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Microsoft Posts Strong Fiscal Year First Quarter Earnings

PCs are not dead and neither is Microsoft.

The company proved the skeptics wrong and posted strong revenue for its fiscal year first quarter 2015 earnings. Microsoft posted $23.2 billion in revenue, up 25% compared with the same period last year. However, net income was down $4.5 billion, compared with $5.2 billion a year ago.

While Microsoft’s fortunes are tied to a variety of technologies from PCs, servers, tablets, and Windows to Office 365 and cloud services, its transition to a mobile and cloud-first company is clearly making headway.

Indeed, Microsoft is actually making money from its hardware and posted nearly $11 billion in revenue in its Devices & Consumer group. Not only is the Xbox console doing well, even Surface is making a comeback. This quarter Surface posted $908 million in revenue, much of it driven by sales from the Surface Pro 3. That’s a big turnaround considering Microsoft had to take a $900 million inventory write-off for Surface RT during its fourth fiscal quarter of 2013, causing the company to miss Wall Street’s expectations.

On Windows Phone, Microsoft only enjoyed “modest gains,” said CEO Satya Nadella during the earnings call. Those gains took place in Europe where Microsoft captured some market share due to low-cost phones.

It’s clear Microsoft has a lot of work to do against the smart phone leaders. The company hopes its Windows ecosystem of universal apps will drive sales but what matters is how Microsoft executes its strategy. The company must convince device owners to make the switch away from Apple iOS and Google Android. Today, it’s all about the apps. Good luck, Microsoft. That’s no small feat.

What will be interesting is whether enterprises make the shift towards PC refreshes once Windows 10 ships next year.

Both Microsoft and its OEM partners enjoyed some growth during fiscal 2014 due to businesses refreshing their PCs with the end of support for Windows XP in April 2014. But now, there’s little incentive for IT pros to go through another PC refresh, especially if the upgrade cycle occurred within the last two years.

PC growth will continue and the overall worldwide decline in shipments is not as high as before according to recent market data from IDC. PCs are not getting cannibalized by the tablet market as much as before and the growth of well-designed notebook PCs and Chromebooks all factor in to a more stable market. IDC forecasts PCs to decrease 3.7% in worldwide shipments for 2014, which is less than was previously forecasted with a decline of 6%.

Nadella said he expects the enterprise to go back to its normal PC business refresh rate in 2015. I suspect, though, that despite early positive feedback for Windows 10, it won’t motivate businesses enough to upgrade their employee’s PC as most likely they’ll be able to run the new OS on a “fairly new” PC. By that I mean one that was bought or leased only within the past two years.

Where Windows OEM Pro licensing reflects the PC market forces, overall Windows volume licensing did grow by 10%. However, it’s going to be a tough battle for Microsoft now that they’re offering Windows licenses for free for phones and tablets below 9 inches. That’s lost revenue, which they think will be offset by the emerging low-cost $199 Windows PCs the industry will see unveiled this fall and winter.

For IT pros wondering whether they should move their organization’s on-premises Office productivity suite to the cloud, more companies seem to be doing so as sales of on-premises Office are getting cannibalized by Office 365.

With Office, one-third of the renewals include Office 365, according to Amy Hood, Microsoft chief financial officer. “We are seeing a mix shift from on-premises to the cloud, from transactional purchasing to annuity, and from standard to premium versions,” Hood said.

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Office 365 is future 
@mariwen I use Office 365 and I can tell you that just being able to access my apps and data from all my devices (iOS, Windows, Mac and Android) is an experience that can't be beat. I don't need to worry about what device I'm carrying at any point in time. However, I think enterprises still need to understand their employees' Office suite usage model and to look at their licensing agreements before making the plunge to Office 365.