This afternoon Microsoft held an earnings call to announce the results of their third quarter for fiscal year 2014.

Overall GAAP revenue was down less than 1% over Q3 2013 at $20.403B, with Non-GAAP revenue up 8% due to Windows Upgrades, Office Deferral, and Video Game Deferral last year bringing down the Non-GAAP revenue last year.

GAAP Gross Margin also fell 8% at $14.462B as compared to $15.702B last year, but Non-GAAP was up 3% due to the same deferrals.

Operating income was down 8% as well year over year, and Earnings Per Share were down 6% at $0.68 per share.

Microsoft Q3 2014 Financial Results (GAAP)
  Q3'2014 Q2'2014 Q3'2013
Revenue $20.403B $24.519B $20.489B
Operating Income $6.974B $7.969B $7.612B
Margins 70.8% 66.2% 76.6%

In the Devices and Consumer lines, Windows OEM revenue was up 4%, mostly driven by a 19% increase in Windows OEM Pro which was attributed to Business PC growth likely due to the retirement of Windows XP. Non-Pro revenue was down 15% for the quarter, with China accounting for 6% of that total.

Office Consumer revenue was up 15% for the quarter. This refers to the full license of Office, and not the subscription based Office 365 Home.

Even with the increases in revenue, Gross Margin was down about 1% year over year for this group.

On the consumer hardware side, there was a large revenue gain of 41%, with Xbox platform revenue up 45%. 1.2 million Xbox One consoles, and 800,000 Xbox 360s were sold in the quarter. Surface revenue was also up more than 50% with Surface revenue now at almost $500 million for the quarter however no actual device sales numbers were announced.

Once again, even though revenue was up, Gross Margin was down 34% which was attributed to the increase in Xbox One console sales and their high BoM.

The final piece of the Devices and Consumer group is the aptly named “Other” category, which includes Office 365 Home, Bing, and Xbox Live revenues. This group was up 18% in revenue over Q3 2013 driven by strong subscriptions for Office 365 Home – now at 4.4 million subscribers and up 1 million for the quarter. Bing search advertising revenue was also up 38%, and Xbox Live revenue was up 17% contributing to the strong increase for this business segment, and unlike the other Consumer lines, Gross Margin was also up 26%.

On the Commercial side, Microsoft announced a 7% increase in revenue and 6% increase in Gross Margin which came from a slight increase in Commercial Licensing at 3%, and a 31% increase in the cloud services of Office 365 and Azure which had 100% and 150% revenue gains for the quarter. Microsoft’s commercial cloud services fall into the Commercial “other” category.

Microsoft Q3 2014 Segment Overview
  Q3'2014 Q2'2014 Q3'2013 Revenue for quarter
D&C Licensing $4.38B $5.38B $4.35B 21.3%
D&C Hardware $1.97B $4.73B $1.40B 9.5%
D&C Other $1.95B $1.79B $1.66B 9.4%
Commercial Licensing $10.32B $10.89B N/A 50.5%
Commercial Other $1.90B $1.78B N/A 9.3%

*note - Q3 2013 data not available due to company reorganization

Also in commercial, Microsoft announced that around 90% of enterprise desktops worldwide are now running Windows 7 or 8 which is impressive considering how many were running XP not very long ago.

Corporate Vice President and CFO Amy Hood also stated that the Nokia acquisition will close Friday April 25 which was four months later than they initially expected. Once completed, all of Nokia’s assets will fall under the Devices and Consumer lines, with license and platform payments falling under the D&C Licensing, and Nokia Devices and Services falling under D&C Hardware.

Overall, strong results in the Commercial segment and great demand for Microsoft cloud services such as Office 365 and Azure were not enough to overcome the consumer segments with Xbox One and Surface margins pulling down the overall result. Xbox One sales are obviously razor thin on margins at the moment which is not unexpected in a new console, and Surface sales are still very low. Next quarter should be interesting to see how the Nokia acquisition fits in, and to see if any headway can be made in the Consumer Hardware segment.

