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Windows sales shrunk, but just a leetle

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Microsoft disclosed on Thursday its earnings for the first time since outgoing CEO Steve Ballmer announced the company's radical restructuring in July, and from all appearances, all is well in Redmond.

The software behemoth reported profits of $5.24bn (up 17 per cent year on year) and earnings per share of $0.63 on record first-quarter revenues of $18.53bn (up 16 per cent), handily beating even the highest analysts' estimates for the three months ending on September 30.

Of the five new reporting units that were created to align with Redmond's new "One Microsoft" strategy, Devices & Consumer Licensing – the division that covers most retail and OEM software sales to consumers, plus Windows Phone – was the only one that appeared to struggle.

Revenues for that group were down 7 per cent from the same period the previous year, to $4.34bn, although Microsoft CFO Amy Hood said in a conference call with financial analysts that the drop was significantly smaller than expected.

Revenue from OEM sales of Windows Pro actually increased 6 per cent. But OEM revenue from non-Pro versions of Windows was down a stinging 22 per cent, much of that due to weakness in the China market. (Hood said that these figures, too, were better than expected.)

Retail and OEM sales of Office were also down somewhere around 5 per cent, but some of that was due to customers shifting to Office 365 subscription licensing, which is now reported under a different unit.

Otherwise, the rest of Microsoft's business units were looking up. The Devices & Consumer Hardware division, in particular, saw its revenues increase 37 per cent from the year-ago quarter, gaining $401m to reach a total of $1.49bn. Nearly all of that was attributed to Surface, and particularly to the 32GB model of the ARM-powered Surface RT, which is apparently selling well all of a sudden. Who knew?

Revenues for the Devices & Consumer Other division – which is where Microsoft lumps its various online marketplaces, advertising businesses, Office 365 Home Premium, and a variety of other odds and ends – were up 17 per cent versus the previous year's quarter, to $1.64bn.

Within that figure, revenue from search advertising was up 47 per cent, driven by a combination of market share growth and improvements to the Bing engine itself. Investor relations manager Chris Suh said that Bing's share of the US search engine market is now 18 per cent.

In addition, there are now more than two million Office 365 Home Premium subscribers. Microsoft sees this market as not just significant, but different than the market for its other Office 365 offerings for businesses, which is why it sticks these sales into a different category than the rest.

As for Redmond's Commercial divisions – which include all software sales through Volume Licensing, plus sales of data center and server products, developer tools, and commercial cloud offerings – overall revenues were up 10 per cent.

The Commercial Licensing unit saw revenues of $9.59bn, an increase of 7 per cent from last year's first quarter, demonstrating that Microsoft's enterprise customers remain as loyal as ever.

Meanwhile, Commercial Other – which includes commercial seats of Office 365, revenues from Microsoft's Azure cloud offerings, Dynamics Online, and other online services – grew its revenues 28 per cent to $1.6bn. It's worth noting that this group brings in the least revenue and posts the smallest gross margin of all of Microsoft's new reporting units, but even that is saying something: the old Online Services division consistently lost money.

In all, it was a decidedly strong quarter for Microsoft, particularly coming off the previous quarter's iffy results, in which its earnings missed analyst expectations and it was forced to take a $900m charge on unsold inventory of Surface RT. And Hood said to expect next quarter – which includes the holiday season – to look even better across every segment of the business.

Nothing could please investors more, and Microsoft's shares climbed more than 5.6 per cent during after-hours trading on the news. ®

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