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Windows XP Continues Haunting Microsoft From Beyond The Grave In Otherwise Decent 2Q

Microsoft reported fiscal second-quarter results that were generally in line with Wall Street's expectations, but somehow, Windows XP continues to cause headaches for the software giant.

Windows XP was one of Microsoft's most successful products ever, but somehow, even in the afterlife, it's still managing to cause headaches for the software giant.

Microsoft reported fiscal second-quarter results Monday that were mostly in line with Wall Street's expectations, but said Windows enterprise and consumer licensing revenue came in light due to the waning impact of the Windows XP upgrade cycle.

During Microsoft's fiscal second quarter ended Dec. 31, revenue for both Windows OEM Pro and Windows OEM non-Pro dropped 13 percent compared to last year's second quarter. Windows volume licensing revenue grew 3 percent during the quarter.

[Related: Microsoft CEO Nadella: We Want People To Love Windows 10, Not Just Use It]

On the call, CEO Satya Nadella said Microsoft is still seeing "healthy demand" for Windows Pro despite the unfavorable comparison to last year's second quarter, when companies were still moving off of XP by buying new PCs.

Microsoft CFO Amy Hood said the decline in Windows Pro revenue was also due to the company's introduction of lower-priced Windows versions for academic customers.

On the consumer side, Microsoft made a "strategic decision" to bring Windows to low-cost tablets and laptops, Hood said. It's now offering Windows 8.1 With Bing to OEMs free of charge, but that move has led to lower Windows revenue, she said.

Despite the near-term impact on revenue, these moves will benefit Microsoft down the road by expanding the overall market for Windows, Nadella said on the call.

With Windows 10, Microsoft is aiming to give developers a single target for building apps that run on all kinds of devices, Nadella said.

"The most strategic objective for us is to get developer momentum with Windows 10," Nadella said. "We're creating a great opportunity for every developer to write Universal Apps that run on desktops and devices."

Hood also said that Microsoft, when it rolls out Windows 10, will stick to its traditional Windows OEM licensing model, in which PC makers pay Microsoft a licensing fee for loading Windows on new hardware.

At its Windows 10 event last week, several Microsoft executives used the term "Windows as a service" to describe their plan to provide security and feature updates to the OS, sparking speculation that it would sell the OS as a subscription service.

NEXT: Microsoft's Bright Spots During Its 2Q


Aside from Windows, there were bright spots for Microsoft during the quarter. The Devices and Consumer unit, of which Windows is a part, saw revenue jump 8 percent to $12.9 billion.

Surface revenue grew 24 percent to $1.1 billion, the first time that product line has topped the $1 billion mark in quarterly sales. Microsoft's Nokia phone hardware business generated $2.3 billion in sales, and Lumia smartphone sales totaled 10.5 million units, up 30 percent from last year. Nokia wasn't part of Microsoft during last year's second quarter.

Microsoft also saw its Office 365 Home and Personal subscriber base expand to more than 9.2 million, up 30 percent from last quarter.

Microsoft's Commercial unit saw revenue grow 5 percent to $13.3 billion, including a 114 percent growth in sales of Office 365, Azure and Dynamics CRM Online cloud services.

Microsoft's cloud business is now on a $5.5 billion annual run-rate, Nadella said on the call.

Microsoft's shift to higher-value cloud services is the primary driver for this growth, said Nadella, adding that Enterprise Mobility Suite, a bundle of mobile device management and security products, is seeing "fantastic momentum" since launching last year.

Microsoft's commercial cloud licensing revenue was $10.7 billion, down 2 percent year-over-year.

Microsoft's profit was $5.86 billion, or 71 cents per share, compared to $6.56 billion or 78 cents per share, during last year's second quarter.

These numbers include $243 million of expenses from the 18,000 layoffs stemming from Microsoft's corporate reorganization last year and its acquisition of Nokia's Devices and Services business.

Microsoft shares fell more than 4 percent in Monday after-hours trading, but Microsoft shares are still up around 25 percent over the past 12 months.

For Microsoft's current quarter, Devices and Consumer licensing is expected to pull in revenue of $3.4 billion to $3.6 billion. For the Commercial unit licensing, Microsoft is expecting $9.7 billion to $9.9 billion in revenue.

Hood said foreign exchange fluctuations could negatively impact revenue by up to 4 percentage points, mostly on the commercial side.

PUBLISHED JAN. 26, 2015

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