Source: Microsoft

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  • Penti - Saturday, April 26, 2014 - link

    They were needed for Nokia to stay in business, you know make money as you suppose to do as a good capitalist, for Texas Instruments to stay in the mobile field and so on. Now they had to choice to exit the market instead, while Microsoft gained about 10 000 assembly workers in Asia. While Qualcomm/Microsoft hindered them to continue to focus on camera tech.

    Nokia was profitable, if you read the damn post I point out that the Devices & Services division didn't make a loss until the quarter after Elop pulled the rug under everybody's feat with his memo. Microsoft couldn't buy a 60 000 employee firm, and they don't care that the business they bought still makes huge losses, they just need somebody peddling Windows Phone devices to be able to make the claim that they aren't ignoring the growing markets of mobile devices. You can't claim that it helped them in any way. You don't put forward any arguments or facts to back that up.

    Microsoft didn't acquire any of the patents. Neither will the phone business become part of the Windows Phone-group as they will keep the OS development separately, they will source and fab their phones at different facilities (their own in many cases) than those who make their Xbox's and computers. And so on.
  • MartinT - Friday, April 25, 2014 - link

    I don't think the Lumia line produced a single quarter of profits in the 3 years since Mr Elop announced Nokia's decision to go with Windows Phone.
  • darkich - Friday, April 25, 2014 - link

    Exactly..numbers show that their smartphone division was their biggest money loser ever since the dismissal of Symbian and Meego.

    It was their feature phone and Asha lineup that kept the company from falling apart
  • melgross - Friday, April 25, 2014 - link

    It's not a matter of them ruining Lumina. It's a question of what percentage of those left who are buying Lumina devices are buying them from some sense of loyalty to the old Nokia. Let's face it, many if us pretend to ourselves that we are making an objective choice, when we're not. So if a fair percentage of that fairly small number of people still buying Nokia phones are mostly buying them BECAUSE they are Nokia phones, they may lose interest when they are labeled Microsoft phones.

    Microsoft tablets haven't taken off, and the Microsoft name on them hasn't helped. Neither has Microsoft's marketing dollars. So it will be interesting to see what will happen here.
  • lmcd - Friday, April 25, 2014 - link

    Microsoft tablets, no, but Windows tablets, yes.

    We'll see if it improves, but I'd bet it will.
  • Lord 666 - Friday, April 25, 2014 - link

    Backwards compatibility for Xbox 360 is the killer app for Xbox One.
  • cmdrdredd - Friday, April 25, 2014 - link

    Windows phone will beat up Android because you think hardware sells a device? does. If the phone can't do half of what people do every day with the apps available on Android and iOS, it just won't sell. It's that simple.

    As for the XB1 and what you say "killer app". Those don't exist anymore. Look at how many PS4s and XB1s sold in 4 months time with the release lineup they had. Seems people are finding different reasons to buy them today, not for the single ultra hyped game that nobody else has. Those help move some units, but they don't define a console anymore.
  • meacupla - Thursday, April 24, 2014 - link

    There are still plenty of SGS3, Nexus 4 and iphone 4s floating around in the market place and they are still very usable thanks to firmware/software updates, where as windows and blackberry have become obsolete junk thanks to lack of updates.

    If microsoft wants more windows phone customers, it needs to up the software support for (soon to be) older hardware, or end up like BB and their, basically, garbage hardware that no commoner wants.
  • tiwi13 - Friday, April 25, 2014 - link

    The ORIGINAL WP7 phones got their last update March 2013 (and they were released in October 2010). That's pretty substantial.
    Barring carriers "testing updates" (basically jamming their fingers up their asses), every WP8 released since October 2012 is running the latest stable version.
    Plus, they've opened up the "Developer Preview" (WP8.1 Beta) to ANYONE for free. Even if your carrier hasn't decided to do anything with it.
  • Alexvrb - Friday, April 25, 2014 - link

    Barring carrier interference, every WP8 device should get 8.1. They've already gotten multiple GDR updates... they're supporting WP8 quite well, actually. But it's pretty obvious to anyone here that you don't have much experience with the platform, given that you're attempting to compare it to Blackberry.

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