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Partner Takeaways from Microsoft's Q1 Earnings

Microsoft's earnings report last week brought a sharp bounce in the stock price. Here are five notes for the Microsoft channel from Microsoft's earnings release, press release, investor call and 10Q statement:

  1. Surprisingly strong overall performance. After last quarter's poor performance, this quarterly earnings statement was a loud cry from Microsoft that rumors of its demise are greatly exaggerated. The company beat analysts' expectations with revenues of $18.53 billion, net income of $5.24 billion and earnings per share of $0.62. The results even caught Microsoft off guard. "Total revenue was up 7%, to $18.6 billion, and came in about $700 million better than our expectations," said Chris Suh, general manager of investor relations, on the investor call.

    Meanwhile, the new reporting structure that divides Microsoft up into different reporting units seems, for now, less opaque than it at first appeared. Several financial analysts on the investor call thanked Microsoft for providing more detail.

  2. The "Devices" in the Devices and Services strategy are hurting margins. No surprise here, but selling computers like the Surface rather than just the software for computers cuts into your profit margins. We got detail on this in the 10Q. Devices and Consumer hardware cost of revenue increased by 101 percent, dropping the gross margins for the sector by 54 percent. This increase in cost of revenue was "primarily due to $645 million higher Surface cost of revenue." (This segment also includes Xbox.) The cost came both from higher volumes of Surface sales during the quarter, along with inventory buildups of the Surface 2 and Surface Pro 2 devices, which launched after the quarter ended.

    Across the company, cost of revenue increased 23 percent, and Microsoft's 10Q again said the increase was "primarily due to Surface product costs." There's a reason investors have been lukewarm about Microsoft's shift toward devices.

  3. As a product, Surface is doing better. In the previous quarter, there was little but bad news about Surface. Microsoft announced a $900 million charge related to excess inventory of the Surface RT devices. This time, CFO Amy Hood said, "We more than doubled the number of units sold over the prior quarter. In terms of mix, Surface RT did better than expected."

    Altogether, units and revenues were both up. "D&C Hardware revenue increased $401 million or 37%, due primarily to Surface revenue of $400 million," Microsoft's 10Q stated. While the channel went unmentioned and Microsoft referred vaguely to improved execution, the quarter does coincide with the extension of Surface sales to authorized distributors, rather than just through Microsoft's physical and online stores.

  4. Client Windows remains a disaster, business Windows is stabilizing. The numbers from IDC and Gartner for the comparable period have been stark -- a freefall for the PC market. Microsoft's results reflect that on the consumer side, but the company's core Windows client franchise did OK on the business side. Here's Suh summarizing the situation:

    "Our Windows OEM business performed better than expected, declining 7% versus our expectation of a mid-teens decline. ... We believe we are seeing a stabilization in business PCs, which grew again this quarter and drove Pro revenue growth of 6%. We also saw better-than-expected performance in the consumer part of our business. Non-Pro revenue declined 22%, but was several points better than expected."

  5. The state of servers is strong. For the bulk of Microsoft's solution provider partners whose bread-and-butter business is built atop Microsoft servers, those products continue to perform. Tidbits from the investor call involving servers included:

    • Server product revenue grew 12% overall.
    • SQL Server revenue grew in double digits; SQL Server Premium revenue increased over 30%.
    • SharePoint and Exchange saw double-digit growth.
    • Lync revenues increased nearly 30%.

Posted by Scott Bekker on October 28, 2013


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