A big jump in sales in Microsoft's consumer hardware devices unit, which includes its Xbox gaming console and Surface tablets, helped the company grow its revenue 14 percent and slightly improve profits year-on-year in its second fiscal quarter.
Microsoft's revenue in the quarter ended Dec. 31 came in at $24.51 billion, exceeding the consensus expectation of $23.68 billion from Wall Street analysts polled by Thomson Financial.
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Net income grew from $6.38 billion, or $0.76 per share, in 2012's second fiscal quarter, to $6.56 billion, or $0.78 per share, Microsoft said Thursday.
"I am pleased with the results as we exceeded our expected revenue growth while continuing to maintain our focus on improved execution and cost management," CFO Amy Hood said in a conference call to discuss the results.
Adjusting for deferred revenue related to special offers, revenue growth in the quarter would have been 11 percent and earnings per share would have been down 4 percent.
The Devices & Consumer Hardware unit grew its revenue from $2.80 billion to $4.72 billion, as Microsoft sold 7.4 million Xbox gaming console units into the retail channel, almost 4 million of them the new Xbox One model.
Meanwhile, revenue from Surface tablet sales more than doubled sequentially, from $400 million in the first quarter to $893 million in the second quarter. Units sold also more than doubled.
However, as spotted by Computerworld in Microsoft's 10-Q filing with the government, the cost of making and marketing Surfaces exceeded the revenue, so Microsoft lost almost $40 million in that business.
Asked about that on the conference call, Hood said Microsoft has learned a lot since it launched the product about integrating its OS and providing access to cloud services. "We have to make more meaningful progress," she said.
Microsoft is committed to improving the Surface technology, pricing strategy and gross margins, according to Hood.
Gross margins in Devices & Consumer Hardware fell 46 percent because cost of revenue shot up 111 percent to $2.3 billion.
Devices & Consumer Licensing revenue dropped from $5.70 billion to $5.40 billion year-on-year, as sales of Windows to hardware partners that in turn resell it with their PCs, tablets and other devices declined 3 percent. Windows OEM Pro sales to businesses grew 12 percent, but Windows OEM sales to consumers erased that gain. Retail sales of Windows declined $264 million, or 69 percent.
Office consumer revenue fell 24 percent, due to take-up in Office 365 Home Premium and to weak PC sales. Windows Phone revenue grew 50 percent.