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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  • Sttm - Thursday, April 24, 2014 - link

    I see three areas where MS could be very strong this year:

    WP, I see a weakness with the Android offerings this cycle in the SGS5 and One M8 as they are both rather lackluster upgrades, giving MS a chance to catch up and strike hard with WP 8.1 if they manage to get competitive hardware to market with the marketing to back it up.

    Windows, Finally putting the start button back in, that + death of XP support should = better sales.

    Office, now that it is on iPad, it just cements it as the only real option for serious work on almost every platform.

    Im iffy on Xbox One. Big negative in it's not outselling PS4, but I am not sure it has to. It's also still pretty early. It needs a killer app, Titanfall is kind of, but being on 360 and PC it's not really.
  • darkich - Friday, April 25, 2014 - link

    WP can only go down after Nokia acquisition.
    If you think people all over the world will embrace "Microsoft Mobile Lumia" then you are deluded.

    They will face a hard wall of reality with this move..deservingly so for ruining one of the greatest European companies.
  • damianrobertjones - Friday, April 25, 2014 - link

    How have they ruined Nokia? At times I really do think that people imagine these things and, if anything, the Lumia line with WP has SAVED Nokia.
  • Penti - Friday, April 25, 2014 - link

    How so, they have fired about 30,000 people and nothing of the soul or the core is left. All their suppliers (semiconductors) was left out when shifting, forcing at least two to exit the market. Nokia sold 100 million smartphones in 2010 and was profitable till after the quarter of the burning memo platform, 8.1 is just now getting features that Nokia had on even Symbian multitouch capacitive smartphones in 2010 and the platform they changed to didn't exist so they had nothing to sell all these years. They get new teams in China that can develop cheap smartphones, the business in Europe is pretty much defunct in the mobile phone side. The sales in NA is pretty much not there and lower than European markets, which doesn't bode well now that management moves to Redmond. They didn't succeed in their home market. In Finland more than 5000 got money because of the layoffs a few thousands quit before they could claim any, a few thousands more was transfered to other business and was subsequently laid off and they also got funds from the EU to deal with it, pretty much everybody works with other stuff now. Windows Phone sales is lower than even Xiaomi's (new Chinese maker, been around just under 4 years) sales this quarter. They are not in the top ten smartphone makers.
  • darkich - Friday, April 25, 2014 - link

    Thank you for taking the time and patience to sum that up perfectly
  • eanazag - Friday, April 25, 2014 - link

    I was tracking you till you said Symbian. Symbian was suck @ss for too long.
  • lmcd - Friday, April 25, 2014 - link

    Yeah their only real hope was MeeGo, but took too long bringing it to market (even before Elop, the N900 was popular but far from mainstream with Maemo).
  • Penti - Saturday, April 26, 2014 - link

    Still WP7.X was worse and NA market share for WP is about five percent at most today. WP is a catastrophe in NA so that Symbian was marginal there doesn't really matter. Phones like Nokia N8 was quite popular here in Europe. They had a path forward for Maemo that did realize into MeeGo 1.2 Harmattan N9 device, the software platform at that time was complete and ready, it wasn't an enthusiast platform any more, but was already in the process of being dismantled by the Microsoft deal under the guise of getting that 1B USD year for keeping Windows Phone as the smartphone track. Did try to emphasize even when writing even Symbian.

    Symbian shared development framework / tools with MeeGo – Qt was standard from 2010 – so it was part of a much more agile and modern strategy than to say that they sat the ships on fire while Microsoft had nothing to deliver. They announced that they would cease supporting their own products and go exclusive with Microsoft while Microsoft still had nothing to give them, not even Mango. It took four years after Mix 2010 for 8.1 (preview) to materialize, four years! If that is not slacking and ignoring the market (which you can't say about Nokia's previous plans pre-MS deal, with MeeGo, Qt, QtQuick, QtMobility and other efforts in full swing) I don't know what is, that is being totally lousy and lying to the market for too long if I have ever seen it.
  • errorr - Friday, April 25, 2014 - link

    Nokia would have folded if not for the WP cash injections. So they ruined Nokia by saving it. They eventually just had to buy it because WP was such a failure. So your claim the M$ killed Nokia has a faulty null hypothesis.
  • Morawka - Friday, April 25, 2014 - link

    The suppliers are not needed. MSFT has their own hardware suppliers thanks to Xbox One and Surface Hardware. No need in having a completely different supply chain. This is just efficient business management.

    They are trimming all the fat that made nokia unprofitable, and using key patents they acquired with the acquisition to strengthen their platform. Nokia Windows Phones will become much better because they can do like apple and integrate hardware, software and ecosystem.

    Yes its sad so many lost their jobs, but that's how the business works.

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