Microsoft's Q2: Enterprise shines, Surface details scant

Microsoft's Q2: Enterprise shines, Surface details scant

Summary: The software giant's enterprise products---System Center, SQL Server and Lync do well. Details about Surface's reception are few and far between.

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Microsoft's second quarter results were a mixed bag relative to estimates as its enterprise products fared well, but details about Surface units, hidden within the Windows division, were largely missing in action.

The second quarter was all about Windows 8 sales and the Surface, but in the end enterprise was Microsoft's biggest strength. Products like Windows Server may not garner the headlines, but drive Microsoft's results.

The company reported second quarter earnings of $6.38 billion, or 76 cents a share, on revenue of $21.46 billion. Wall Street was looking for earnings of 75 cents a share on revenue of $21.53 billion.

In a statement, Microsoft CEO Steve Ballmer noted that there was "growing enthusiasm" about Windows 8, Windows Phone 8 and Surface. However, the Windows division's revenue growth---excluding deferred revenue from Windows 8 pre-sales was 11 percent. Including deferred revenue the Windows division's sales were $5.88 billion, up 24 percent.

However, most of the strength for Microsoft was with enterprise products. SQL Server revenue was up 16 percent from a year ago, and System Center sales gained 18 percent.

As for Surface, Microsoft only said that non-OEM revenue was up 40 percent. That revenue line includes the Surface, but also Windows 8 upgrades. The latter was obviously larger.

In addition, Microsoft's outlook talks about the potential for Surface and Windows 8's addressable market, but falls well short of any unit predictions.

On a conference call with analysts, Microsoft largely danced around various questions about the Surface. Key points from Microsoft CFO Peter Klein:

  • The company saw growth in developed markets and mid-teens growth in emerging markets.
  • Skype had 138 billion minutes of calls on its network this quarter, up 59 percent from a year ago.
  • Cost of goods sold increased 1 percent due to Nokia payments, the launch of Surface and cloud and infrastructure spending.
  • "While the number of apps in the Windows Store quadrupled, we clearly have more work to do. We need more rich, immersive apps that give users access to content that inform, entertains and inspires," said Klein. 

Here's a look at the relevant slides:

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As for the outlook, Microsoft said its fiscal 2013 expenses would be in line with its previous outlook of $30.3 billion to $30.9 billion. A deep dive indicates that Microsoft can't guess where the PC market is headed.

In its outlook, Microsoft said it would work with partners to reimagine Windows and there was a massive market. Other divisions, however, offered concrete growth estimates. Servers and tools would see low-teens product revenue growth and enterprise services growth in the mid-teens in the third quarter.

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The business division also had growth estimates. Add it up and Microsoft may be flying a bit blind in the post-PC era.

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By the numbers:

  • Microsoft's entertainment and device division delivered second quarter operating income of $596 million on revenue of $3.77 billion, down from $4.24 billion a year ago.
  • The online services division pared its operating loss by a wide margin in the second quarter. The unit had a second quarter operating loss of $283 million on revenue of $869 million, up from $784 million. Microsoft cited stronger advertising and Bing market share gains. 
  • Microsoft’s business division is the cash cow of the company with second quarter operating income of $3.65 billion on revenue of $5.69 billion. The Windows division had operating income of $3.3 billion on revenue of $5.88 billion.
  • Servers and tools had operating income of $2.12 billion in the second quarter on revenue of $5.18 billion.  

Topics: Enterprise Software, Cloud, Data Centers, Microsoft, Microsoft Surface, Windows 8, Windows Server

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44 comments
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  • Wow great numbers for MS with W8/WP8 not coming in until the end and

    oems not in the game yet. 2013 looks very bright for them.
    Johnny Vegas
    • It's not bright. It's a bleak outlook.

      Everyone knows that when Microsoft goes quiet and doesn't reveal Surface sales, that means it is a disappointment. In other words, a failure.

      OK, enterprise software is selling well. But Surface was supposed to be Microsoft's future, in a world where consumers are transitioning away from x86 PCs, and moving to ARM-based mobile devices instead. It looks like the enterprise will later follow, when data centers move to 64-bit ARM processors.

      With Windows RT and Surface RT now dead in the water, where is Microsoft's future?
      Vbitrate
      • disappointment isn't failure

        MSFT may have wanted another Xbox, but they got another mouse. Profitable maybe, but tiny compared to Windows and Office.
        hrlngrv 
      • Is Surface dead in the water?

        Is that like when XBox was dead in the water? And isn't Windows 8 Microsoft's future, not the Surface by itself? Looking at the numbers, even if Microsoft doesn't sell another Surface (higly unlikely) OEM' selling tablets will keep the numbers solid.

        And unless you may not have known, Windows runs on 64-bit ARM processors, so there's not much of a problem there. And that is if Enterprise moves to ARM or servers, which is really not the case looking at OEM and MS's numbers.

