Microsoft earnings show power of devices, services

The New York TimesJanuary 25, 2014 

A picture of the new Microsoft, one transformed from a software factory into a maker of devices and online services, came into sharper focus this week.

The old Microsoft had an almost unmatched ability to chug out profits by selling software on discs to customers. The new Microsoft has an expanding portfolio of hardware products with decidedly lower margins.

That was clear Thursday, when the company reported a happy 14 percent increase in revenue — in large part from brisk holiday sales of its new Xbox game console and Surface tablets — and a less happy 3 percent rise in profit.

The changing image of Microsoft was greeted positively by investors. Microsoft management has been coaching Wall Street for some time to expect major changes in its business as it refashions itself to what it calls a devices and services company.

The holidays are an especially strong time for hardware sales, and they offered a good test of the company’s evolving focus. The new Xbox One turned out to be one of the most highly sought gifts this year, and Microsoft’s new versions of the Surface tablet received better reviews than its first tablet offerings.

Those sentiments translated into sales. Microsoft sold 7.4 million Xbox consoles, including the Xbox One and the older Xbox 360, up from 5.9 million a year ago. And revenue from the Surface tablet more than doubled to $893 million from the previous quarter. In the last quarter, which was Microsoft’s second fiscal quarter and ended Dec. 31, revenue from devices and consumer hardware rose 68 percent, to $4.73 billion, growing far faster than any other part of the company.

The company reported net income in the quarter of $6.56 billion, or 78 cents a share. That was up from $6.38 billion, or 76 cents a share, a year ago. Microsoft’s revenue jumped 14 percent, to $24.52 billion.

Ted Schadler, an analyst at Forrester Research, said Microsoft’s results spoke to the growing appeal of products such as the Surface in which hardware and software are tightly coupled.

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