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Microsoft's Q1 2015: Surface growing strongly and Lumia sales up

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Surface revenue up 127 percent

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Microsoft has published its Q1 fiscal 2015 earnings report, and the company has made $4.5 billion in net income on $23.20 billion in revenue. Revenue has increased compared to $18.53 billion from the same period last year, but net income has decreased 14 percent compared to last year's $5.24 billion. Microsoft's drop in profits is largely related to $1.14 billion of integration and restructuring expenses following the Nokia phone business acquisition.

Surface revenue up massively

With the launch of the Surface Pro 3 in late June, we’ve finally got a full quarter of Surface revenue that includes Microsoft’s latest tablet. While Surface sales are still a mystery, Surface revenue was $908 million this quarter, up a massive 127 percent from the $400 million this time last year. Last quarter Microsoft’s decision not to ship the Surface Mini hit revenue for Surface overall, but that blip is well behind the company now. If Surface Pro 3 sales continue to be strong, then Surface could easily be Microsoft's next billion dollar business. Microsoft also notes that Surface gross margin was positive this quarter for the first time, but without an exact break down of all the marketing and R&D costs involved, it's hard to say if Surface is profitable just yet. It's heading in the right direction, though.

Surface Pro 3 review

Elsewhere in hardware, Microsoft sold 2.4 million Xboxes in the quarter, though it once again hasn’t revealed the split between Xbox One and Xbox 360. Microsoft’s Xbox One console has fallen behind Sony’s PlayStation 4 US sales for nine months in a row now.

OEM revenue for Windows decreased by just two percent this quarter, showing that sales of traditional PCs and laptops are close to settling down after years of solid decline. Businesses continue to refresh their PC hardware as Windows XP is no longer supported and Windows 7 moves in as a replacement. Windows 8 adoption in businesses hasn’t been particularly strong, and Microsoft is now focused on Windows 10 which is aimed directly at desktop PC users and businesses. The software maker recently released a Technical Preview of the new operating system, and a final version of Windows 10 should be available by mid 2015.

9.3 million Lumia handset sales, up from last year

Microsoft’s mobile efforts might be increasingly moving across platform, but the company still sells Windows Phone licenses and has been focusing on the low-end to push for growth recently. The Lumia 930, 630, and 530 were all launched and made available during the recent quarter, and Microsoft has been increasingly signing new hardware partners in 2014. Microsoft sold 9.3 million Lumia phones in the most recent quarter, a 5.6 percent increase from the record 8.8 million handset sales in the same period last year.

Nokia Lumia stock

Microsoft’s server and cloud offerings continue to be a vital strength for the company. Revenue has increased 13 percent for server, and commercial cloud revenue grew by a massive 128 percent thanks to Office 365, Azure, and Dynamics CRM. On the consumer side of Office, 7 million people are now subscribed to a mix of Office 365 Home and Personal, up from 5.6 million this time last year. However, Office consumer revenue is down 5 percent overall, showing that Microsoft needs to continue to push even more consumers to its cloud version of Office this year and next.

Nadella commits to Xbox once again

Microsoft CEO Satya Nadella helped lead an investor call for the company's latest quarter and there weren't many surprises. Nadella once again reaffirmed Microsoft's commitment to Xbox, and noted the company  will strengthen its gaming experiences on PCs and consoles. "Gaming is the one category that we’ve said we’ll invest in it for its own sake in driving enterprise value," explains Nadella. "The reason we’re why we’re so competitive now in Cortana and speech recognition, which I think is core to productivity, first started with Kinect and Xbox." Nadella clearly sees Xbox as an important way for the company to analyze and feedback data to improve other products at the company. On the topic of cloud computing, Nadella says everyone should "think of Azure as the common fabric of all our applications." A clear signal to the importance of the cloud's influence on Microsoft's future.

Update (3:40AM ET 10/24): article updated to clarify Surface gross margin improvements.