Microsoft Q3 strong: Office 365 subscriptions surge, Windows upgrades pay off

Summary:Microsoft's first quarter with Satya Nadella at the helm was a good one. The enterprise unit delivers the dollars again.

Microsoft's fiscal third quarter was better than expected as the company added 1 million Office 365 Home subscribers, benefited from the enterprise move away from Windows XP, rode its enterprise unit and added cloud features.

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Meanwhile, Microsoft Surface revenue was up 50 percent in the quarter compared to a year ago to $500 million.

Overall, Microsoft reported third quarter earnings of $6.97 billion, or 68 cents a share, on revenue of $20.4 billion, roughly flat with a year ago.

Wall Street was expecting Microsoft to report fiscal third quarter earnings of 63 cents a share on revenue of $20.39 billion.

The quarter is notable for Microsoft since it's the first one with Satya Nadella as the leader. Nadella has made a few appearances at Microsoft's Build conference and the Office for iPad launch. In addition, the quarter is the last one before Nokia is added into the revenue mix. Analysts widely expect Nokia to ding Microsoft's profit margins and earnings for the foreseeable future. 

On a conference call with analysts, Nadella said:

We will continue to push hard and move quickly, and you'll see the proof in that month after month in the products we build. What you can expect of Microsoft is courage in the face of reality, we will approach our future with a challenger mind set. We will be bold in our innovation. We will be accountable to our customers, partners and shareholders.

Microsoft's outlook for future quarters won't include Nokia so the company will have to update when the deal closes on Friday. 

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 Microsoft's business unit breakdown had a familiar storyline with recent quarters. The enterprise division, known as commercial licensing, delivered revenue of $10.32 billion, up from $9.98 billion a year ago. 

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Microsoft's commercial unit continues to execute well as server product revenue was up 10 percent, SQL Server sales jumped more than 15 percent and Windows volume licensing revenue was up 11 percent from a year ago. One notable tidbit: Microsoft estimates that about 90 percent of enterprise desktops are on Windows 7 or Windows 8.

In addition, Microsoft said its "commercial other" revenue, a proxy for cloud services such as Azure and Office 365, delivered third quarter sales of $1.9 billion, up 31 percent from a year ago.

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Microsoft's core business historically, Windows, fared well in the fiscal third quarter as licensing revenue to original equipment manufacturers (OEMs) was up 4 percent. Business PCs led the gains as Windows Pro revenue was up 19 percent, but non consumer OEM sales fell 15 percent. Microsoft recently ended support for Windows XP and that move prodded enterprises to upgrade to Windows 7 in most cases. 

On the hardware front, which will be totally transformed for Microsoft by the Nokia deal, the company said that Surface revenue was $494 million, up 50 percent from a year ago. The company also sold 2 million Xbox consoles.

msft q3 14c

Topics: Enterprise Software, Microsoft

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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