10 Illuminating Points From Microsoft's Q1 Earnings

Microsoft Silences Its Critics ... For A While

Microsoft, in its first-quarter earnings, delivered results that will quiet predictions about the company's impending demise, at least for a while. The company also introduced its new two-part reporting structure that splits its business into consumer and enterprise parts.

In the first quarter, Microsoft Revenue for the new Devices and Consumer segment was $7.46 billion, up 4 percent from last year, while the new Commercial (enterprise) segment saw sales jump 10 percent to $11.2 billion. One of the big bright spots was stronger sales of Surface tablets, which led Microsoft to share a Surface quarterly sales figure for the first time. Sales of Windows to enterprises also grew 6 percent. However, Microsoft's sales of consumer Windows dropped 22 percent, as customers continue to shun PC purchases in favor of iPads and Android tablets.

As Microsoft continues to search for a new CEO, and settles in after its big company re-organization, CRN looks at 10 key points to remember from its first-quarter earnings call.

Microsoft Says Enterprises Are Moving To Its Cloud

Microsoft's Commercial unit cloud business, which includes Office 365 and Windows Azure, saw a "year-over-year gross margin expansion," Microsoft CFO Amy Hood said during the earnings call.

Microsoft's revenue for Commercial cloud services rose more than 100 percent compared to last year's quarter, and Office 365 seats and Azure customers are both "growing triple-digits," Hood said. Meanwhile, Microsoft's Windows Server Premium and System Center, the pillars of its enterprise private cloud story, grew double-digits percentage-wise during the quarter, Hood said.

"With all of the innovation we are delivering to our enterprise customers, we continue to be uniquely positioned to capture more and more of the addressable market," Hood said on the call, according to Seeking Alpha's transcript of the event.

Microsoft Says It's Figuring Out How To Sell Surface Tablets

Microsoft "more than doubled" Surface tablet sales, and the devices generated $400 million in revenue during the quarter, Hood said. This was the first time Microsoft broke out quarterly Surface numbers, and it shows that sales have reached a point where they're not embarrassing to talk about.

Interestingly, Microsoft's Surface RT tablet "did quite well" this quarter, with the 32-GB Surface RT selling well in the education and retail segments, Hood said on the call. That's huge, since Microsoft took a $900 million charge on unsold Surface RT inventory during its last quarter.

Overall, Microsoft made "a lot of progress in sales execution on Surface" this quarter, and it's expecting that to continue in the current holiday season quarter, Hood said.

Microsoft's Cloud Services Foray In China

In the Q&A, Hood was asked to comment on the state of Microsoft's cloud business outside the U.S.

By way of response, Hood said it's important to note that Microsoft was the first cloud player to start up a data center in China, which it uses to deliver Office 365 and Windows Azure to customers.

Given the previous business struggles Microsoft has encountered in China, and the shaky macroeconomic conditions there, that was a bit of a risk, Hood said. But, it's one that Microsoft expects to pay off.

Microsoft's cloud foray in China "provides interesting opportunity for us to begin monetizing end markets that have been harder for us to grow, maybe with our more traditional business model," Hood said, according to Seeking Alpha's transcript of the earnings call.

Microsoft Is Banking On A Big Holiday Quarter

With Surface 2 tablets now on the market, and a coming wave of Windows 8.1 tablets and Windows Phone 8 smartphones headed for store shelves, Microsoft believes it's set up to have a booming holiday quarter.

Hood said Microsoft is pumped up about 8-inch tablets from Dell, Lenovo and Toshiba that will boast price tags of under $300. Microsoft is also "incredibly excited" about the Nokia Lumia 1520, a 6-inch device that marks Nokia's entry to the "phablet" market, Hood said.

"We are set up for a terrific holiday season. We will have a wide variety of Windows-based devices in market," Hood said on the call, according to Seeking Alpha's transcript of the event.

Windows Did Better Than Microsoft Expected

Microsoft's Windows sales to OEMs declined 7 percent in the first quarter, but that was an improvement from the 15 percent decline it saw in the previous quarter. Microsoft, which was expecting a "mid-teens" decline percentage -wise, saw encouraging signs here, Hood said. Sales of the Professional versions of Windows, which typically are purchased by enterprises, rose 6 percent during the quarter. But, sales of consumer Windows dropped 22 percent, continuing a decline that has been seen for the past several quarters. However, despite these sobering stats, Hood said Microsoft's Windows sales to OEMs were actually "better than we expected." If you take out the China market, consumer Windows OEM sales dropped 17 percent, she noted.

"I think overall we do think that things were probably more stable in the business segment and encouraging and then consumer and developed markets particularly were better than we had seen," Hood said during the call, according to Seeking Alpha's transcript of the event.

Average Sale Prices Of Windows 8.1 Devices Is Going To Drop

The proliferation of Windows 8.1 devices set to hit the market this holiday season, including new 8-inch tablets and a 6-inch "phablet," comes with a bunch of new price points as well.

During the Q&A, Hood was asked about average sale prices for the new tablets and which way they'll be trending.

Hood, acknowledging that the question was "a bit awkward" to answer, said Microsoft expects ASPs to decline as a result of the cheaper Windows 8.1 tablets. However, Microsoft will gain Windows market share as a result of the expected increase in overall device sales.

Hood said Microsoft has factored this into its guidance for the holiday quarter, adding that it won't have a "material impact" on ASPs.

Consumer Office 365 Declined, But Microsoft Says That's Not A Big Deal

Microsoft is "making meaningful progress" in its consumer business and a big part of that is Office 365 Home Premium, Hood said. While Office sales to consumers dropped 5 percent during the quarter, Microsoft actually forecast this last quarter as an effect of moving from on premise to cloud subscription revenue.

"Consumer Office licensing revenue declined this quarter. The financial impact of the shift to Office 365 Home Premium was generally in line with our expectations," said Chris Suh, Microsoft's general manager of investor relations, according to Seeking Alpha's transcript of the call.

Microsoft now has 2 million Office 365 Home Premium customers after adding about 1 million customers in the past 6 months. It costs $99.99 per year and lets customers install it on up to 5 PCs.

Windows XP Is Down To 25 Percent Of PCs And Dropping

Microsoft, which is cutting off all support for Windows XP next April, is finally seeing customers moving off the aging, 12-year old operating system, Hood said on the call. As the XP deadline approaches, Microsoft is expecting to see enterprises re-up with volume licensing agreements.

"We continue to make progress on the XP install base and now a little over 75 percent of the PCs are running [Windows] 7," Hood said on the call. As more customers move off of XP, Microsoft is expecting their upgrades to have more impact on its volume licensing business than its Device and Consumer licensing segment, Hood said.

SQL Server Sales Are Going Like Gangbusters

Microsoft's SQL Server product gained market share during the quarter in part due to customers' growing interest in business intelligence and big data technologies, Hood said on the call.

SQL Server revenue "grew double-digit" while the top-end SQL Server Premium product saw revenue growth of more than 30 percent, Hood said.

Earlier this month, Microsoft launched a second preview of SQL Server 2014 that it says uses in-memory database technology to process transactions 10 to 30 times faster than the previous version.

Microsoft Says Bing Upgrades Drove Increased Advertising Revenue

Microsoft saw a 47 percent increase in search advertising revenue during the quarter and now accounts for about 18 percent of the U.S. search query market.

Hood chalked up these gains to "some real technical improvements" Microsoft has made to the Bing search engine. The algorithms are better, and Microsoft is making Bing investments "allowing us to monetize at a higher level," Hood said during the call.