Microsoft’s transformation is underway as latest profits beat expectations

Revenue grew for both the consumer and commercial sides of the business, although the company remains weighted towards enterprise sales

Microsoft has released its first earnings report since outgoing-CEO Steve Ballmer announced a dramatic restructuring of the company back in July, and there's good news for Microsoft and its investors.

The company reported net profit of $5.24 billion (£3.23bn), up 17 per cent year on year, and revenue of $18.53 billion, a rise of 16 per cent from the same period in 2012. However, despite this growth there remains a clear imbalance between the company’s commercial and consumer businesses.

Commercial revenue grew 10 per cent to $11.20bn, with revenue from Microsoft’s cloud services increasing by 103 per cent, but consumer revenue (including ‘devices’ such as tablets and phones) grew by a comparatively smaller margin – up only 4 per cent to $7.46bn.

Overall though these reports are heartening, especially given the previous quarter’s disastrous performance. The company’s annual 10-K report in July included a $900m write-down of unsold Surface RT inventory, whilst total revenue from both the Surface RT and Surface Pro in the 2013 fiscal year only totalled $853m.

These reports came just as the company was announcing a massive restructuring to focus on ‘devices and services’ and these latest earnings suggest the transition is going well. Analysts were expecting earnings of 54 cents a share according to an average by Thomson Reuters, but Thursday's filings show earnings of 62 cents a share.

OEM software sales drop, and its Surface to the rescue

The comparative drop in consumer revenue seems to have mainly originated from slow performance from the licensing unit (one of the three sub-divisions of ‘Devices and Consumers’ – the others being Hardware and ‘Other’) whose revenues dropped 7 per cent year on year, with retail and OEM sales of Office (broadly speaking, copies of the software sold with hardware by other manufacturers) dipping 5 per cent and OEM revenues from non-Pro versions of Windows falling a whopping 22 per cent.

However, at least some of these drops are due to the restructuring of the company and wider shifts in the industry. Sales of Office in the form of Office 365 Premium (a cloud-based subscription service that Microsoft now claims has more than 2 million subscribers) no longer file under licensing but under ‘Other’, for example, whilst the declining market for PCs has hurt OS sales globally.

Elsewhere in the consumer division there was a pleasant surprise for Microsoft’s Surface. Sales of the tablet-laptop hybrid (this moniker thanks to the well-received Touch and Type keyboard covers) helped boost the revenue of the Hardware sub-division 37 per cent year on year to $1.49bn, with Surface sales making up $400m of this.

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