Microsoft’s Remarkable Quarter

Last quarter, Microsoft (Nasdaq:MSFT) announced serious management changes, with CEO Steve Ballmer announcing plans to retire by next year. Meanwhile, the company is doing a surprisingly successful job at pivoting itself to a “devices and services” organization from a software-focused one. The company reported a stellar quarter, surpassing market expectations and reaffirming faith in its ability to reinvent themselves as it has done several times in the past.

Microsoft’s Financials

Q1 revenues grew 16% to $18.53 billion, surging past market projections of $17.79 billion. EPS of $0.62 was 17% higher than previous year’s earnings and exceeded market expectations of $0.54.

The company’s quarterly performance was especially impressive considering that these results come amid a continuing drop in global shipments of PCs. According to an IDC report, PC sales fell 8% during the third quarter this year, making it the sixth consecutive quarter of decline.

By segment, Devices and Consumer Licensing revenues fell 7% over the year to $4.3 billion. Devices and Hardware revenues grew 37% to $1.48 billion driven by sales of Surface tablets and Xbox consoles. During the quarter, Microsoft reduced prices of Surface tablets to make them more attractive to buyers. Surface accounted for $400 million in revenues for the quarter. Microsoft sold 1.2 million Xbox consoles as it prepared for the launch of Xbox One next month. Revenues from the Devices and Other segment grew 17% to $1.64 billion, with Xbox transactional revenues growing 25% over the year. Microsoft ended the quarter with more than two million Office 365 Home Premium subscribers. Bing continued to gain market share and now contributes 18% of the U.S. market compared with 15.9% a year ago.

Revenues from the Commercial segment grew 10% to $11.2 billion, with licensing revenues growing 7% and other revenues growing 28% over the year. Commercial Cloud revenues also saw strong growth of 103% in the quarter.

For the current quarter, Microsoft projects revenues of $23.1 billion-$24.1 billion with EPS of $0.65-$0.71. It is depending on several product releases aimed at attracting holiday sales.

Microsoft Remains Focused on Product Upgrades

Microsoft continued to highlight the wide range of product upgrades for the current quarter. Last week, it released the upgraded Surface 2, Surface Pro 2, and Windows 8.1, all of which are geared to getting a bigger share of the Android market. Surface 2 is expected to be a big hit among consumers during the holiday season. While it will be no match for the more expensive iPad Air, analysts believe that for first-time tablet users, Surface 2 is a very attractive option. The 32GB Surface 2 is retailing at $449 and comes with features such as a high-resolution 1920 x 1080 display, USB3 port, microSD card port, access to 200 gigabytes of storage space on MS SkyDrive for two years, and a year of free Skype calling with Wi-Fi Hot Spot access.

Last week’s Windows 8.1 upgrade release has also been received well by the market. The earlier release of the touch screen–focused OS, Windows 8, had caused quite a few hardships to consumers as they switched over from the traditional Windows to the new one. With 8.1, Microsoft has addressed some consumer concerns, such as bringing back the Start button. The OS is also an effort towards addressing the mobile and computing convergence as Microsoft unifies its look and feel across these devices. The 8.1 Start screen continues to feature large and small Live Tiles to show apps such as weather updates, calendars, and the Windows Store. Some of the big enhancements include the increased dependence on SkyDrive and the ability to search on the OS that not only searches the app, but also reaches out to Bing for a more exhaustive search.

For the holiday season though, probably the biggest release is the much awaited Xbox One. Xbox One is scheduled for launch on November 22 and promises to be a “first class experience” for all gamers. The new console features an 8 core CPU built specifically by AMD, a D3D 11.1 graphics chip, dedicated 32MB of built-in ESRAM memory, 8GB DDR3 of RAM and a 500GB hard disk drive for storage, and a Blu-ray player. For the first time, Xbox One is expected to enable players to play against PC gamers who own the same game. Besides gaming, the device will also support viewing of live TV, recorded content, and original programming. The console’s launch will be parallel with the release of 51 new game titles for the console, including exclusive games like “Titanfall” and “Forza Motorsport 5.” The console is expected to give Sony’s upgraded PlayStation a big run for its money.

The market is pleased with Microsoft’s performance and the stock is trading at $35.73, with a market capitalization of $297.63 billion. It touched a 52-week high of $36.43 in July 2013.