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

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.

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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. 

msft q3 14

 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. 

msft q3 14a

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.

msft q3 14b

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

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

    Sorry ABMers, Microsoft will not be dying this quarter or this year for that matter.

    "Meanwhile, Microsoft Surface revenue was up 50 percent in the quarter compared to a year ago to $500 million."
    Still think its a flop? This next generation device is selling quite well.
    Loverock.Davidson
    • Why pick fights?

      It looks like all the big tech companies are having good quarters despite the increase in competition.

      Sounds like a win, win and win situation to me.
      Emacho
      • So true

        This means that the economy is picking up. Surface tablets are great for work. They should have better quality hardware as Samsung, Amazon, and Apple. they need to work on screen resolution.
        Kaffeguy
    • Surface Joking

      Bwhahaha joke, Surface 2 and Pro 2 sold out everywhere but only sold between $500M/$449 = 1.1 M unit - $500M/$899 = 500 k unit. Enjoy your Surface nobody want
      bksherly
      • I wanted one.

        Looks like you've just been proven wrong.
        ForeverCookie
      • I also wanted one

        Five actually-just bought 5 Surface Pro 2's
        jthompso@...
      • Try rewording that comment

        The way you stated it makes no sense.
        How many Surface units sold in last year's quarter vs how many Surface units sold this year in this year's quarter? Even assuming they all sold at $899 each, that's 556,174 units or just over half a million. Not shabby, but not great either.
        Vulpinemac
    • 500 Million

      The Surface ASP would be a midpoint between the price of the RT version and the Pro version. Let's say it's no less than $400 and no more than $1,000. That would put the range of sold items in the quarter between 1.25 million and 500,000. (There's a subtlety in that Microsoft may consider a sale if it's acquired for retail, but that might not be sold-through and may be returned. Any thing sold direct is, indeed, incontrovertibly sold.) (I'm also not sure if Surface accessories are included in the Surface number. From my observation, the accessories are the really high-margin items, so it isn't a bad think if they form a significant part of that revenue number.)

      To state the obvious, the higher the ASP, the more higher priced Surfaces being purchased, which is better for the bottom line.

      So, 2,000,000 - 5,000,000 per year. Flop? No. Hit? Well, yesterday Apple disappointed with news that only 16 million (64 million per year, annualized) were sold. So is the Surface a hit? Sure, why not. But down in AA ball.

      (Incidentally, sell-through for Apple last quarter was 17.5 million (70 million, annualized), according to the LA Times report at http://www.latimes.com/business/technology/la-fi-tn-apple-ipad-sales-20140424,0,7109010.story#axzz2zqbgALnG. According to Forbes, the iPad's ASP was $465 and I estimate revenues at 7.44 billion. Today's good news was that Microsoft had 333 million in Surface revenues in the Jan-Mar quarter of 2013 and 500 million this year with a undeniably superior product line-up.)
      DannyO_0x98
      • I've always thought the same way with iPad

        In that there's a subtlety in that Apple may consider a sale if it's acquired for retail, but that might not be sold-through and may be returned. They don't offer them for free to Best Buy, they purchase them, so that's a sale for Apple, even if it's still sitting on the shelf at Best Buy.

        And I agree, any thing sold direct is definitely sold.

        I say this as I noticed that early on Apple used to boast of "activations", and as they started to back off, the they started reporting sales, as in "sales to channel and retail partners".

        It would be in keeping with the explanation Tim Cook offered the other day, and in line with how every other company counts sales.
        William.Farrel
        • Since not all iPads are cellular, you can't just count activations

          To do so would distort the sales numbers as a fair proportion of iPad owners choose the wi-fi-only versions and use their iPhone (or other smartphone) as a hotspot. With the ever-increasing availability of wi-fi hotspots around the world, the need for a 4G radio in a tablet is significantly reduced.
          Vulpinemac
    • RT is not the thing you expect if you actually want windows.

      Mostly RT the real windows is the top price item not cheap at all quite expensive it is no competitive.
      Altotus
    • One million subscribers over a quarter, is hardly a 'surge'.

      Hundreds of millions of people are still using MS Office 2003 and prior, even though it like XP, was retired on April 8. Office 365 has been around how long, now? And we hate it. We hate everything from 2007 onward, because MSFT ruined MS Office (except maybe for some features of Excel), from that year onward.

      So yeah, a BIG FLOP. For many won't choose it, because each iteration of Office after 2003 (again, excepting some features in Excel) are WORSE.

      So you should be asking why the number isn't 100 million, which wouldn't even be 20% of the installed MS Office base.
      brainout
      • Don't lie to yourself.

        One million subscribers in two years is pretty impressive, and you know it.

        Just because you personally don't like it doesn't mean that those hundreds of millions of people share the same opinion.

        In fact, most of them could probably care less about what version of Office they're running.

        Office is Office. They bought it once, so why would they need a new one?

        It isn't an operating system, it isn't a video game, and it sure isn't development kit.

        It's an Office suite.

        A lack of sales isn't because it's getting "worse" like you claim, it's because people don't need to buy it again.

        Don't believe me? Go to friend or any other "ordinary" person you know, and ask them why they aren't upgrading their Office version.

        Chances are, they'll tell you the exact same thing I did.

        Office 2003 still runs on Windows 7 and 8, why should they bother upgrading?
        ForeverCookie
        • You've made a point, but not necessarily the point you expected to make.

          You're right. Most people simply don't care which version of an app they're using--until it no longer works. A lot of people are still using Office '03 because they never saw a need to upgrade but others were forced to upgrade and things became so different they started looking for alternatives. Planned obsolescence can be a good thing, but only if the replacement is better than the original.
          Vulpinemac
    • A 50% increase sounds great--but how many actual devices does that mean?

      It's going to take more than three months for the new CEO to have a visible impact on Microsoft's numbers. We can only hope that he fixes the mistakes his predecessor made.
      Vulpinemac
  • In other words

    Microsoft is firing on all cylinders.
    honeymonster
    • Not on all cylinders yet...

      But it looks like repair is underway.
      Vulpinemac
  • Celebration has started here...

    My rep and I are getting ready for a night on the town. $500 million in Surface revenue!! That is huge. Apple wishes they could post such huge figures for their tablet.
    Mike Cox
    • Welcome back, Mike!

      :)
      William.Farrel
    • Positive sign for sure

      But you do know Apple sold about $8 billion worth of iPads or roughly 16 times more than surface tablets - in a bad quarter for Apple!
      Microsoft have a lot of catch up to do yet.
      AleMartin