        I can't agree with your assesment. It's far from bleak, it actually bright because Microsoft now has an ARM based OS. I can say that its probably a bit scary for MS's competitors now that they do. It sounds like its really scaring alot of the MS haters right now.
        Challenger R/T
        • If Windows RT fails as it seems to be doing...

          Windows 8 won't be running on ARM, now will it.

          Even the flagship Office doesn't really work on Windows RT - it is a feature cut version that just barely works... and happens to be called "Office".
          jessepollard
          • but it's actually better than

            anything else out there.

            it's always the user's choice to keep punishing himself over bad software or picking up Office.
            Master Wayne
          • The only feature cut...

            ..is Outlook. But that is the very first app featured as a true Windows 8 app. Please explain how Word, Excel, OneNote, and PowerPoint is "cut"? Otherwise, refrain from such assertions such as "Even the flagship Office doesn't really work on Windows RT". Or, simply place your foot into your mouth while admitting your lack of knowledge.
            TechNickle
          • Yes it will be running on ARM. Think about it -

            The work is done, the code in place, and appears to be a nice OS. So if consumers don't pick up on Win8 RT, but Enterprise is looking for ARM based OS for a server, Microsoft now has a complete one for that.

            Some tweaks and additions would not be hard from this point.
            William Farrel
        • Haters Are Gonna Hate

          @Challenger R/T - It doesn't matter what Microsoft does, people are going to scratch, and scrape for whatever negative they can find to give it a negative spin. Some through fear (don't know why) and some through fanboyish. Either way, I own An Asus Transformer Prime, An iPad 3, and A Surface, and Seriously Surface running RT is easily the better of the three products. And Once Surface Pro comes out, it won't even be fair to compare it to Android or iPad devices, because it's simply in a completely different class. Most of the people whining on this site about MS are apple drones doing what drones do. (sacrifice themselves for the queen bee)
          CETanner
      • Business tools are their future

        Microsoft has always been very clear headed here - SQL Server, Azure, Visual Studio, Exchange Server, Windows Server.... These products all have a much clearer headed vision than the chaotic path Windows has been set on.
        Mac_PC_FenceSitter
  • Imagine what WP8 #s look like after Nokia expands to all carriers.

    2013 is destined to be a growth year.
    LBiege
    • Isn't Nokia already reporting good WP8 sales?

      Not blockbuster numbers but still, I heard somewhere (from a journalist) that they were seeing good numbers with Wp8 devices.

      Owning an android, I still hope Wp8 does well. iOS and Android are constantly trying to outdo each other (right now I think Android is winning there) but based on the same paradigm. WP8 will help push the envelope in mobile UI's and services.
      fer.paredesb@...
  • A good quarter for MS

    Enterprise is always top priority for MS, remember they released Surface RT with Office 2013, its pretty obvious that it was not a toy. 2013 will bring massive opportunities for Windows 8 / RT / WP8 devices.
    Owlll1net
    • Surface RT is not part of the enterprise product portfolio

      That's SQL Server, Visual Studio, and Azure.
      Mac_PC_FenceSitter
    • Correct.

      And office on surface RT can't be used for business.. So unless someone didn't read the licensing or upgraded, there violating microsoft license..
      Anthony E
  • Surprised at Lync's growth.

    Nice little collab/chat tool. I guess they are going to keep pushing Skype for consumer messaging, and Lync for enterprise messaging.

    I've used it at 3 different clients. None have yet to utilize the audio/video capabilities so I would like to see that at some point, but I'm guessing it's more of a bandwidth vs. infrastructure/design issue.
    dtdono0
  • Microsoft's Q2: Enterprise shines, Surface details scant

    I'm impressed with these numbers. So much for the ZDNet post-PC era and decline of the PC stories. After all these years Microsoft still has what it takes to make it in today's computing world. That is why I use their products and know they will be around for a long time.
    Loverock-Davidson
    • Loverock-Davidson ....pass me the pipe

      I want a hit from what your smooooooooking.........
      Over and Out
      • RE:Loverock-Davidson ....pass me the pipe

        That's Loverock's problem. Either what he doesn't smoke at all or what he's smoking is not even 1/100 as potent as the stuff you're smoking.

        As much as many of the bloggers here on ZDNet like repeat the message of "Post-PC era" repeatedly, there's no such thing. People doing serious work and enthusiast will always have a use for traditional PC form-factors. Even the Surface, is designed to be more than just a basic consumption device. Many jobs can't really be done with an iPad as much as guys like James Kendrick likes to champion such an idea.
        Those who hunt Trolls
  • did anyone else look at the operating income figures?

    Consolidated and most divisions' separate 3- and 6-month figures down from last year. Better than estimates, but still down. MSFT is no longer a growth company.

    If Surface RT had been a raging success, would MSFT have remained silent about that?

    2013 will be an interesting year. If RIM turns around with Blackberry 10, which will have a broader roll-out than Nokia's handsets, it could be interesting in an unpleasant way for MSFT.
    hrlngrv