Record first-quarter sales for Microsoft, but Windows OEM revenue falls

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Microsoft reported record first-quarter revenue that topped $18.5 billion, although WIndows OEM revenue dropped 7 percent during the three-month period.

The latter number wasn’t quite as good as Microsoft made it out to be, either: excluding the “Pro” versions, OEM sales of Windows dropped 22 percent. Surprisingly, Microsoft chief financial officer Amy Hood said that number was better than the company had originally expected, which was a decline in the mid-teens.

Hood struck perhaps the most upbeat note, however, when she predicted a “healthy holiday performance” across Microsoft’s product portfolio in a conference call that accompanied the earnings report.

”We’re seeing signs of stabilization in the business segment with two consecutive quarters of growth and a relatively stable outlook for the next couple of quarters,” Hood said. “While the consumer segment is more volatile with increasing competition for share of wallet, it also performed better than expected, particularly in developed markets.  “

That’s good news for a technology industry worried about an anemic holiday season—helped, in part, by Microsoft’s own struggles convincing customers to buy Windows 8. With Windows 8.1, however, Microsoft’s Hood expressed confidence that the company was back on track.

Microsoft reported net income of $5.2 billion for the quarter, a 17.4 percent increase over the previous year. Revenue rose 15.7 percent from the year-ago quarter, beating analyst expectation of $17.29 billion in quarterly revenue.

In all, it ended up as a generally upbeat quarter for Microsoft, which is weathering an ongoing CEO transition, a company reorganization, and a corresponding restructuring of its business units alongside a new revision of its operating system and an update to its Surface tablet as well.

“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, the outgoing Microsoft CEO, in a statement. “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.”

In September, Microsoft reorganized its business structure “to innovate with greater speed and efficiency,” it said. In doing so, familiar Microsoft products now are accounted for in different groups.

All told, Microsoft said that its Devices and Consumer business saw revenue increase 4 percent to $7.46 billion. Within that grouping hides three business units; Devices and Consumer Licensing is probably the most important, containing Microsoft’s Windows business. Revenue in D&C Licensing dipped 7 percent to $4.343 billion; Microsoft said that Windows OEM licensing fell by the same amount. But that was hidden by Windows Pro revenue, which increased for the second consecutive quarter, Microsoft added. Overall, OEM Windows revenue, excluding Windows Pro, fell by 22 percent.

Devices & Consumer Hardware, which houses the Xbox, saw revenue increase to $1.49 billion, a boost of 37 percent.  Revenue for the Microsoft Surface tablet grew to $400 million with sequential growth in revenue and units sold over the prior quarter, Microsoft said. Surprisingly, the mix of sales favored the Windows RT-based, 32-GB Surface model, Hood said.

Microsoft’s Devices and Consumer Other category (Windows Store revenues, Xbox Live, Office 365, and other smaller businesses) saw revenue increase from $1.4 billion to $1.635 billion.

As it has before, sales of Microsoft’s enterprise and commercial product helped boost Microsoft’s bottom line. Commercial revenue grew 10 percent to $11.20 billion, Microsoft said. Gross margin and revenue grew by 10 percent. Office 365 subscriptions grew by triple digits, Microsoft said.

Microsoft’s outlook was equally robust; Devices & Consumer Licensing revenue in the calendar fourth quarter is expected to be between $5.2 billion and $5.4 billion, a significant increase from the current quarter. And Devices & Consumer Hardware sales are expected to be even stronger; a whopping $3.8 billion to $4.1 billion, driven by Surface and sales of the Xbox One console beginning Nov. 22.

”We expect the launch of Xbox One to be the biggest in Xbox history, and we feel great about our ability to continue our leadership position in the living room,” Hood said.

Updated at 4:49 PM PT with additional details.

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