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Microsoft 1Q profit, sales top views; shares jump

Friday - 10/25/2013, 8:10am  ET

RYAN NAKASHIMA
AP Business Writer

LOS ANGELES (AP) -- Microsoft posted quarterly revenue and earnings Thursday that easily topped Wall Street forecasts, marking a healthy start to a companywide overhaul it announced in July that should help the software giant transform into a devices and services company.

Its stock rose nearly 6 percent in after-hours trading.

"Our devices and services transformation is progressing," CEO Steve Ballmer said in a statement with the company's fiscal first-quarter results. Ballmer said in August he'll step down within 12 months and the search is on to find his successor.

Microsoft's net income in three months through Sept. 30 grew 17 percent to $5.24 billion, or 62 cents per share, from $4.47 billion, or 53 cents per share, a year ago.

That beat the 54 cents expected by analysts polled by FactSet.

Revenue rose 16 percent to $18.53 billion, also beating the $17.79 billion analysts were expecting.

Microsoft's revenue from its Surface tablets hit $400 million, representing a gain in revenue and more than a doubling of unit sales from the quarter that ended in June, helped by a price cut to its slimmed down Surface RT model in July. Profitability in the division that houses Surface fell, mainly because the cost of making Surface tablets rose by $645 million from a year ago.

It's the first time the company has broken out Surface results.

Lisa Nelson, director of investor relations, said the strategy behind Surface is to sell more devices, allowing the company to cover its fixed costs, while benefiting if users pay for other Microsoft services like the Skype Internet calling app or extra cloud storage space through SkyDrive. A new partnership to outfit Best Buy stores with special displays dedicated to Microsoft wares should help boost sales, she said. The company also launched its latest models, Surface 2 and Surface Pro 2, on Tuesday.

"We're feeling really good about Surface, especially as we head into the holiday season," she said.

Revenue from its flagship Windows operating system from manufacturing partners declined, while enterprise software business grew.

Commercial licensing -- representing enterprise products like Windows Server and System Center -- is now by far Microsoft's biggest reporting segment. Its revenue rose 7 percent to $9.59 billion. When combined with cloud-computing services such as its Windows Azure platform and subscriptions to Office 365, commercial revenue rose 10 percent to $11.2 billion.

Devices and consumer licensing revenue, containing revenue from Windows and Windows Phone, fell 7 percent to $4.34 billion.

Hardware sales including Surface rose to $1.49 billion from $1.08 billion, while other consumer revenue from units such as the Bing search engine and its own video game sales climbed to $1.64 billion from $1.40 billion.

It has been a busy year for Redmond, Wash.-based Microsoft Corp. Last month, it vowed to acquire Nokia's smartphone business for $7.2 billion and this month it launched sales of the latest version of its Surface tablets. Next month it will launch its latest game console, Xbox One.

The transformation of Microsoft's business is crucial as sales of personal computers -- once Windows' mainstay -- continued to fall. Research firm IDC said that global shipments of PCs fell 8 percent in the third quarter of the year for the sixth straight decline. Another firm, Gartner, put the decline at almost 9 percent.

Daniel Ives, senior analyst at FBR Capital Markets & Co., said Microsoft's strong enterprise software and cloud-computing results are offsetting the decline in the PC market.

"Even though there are massive PC headwinds they're facing, they're doing an admirable job," he said.

Microsoft's shares rose $1.88 to $35.60 in extended trading following the release of the earnings report.


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