revenue this year grew 8 percent and earnings per share grew 5 percent.

Here’s how the various groups within each of Microsoft’s two broad segments performed in the third quarter:

Devices & Consumer:

Overall, this segment reported revenue of $8.30 billion, up 12 percent.

• Licensing (Windows device manufacturers, consumer Windows, Windows Phone, Office consumer, and patents): $4.38 billion revenue, up 0.7 percent.

Revenue from licenses sold to manufacturers using Windows grew 4 percent, boosted by 19 percent growth in revenue from makers of business-oriented PCs.

Consumer Windows grew slightly, helped in part by Microsoft’s decision to end support for the popular, aging Windows XP.

Consumer Office revenue grew 15 percent.

• Hardware (Surface, Xbox and Xbox Live subscriptions, second- and third-party video games, and other hardware): $1.97 billion revenue, up 41 percent.

The launch of Xbox One in November continued to provide a boost, with sales of 1.2 million of the consoles in the third quarter; 800,000 Xbox 360 units were sold.

Surface revenue grew 50 percent to about $500 million.

• Other (Bing and MSN, Office 365 Home, first-party video games, marketplaces such as Windows Store, Windows Phone Store and Xbox Live transactions, as well as Microsoft retail stores): $1.95 billion revenue, up 18 percent.

Online advertising revenue increased 16 percent, while search advertising revenue increased 38 percent.

Office 365 Home now has 4.4 million subscribers, up 1 million from the previous quarter.

Commercial:

Overall, this segment reported revenue of $12.23 billion, up 7 percent.

• Licensing: (Windows enterprise, Windows Server, SQL Server, Visual Studio, System Center, Office for businesses, Dynamics, Skype, Lync, SharePoint, Exchange, Windows Embedded): $10.32 billion revenue, up 3 percent.

Windows volume-licensing revenue grew 11 percent; server-products revenue grew 8 percent, driven primarily by increased sales of SQL Server; and Lync, SharePoint and Exchange collectively had double-digit growth.

• Other (enterprise services, cloud services, including Office 365 for businesses, Azure, Dynamics CRM Online): $1.90 billion revenue, up 31 percent.

Cloud-services revenue shot up 101 percent, attributable primarily to the growth of Office 365. Azure revenue grew more than 150 percent.

In after-hours trading, Microsoft shares were up $1.02, or 2.6 percent, to $40.86. They closed regular trading Thursday at $39.86, up 17 cents.

Janet I. Tu: 206-464-2272 or jtu@seattletimes.com. On Twitter @janettu



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