Highlights From MSFT Earnings: Surface Sells, Bing Revenue Up, Windows Struggles

Microsoft announced fiscal quarterly revenues this afternoon. The company had $26.5 million in revenue (up 8 percent YoY) and $7.8 billion in operating income, which was down 2 percent.

Selected divisions performed very well (devices, commercial and cloud services), while Windows and traditional Office did not do as well.

On the positive side, Microsoft reported Surface revenues of $1.1 billion, which was up 24 percent. This was mostly attributable to sales of Surface Pro 3. In Surface Pro 3 Microsoft has finally a bona fide device hit on its hands.

Xbox sold well and Microsoft also reported $2.3 billion in phone sales, 10.5 million units of which were Lumia handsets. This marks a new quarterly record, though driven by aggressive pricing (“affordable smartphones”). Gross margin on handsets for the company was 14 percent. Last quarter Microsoft sold 9.3 million Lumia handsets.

Microsoft hopes that its next OS, Windows 10, which seeks to provide a more seamless and integrated experience across screens, will further boost its Lumia phones. Despite the increase in unit sales Windows Phone market share is largely flat with some isolated exceptions in Europe.

Windows licensing revenue was off 13 percent and Office consumer revenue was down 25 percent. However the company said it grew Office 365 subscriptions (part of cloud services) to 9.2 million, which represents 30 percent growth vs. last quarter. Over time Office 365 subscribers pay more and are more valuable than conventional Office buyers.

Bing paid search revenue was up 23 percent YoY. Microsoft said that was a result of more query volume and higher revenue per search. Repeating comScore, Microsoft said Bing had a 19.7 percent search market share in the quarter.

Display ad revenue was down for the company.

Investors expressed concern about the outlook for Microsoft’s Windows business, sending the stock down in after-hours trading. However the company’s Windows 10 announcement last week has been well received and early technical reactions have been favorable.

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Greg Sterling

Greg Sterling is a Contributing Editor at Search Engine Land. He writes a personal blog, Screenwerk, about connecting the dots between digital media and real-world consumer behavior. He is also VP of Strategy and Insights for the Local Search Association. Follow him on Twitter or find him at Google+.