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Microsoft: Profit DECIMATED because you people aren't buying PCs

Around 10 per cent missing from this time last year

Microsoft CEO Satya Nadella

Microsoft has weathered a difficult three months: despite signs of growth in cloud computing, overall sales were dragged down by dwindling demand from consumers.

Revenues of $21.73bn in Microsoft's third quarter of fiscal 2015, ended March 31, met analysts' expectations. However, sustainable growth still eludes the software giant. Last quarter, its sales were up 8 per cent, year-on-year. This quarter it saw only 6.5 per cent growth.

And while the firm's earnings of $0.61 per diluted share beat Wall Street's expectations handily, its net income was in the gutter at $4.99bn, down 11.9 per cent from the year-ago quarter.

So what happened? Once again, it was the PC market what dunnit. Redmond's Devices and Consumer Licensing reporting segment – which covers sales of software like Windows and Office to the retail market – reported revenue of $3.48bn, a 20.7 per cent decline from a year ago.

Similarly, the enterprise-focused Commercial Licensing group brought in $10.04bn in revenue – which, while impressive, was still a 2.8 per cent year-on-year decline.

But it was the softness of the consumer market that really hurt Microsoft this quarter. The Computing and Gaming Hardware division's revenue sank 8.8 per cent from the year-ago quarter, to $1.8bn. And discounting the revenue from Microsoft's Phone Hardware division, which didn't exist a year ago, the firm's consumer sales saw a year-on-year decline of 9 per cent.

Things weren't looking so great in the Phones department, either. It's still too early after the close of Redmond's Nokia gobble to gauge whether there's growth there. But while the group brought in $1.4bn in revenue in the first quarter and said it sold 8.6 million Lumia devices, it lost $4m in gross margin.

One effort that Microsoft can safely call a success, however, is the Surface Pro 3. The firm said its Surface revenue for the quarter was $733m – which, while a significant drop from its sales over the holiday quarter, was 44 per cent higher than what it sold in the same period a year ago.

Is Microsoft's cloud ready to make it rain?

There are signs of life in Redmond's cloud efforts, too. Unfortunately, Microsoft's revamped reporting structure spreads its cloud revenues across more than one bucket, each of which also includes sales of other products. It also likes to lump together its SaaS offerings like Office 365 and Dynamics CRM Online with its Azure IaaS and PaaS offerings, making an exact reckoning of its cloud revenue difficult. But tellingly, while licensing sales shrank, both of Microsoft's major "Other" reporting categories showed growth.

Devices and Consumer Other, which is where Redmond books revenue from Office 365 Home and Office 365 Personal subscriptions, saw year-on-year growth of 16.9 per cent, with revenue of $2.28bn for the quarter. Bear in mind, though, that this segment also includes such things as Microsoft's retail division, its videogames department, its search and display advertising sales, and so on.

Commercial Other, meanwhile, grew its revenue a respectable 45.1 per cent from a year ago and 6.4 per cent sequentially, with revenue of $2.76bn. This is where Microsoft books all of its Azure cloud efforts, plus Dynamics CRM Online and all Office 365 subscriptions for businesses.

Bear in mind, growth in this area comes at a price. Microsoft spent $1.39bn on "additions to property and equipment" in the first quarter – 16.7 per cent more than it spent in last year's quarter – much of which probably went toward building out its cloud data centers. By way of comparison, Amazon spent $1.57bn and Google spent $2.93bn on property and equipment over the same period.

Still, when you add both Other divisions together, their combined revenues represented 23.2 per cent of this quarter's total, and they contributed 11.7 per cent of the quarter's total gross margin – all of which suggests there may actually be something to Microsoft CEO Satya Nadella's "cloud first, mobile first" mantra.

Investors, too, seemed optimistic, and despite some disappointing results, they nonetheless sent Redmond's share price up just around 3.4 per cent in after-hours trading on the news. ®

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