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Microsoft Reports 14 Percent Year-over-Year Jump in Q2 Earnings

Microsoft's earnings report for the second quarter of fiscal-year 2014 reflected positive results, with overall revenue at $24.5 billion for the period.

That figure, which met financial analyst estimates, represents a 14% increase compared to Q2 2013. Diluted earnings per share, at $0.78 for the quarter, exceeded analyst expectations of about $0.68 per share.

Microsoft also reported a gross margin of $16.2 billion, operating income of almost $8 billion and net income of $6.6 billion for the quarter. Microsoft's fiscal Q2 period ended on Dec. 31, 2013, reflecting holiday purchasing (see chart).

Microsoft Q2 2014 revenue earnings across segments.

Microsoft's Windows desktop revenue was a little rocky in Q2, as occurred with Microsoft's Q1 earnings. Microsoft's Windows performance likely reflects the 10% plunge in PC sales that was reported by analyst firms for the 2013 holiday quarter, as well as a general trend toward consumer use of mobile computing devices running Android or Apple's iOS operating systems. However, Microsoft CEO Steve Ballmer nonetheless claimed that "our Devices and Consumer Segment had a great holiday quarter," according to a released statement accompanying Microsoft's Q2 financials.

Overall, the Devices and Consumer (D&C) segment showed a 13% revenue increase at $11.9 billion. Microsoft's new financial reporting structure (see table) lumps the Windows desktop operating system into a "Devices and Consumer (D&C) Licensing" segment for non-volume licensing consumer sales and a "Commercial Licensing" segment for volume licensing sales. Microsoft's Q2 announcement reported a 3% revenue decline from Windows OEM sales, representing the consumer market. However, the Windows OEM Pro market was up 12%, according to Microsoft.

The Devices and Consumer segment also includes Microsoft Office and Windows Phone financials. Microsoft reported Microsoft Office revenue being off in its Form 10-Q report, with Windows Phone revenue increasing:

Consumer Office revenue declined $244 million or 24%, reflecting the transition of customers to Office 365 Home Premium as well as continued softness in the consumer PC market. Windows Phone revenue increased $340 million or 50%, reflecting higher sales of Windows Phone licenses and an increase in mobile phone patent licensing revenue.

Microsoft also reported revenue from its Surface computer sales. Surface Q2 revenue was $893 million vs. $400 million in Q1. No breakdown was provided on sales of Surface Pro vs. Surface RT devices.

Overall, Microsoft's Commercial revenue was up 10% in Q2 at $12.7 billion. Microsoft has two Commercial financial reporting segments that are called "Licensing" and "Other," which largely reflect its server sales to businesses. Microsoft reported double-digit growth for Q2 for SQL Server, System Center and cloud services. The company reported triple-digit growth ("more than 100%") for "Office 365 commercial seats and Azure customers" in Q2. However, the figures weren't broken out in Microsoft's announcement.

Microsoft Segment
Products or Services
Devices and Consumer Licensing
  • Windows OEM licensing, other non-volume licensing and academic volume licensing;
  • Microsoft Office consumer non-volume licensing;
  • Windows Phone patent licensing and other patent licensing revenue.
Devices and Consumer Hardware
  • Xbox gaming consoles;
  • Xbox Live subscriptions;
  • Vendor video games sales;
  • Surface;
  • Microsoft PC accessories.
Devices and Consumer Other
  • Resale associated with Windows Store, Xbox Live and Windows Phone Marketplace;
  • Search advertising;
  • Display advertising;
  • Subscriptions associated with Office 365 Home Premium;
  • Studios associated with first-party video games;
  • Microsoft retail stores;
  • Other consumer products and services not included in the categories above.
Commercial Licensing
  • Server products, including Windows Server, Microsoft SQL Server, Visual Studio and System Center;
  • Windows Embedded;
  • Windows commercial volume licensing, excluding academic;
  • Commercial Office, including Microsoft Office for business, Exchange, SharePoint and Lync;
  • Client Access Licenses;
  • Microsoft Dynamics, excluding Dynamics CRM Online;
  • Skype.
Commercial Other
  • Enterprise Services, including Premier support services and Microsoft Consulting Services;
  • Cloud Services, including commercial Office 365 (but excluding Office 365 Home Premium), plus other Microsoft Office online offerings, Dynamics CRM Online, and Windows Azure;
  • Other commercial products and online services not included in the categories above.
Corporate and Other
    Microsoft expenses

Microsoft's business segments. Source: Form 10-Q, Sept. 30, 2013.

About the Author

Kurt Mackie is senior news producer for the 1105 Enterprise Computing Group.

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