12 Key Take-Aways From Microsoft's 1Q Results

Microsoft 1Q Financial Results Reflect The Company's Transition

Microsoft has been undergoing some serious changes this year. In February, Satya Nadella took over as the software giant's leader after longtime CEO Steve Ballmer stepped down. In April, the company acquired Nokia for $7.2 billion in an effort to boost its presence in the mobile phone market. And in June, the company launched the Surface Pro 3, the newest generation of the company's tablet/laptop.

Last week, the company announced its fiscal first-quarter (ended Sept. 30) financial results, and a lot of attention was focused on the company's top-line revenue growth (good) and bottom-line earnings (not so good). But there was a whole lot of information in between those numbers that provides some keen insights about Microsoft's transition into what Nadella, in a conference call with financial analysts, called a "productivity and platform company for the mobile first/cloud first world."

Here's a look at 12 key take-aways from Microsoft's first-quarter earnings announcement.

Revenue Grows More Than 25 Percent

Revenue in the first fiscal quarter (2015) was $23.20 billion, up 25.2 percent from $18.53 billion in the fiscal 2014 first quarter.

Financial analysts had been expecting revenue in the range of $22.02 billion, so Microsoft outperformed expectations.

While revenue from most of Microsoft's business segments grew in the first quarter, much of the growth came from the consumer group, particularly hardware.

Net Income Declines 13 Percent Due To Restructuring Charges

Net income in the first fiscal quarter (2015) was $4.54 billion, down more than 13 percent from $5.24 billion in the fiscal 2014 first quarter.

Why the reduced profitability when sales grew more than 25 percent? Microsoft recorded $1.14 billion in integration and restructuring expenses from the restructuring and layoffs in the company's smartphone division announced in July. Microsoft at the time said it would lay off some 18,000 workers, including 12,500 from Nokia, which Microsoft acquired in April for $7.2 billion.

Earnings per share were $0.54 ($0.65 before the $0.11 for the integration and restructuring expenses). Operating income for the first fiscal quarter was $5.84 billion, down nearly 8 percent from $6.33 billion one year earlier.

Quarterly Surface Sales Close In On $1 Billion

After struggling to gain market traction with earlier generations of its Surface tablet/laptop, sales of the Surface Pro 3, which launched in June and is now in 28 markets, reached $908 million in the company's first quarter.

Earlier generations of Surface, especially those running the Windows RT version of Windows 8, were widely seen as commercially unsuccessful. But the Surface Pro 3 seems to have turned that around. Surface sales in the first quarter marked a 127 percent gain from the same period one year earlier. The company also said Surface gross margin was positive for the first time (although that doesn't include the money Microsoft is sinking into marketing Surface).

On the conference call with financial analysts, CFO Amy Hood said Microsoft expects Surface unit sales to grow sequentially in the current quarter, which includes the holiday shopping season. So a $1 billion fourth quarter for Surface is within the realm of possibility.

Outlook For The PC Industry

Microsoft, of course, is something of a bellwether for the PC industry. While the short-term sales boost generated by the end of Windows XP support has passed, Microsoft executives on the earnings call were still upbeat about PC sales heading into the holiday season.

"We expect the ongoing business PC refresh cycle to continue," CFO Hood said. "We expect that the consumer PC market will remain stable with many of the same dynamics we saw in 1Q."

"I think it will come back to the pre-XP business-PC refresh," Nadella agreed later in the call.

Microsoft's Phone Operations Remain A Work In Progress

Microsoft's phone hardware operations generated $2.61 billion in revenue in the first fiscal quarter. Microsoft, of course, had zero dollars in phone hardware sales in last year's first quarter because those sales came from Nokia.

Microsoft sold 9.3 million Lumia phones in the quarter, including the recently introduced 530, 630 and 930 models. That's up 5.6 percent from 8.8 million handset unit sales one year earlier. But sales of phones other than Lumia declined, although Microsoft did not say by how much.

Microsoft Is Still A Cash Machine

Microsoft generated $8.35 billion in net cash from operations in the first quarter, up 1.8 percent from $8.21 billion in the first fiscal quarter last year. After subtracting cash used for financing, investing and other nonoperational purposes, Microsoft generated $6.30 billion in cash, up nearly 57 percent from $4.02 billion one year before.

Microsoft held $89.19 billion in cash, cash equivalents and short-term investments as of the end of the quarter, up 4 percent from $85.71 billion last year.

Cloud Revenue More Than Doubles

Commercial cloud revenue grew 128 percent year-over-year in the first quarter, reflecting growing sales of Office 365, Dynamics CRM Online and the Azure cloud platform. That marks the fifth consecutive quarter of triple-digit growth, Nadella said, and the commercial cloud annualized revenue run-rate is now $4.4 billion.

Eighty percent of Fortune 500 companies are now using Microsoft cloud products, Nadella said. Forty percent of Azure revenue comes from startup ISVs.

Microsoft's cloud services are winning not just among businesses, but among consumers as well. Office 365 Home and Personal subscribers now total more than 7 million, up 25 percent sequentially from the fourth quarter.

As Cloud Revenue Grows, Sales Of On-Premises Apps Decline

Microsoft is "seeing a marked shift from on-prem[ises software] to the cloud, from transactional purchasing to annuity, and from standard to premium versions," Hood said.

Traditional Office license revenue declined in the first quarter, and sales of Office Commercial products and services grew only 5 percent in the quarter.

On-premises versions of data platform infrastructure software continue to grow, however, including the SQL Server database that recorded sales growth of 13 percent in the first quarter.

Windows Sales Return To Normal After XP Boost

Sales of Windows software surged in fiscal 2014 as customers scrambled to replace Windows XP systems before Microsoft ended support for the aging desktop operating system in April.

Windows Pro OEM revenue in the first quarter "performed in line with the business PC market and volumes were more consistent with those seen before the XP refresh in fiscal '14," Hood said. Windows volume licensing grew 10 percent in the quarter.

The Data Center Buildout Continues

Microsoft had $1.3 billion in capital expenditures in the quarter, and the company continues to expand its data center capacity to meet the demand for cloud services.

"We continue to expand the capacity and locations of our data centers to deliver higher service levels, reduce latency and help meet local data compliance requirements for our global customers," Hood said.

Managing Expectations

For the current second fiscal quarter, Microsoft expects revenue from devices and consumer licensing to be between $4.0 billion and $4.2 billion. Sales of computing and gaming hardware will be between $3.5 billion and $3.8 billion. And phone hardware sales are expected to be between $2.0 billion and $2.2 billion.

Commercial software licensing sales, Microsoft's biggest product segment, are forecast to reach between $10.8 billion and $11.0 billion.

Microsoft expects to incur an additional $500 million in expenses in fiscal 2015 related to the ongoing restructuring, bringing the total charges to roughly $1.6 billion.

Server Software Sales Growth

While cloud-computing software and devices like Surface have grabbed most of the headlines at Microsoft lately, sales of the company's server and data center products -- part of the $9.87 billion Commercial Licensing segment -- continue to grow.

Revenue from server products and services grew 13 percent in the first quarter, including double-digit growth for the SQL Server database, System Center data center management toolset and Windows Server. Sales of productivity server software, including Lync, SharePoint and Exchange, collectively grew double digits.