Microsoft Commercial Business Thrives, But Ballmer Still Remains a Question

5 minute read
David Roe avatar

Microsoft's sales and profits are up. In the first quarter since the company announced a major reorganization and shared the news that CEO Steve Ballmer is retiring, the Redmond, Wash.-based technology giant reported a jump of 17 percent in net income in the fiscal first quarter to $5.2 billion or 62 cents per share.

While the company's commercial wing grew revenues by 10 percent to $11.2 billion, consumer revenues, including devices, grew only 4 percent to $7.46 billion. 

The Ballmer Question

Needless to say, the financial markets were more than happy with the company's $5.2 billion profits on $18.5 billion in revenues. Shares rose about 6 percent in after hours trading. But the financial results still left a lot of questions over the Microsoft, which is struggling to gain traction in a consumer market dominated by devices.

Despite Microsoft's best efforts, consumers are unsure about its new operating system (OS). Ballmer reported in a statement:

Our devices and services transformation is progressing and we are launching a wide range of compelling products and experiences this fall for both business and consumers ... Our new commercial services will help us continue to outgrow the enterprise market and we are seeing lots of consumer excitement for Xbox One, Surface 2 and Surface Pro 2 and the full spectrum of Windows 8.1 and Windows Phone devices.” 

But Ballmer is on the way out and the company that emerges after he leaves will be different than the one he led for the past 13 years. If investors were hoping for an indication — any indication — of who will take over, they were disappointed.

Nothing was said about likely candidates, let alone who might get the job. Because of this uncertainty, financially speaking, nothing too dramatic is going to happen at Microsoft.

Revenue Climbs

Microsoft, when all is said and done, had a good quarter. It was built around excellent commercial results, which buoyed the rest of the company. Overall, performance was a lot better than analysts expected, with revenues pushing above the $11 billion mark. Microsoft thinks a number of factors will continue to drive revenue, including:

  • SQL Server revenue grew double-digits, with SQL Server Premium revenue growing more than 30 percent
  • Lync, SharePoint, and Exchange, productivity server offerings, collectively grew double-digits.
  • Commercial cloud revenue grew 103 percent

This can only be good for the future. Earlier in the week we saw that Office is still the main enterprise productivity suite and, at this point, in an unassailable position.

That Microsoft’s cloud revenues are doing so well is also good for the future. We have already seen IBM, for example, is successfully transitioning away from hardware to software and cloud services, pushing cloud revenues to over $1 billion in the last quarter. Microsoft Chief Operating Officer Kevin Turner noted:

Learning Opportunities

We continue to execute well across our businesses and we are seeing robust demand for our enterprise products and cloud services. Strong customer adoption of Office 365, Azure, and Dynamics CRM Online is accelerating our business transition to the cloud…Our investments in SQL database platform, Hyper-V, System Center, and Lync are driving market share gains as these comprehensive solutions enable customers to increase their insight and efficiency."

Windows Problems

Window OEM revenues dropped 7 percent, but if you dig into it the numbers a little bit deeper it is even worse. When the Professional version is taken out of the equation, the fall was in the region of 22 percent as PC sales fall globally. However, Microsoft Chief Financial Officer Amy Hood was remarkably upbeat about it, given the impact this has on Microsoft figures:

The PC market is better than expected, and we’re seeing signs of stabilization in the business segment.” We’re seeing signs of stabilization in the business segment with two consecutive quarters of growth and a relatively stable outlook for the next couple of quarters…While the consumer segment is more volatile with increasing competition for share of wallet, it also performed better than expected, particularly in developed markets."

She must be the only person in the industry that thinks, in spite of numerous independent reports from the like of Gartner and Forrester, that the decline seems just about terminal.

Consumer Products

But it is the consumer business that really brought Microsoft down. Sales of the company's Surface tablets and Windows phones haven’t gained a respectable market share. Devices and consumer licensing revenue, containing revenue from Windows and Windows Phone, fell 7 percent to $4.34 billion.

While Surface revenue grew to $400 million with sequential growth in revenue and units sold over the past quarter, Microsoft is banking on recent releases of Surface 2 and Surface Pro 2 to help it in coming quarters. It is also expecting a stir around the Xbox release next month. In fact, it deferred $113 million in revenue related to pre-sales of Windows 8.1 to push the next quarter numbers, but it’s far from clear what will happen here.

While the markets responded positively to the financial release, it’s unlikely that much will really have changed when the dust has settled. For investors and partners alike, the real questions are who will replace Ballmer — and what his replacement will bring to Microsoft.


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