recently kicked off a new fiscal year. As the company
begins its fiscal 2015, it has a new CEO in Satya Nadella and
shares have been enjoying upward momentum. So what did Microsoft
have to say on its last conference call? Let's dig into some of
the call's most interesting quotes and find out.
The commercial segment is crushing it
As always, Microsoft's enterprise business pays the bills. The
company's end of support for Windows XP continues to drive
enterprise upgrades for the operating system, while Microsoft's
server offerings are soaring.
In addition to transitioning to the Cloud, our customers
continue to invest in premium versions of our [on-premises]
server products like Windows Server, System Center and SQL
Server. As a result, our server licensing revenue grew 14% this
We also had another breakout year for SQL Server. With SQL
Server 14 we released industrial leading in memory technology
across all database workloads of online transaction processing,
data warehousing and business intelligence. And we grew our SQL
business by more than 19%.
The highly profitable commercial licensing segment remains the
company's top business in terms of both revenue and gross margin.
Commercial licensing contributes nearly two-thirds of Microsoft's
Microsoft is moving down-market
In a world in which
has spurred aggressive price competition by making operating
systems free (both Android and Chrome), Microsoft has little
choice but to adapt.
In addition, we made the decision to evolve the Windows
business model. Now Windows licenses are $0 for any OEM
building a device less than 9 inches. We also added a low-cost
Windows offering with Bing integration for OEM. This new
offering combined with lower hardware specs means OEMs will
bring a fantastic lineup of value-based Notebooks and tablets
to the markets this holiday.
It's a necessary step if Microsoft hopes to compete in the
low-end laptop and tablet markets where Chromebooks and Android
devices are dominant. Microsoft must be aggressive to win over
Office 365 subscriptions are on the rise
Office's transition to a subscription model is proceeding very
well, and the subscriber base for Office 365 continues to
grow at a healthy pace.
We saw strong Commercial seat growth across Office 365
particularly with SMB customers. Additionally, we added over 1
million new subscribers to Office 365 Home and Personal, and we
ended the quarter with 5.6 million users.
Bringing Office to the iPad has also strengthened Office 365's
value proposition, and the initial reception was
positive. Nadella added that there have been over 35 million
downloads of the Word, Excel, PowerPoint, and OneNote on iOS.
Nadella's vision has always been to offer Office on a wide range
of devices, and that strategy is already paying off.
Say hello to the phone hardware segment
Now that the acquisition of
's devices business is complete, Microsoft has established a new
reportable segment: phone hardware. Low-end devices continue to
drive Windows Phone's market share gains.
With the closing of the Nokia devices and services
acquisition during the quarter, we established a new segment,
phone hardware, to provide transparency into the progress we
will make as we improve and grow the phone business. This
quarter Lumia device sales were primarily driven by good
performance in the lower price point 500 and 600 series. Sales
of non-Lumia devices were in line with the overall feature
phone market dynamics. Our gross margins were affected by
decisions we made to rationalize the device portfolio as well
as acquisition related amortization expense.
Phone hardware revenue totaled $2 billion this quarter with
a product mix that is skewed toward low-end devices that
aren't as profitable as their higher-end counterparts. The
new segment reported a gross margin of 22%, well below
Microsoft's corporate average of 68%.
Surface Mini was real and killing it hurt
Industry watchers widely
Microsoft to launch a Surface Mini tablet at the company
press event in May. The device was a no-show, and reports later
suggested Microsoft axed the product at the last minute. The
company also accidentally
as to the Surface Mini's existence. CFO Amy Hood confirmed during
the conference call that Microsoft changed its mind.
In late June we launched Surface Pro 3. While it is still
early, sales are outpacing earlier versions of Surface Pro, and
we are excited to bring the device to many more markets this
summer. During the quarter we reassessed our product road map
and decided not to ship a new form factor that was under
development. Combined with the transition of production toward
our latest Surface offering, we made inventory adjustments,
which affected our gross margins.
Software is generally a high-margin business, while hardware
is usually the opposite. Microsoft is seeing margin dilution from
entering the hardware business, but first-party hardware is
strategically important to the company's competition with
Leaked: Apple's next smart device (warning, it may
Apple recently recruited a secret-development "dream team" to
guarantee its newest smart device was kept hidden from the
public for as long as possible. But the secret is out, and some
early viewers are claiming its everyday impact could trump the
the iPad. In fact, ABI Research predicts 485 million
of this type of device will be sold per year. But one small
company makes Apple's gadget possible. And its stock
price has nearly unlimited room to run for early in-the-know
investors. To be one of them, and see Apple's newest smart
5 Things Microsoft Corporation's Management Wants
You to Know
originally appeared on Fool.com.
Evan Niu, CFA
owns shares of Apple. The Motley Fool recommends Apple, Google (A
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