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Microsoft's Q3 2015: Surface and Lumia up, but profit down

Microsoft's Q3 2015: Surface and Lumia up, but profit down

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Microsoft has published its Q3 fiscal 2015 earnings report, and the company has made $4.98 billion in net income on $21.7 billion in revenue. Revenue has increased 6 percent from the same quarter last year, but net income has dropped 12 percent. Microsoft does note that its financial results "include $190 million of integration and restructuring expenses" from the Nokia phone business deal. Despite the profit drop, Surface and Lumia are both looking stronger for Microsoft alongside impressive cloud growth. Microsoft is preparing to set the stage for the rest of 2015 at its Build developers conference next week, and today's results make it clear why CEO Satya Nadella is focused on cloud and mobile opportunities across multiple platforms.

It's the third quarter of Surface Pro 3 sales, and things don't appear to be slowing down. Surface-related revenue ($713 million) has increased by 44 percent from the same period last year. Once again, actual Surface sales are still unknown as Microsoft refuses to break them out, but the trend of Surface revenue increasing is a good indication that Microsoft's tablet laptop hybrid is steadily increasing its user base.

Xbox sales figures are down

On the gaming side, Microsoft says it sold 1.6 million Xbox consoles during the quarter compared with 2.0 million consoles during the same quarter last year. Xbox platform revenue is down 24 percent year-on-year, driven by a 20 percent decline in console volume and lower Xbox One console prices compared to the prior year. Sony has been consistently outpacing the Xbox One with its PS4 sales, with few exceptions in monthly figures from NPD in the US. Microsoft may have dropped the price of its Xbox One console to $349 without Kinect, but it has little effect on the continued console war.

Nokia Lumia stock

Microsoft has revealed it won’t launch a new flagship Windows Phone until Windows 10 is ready for phones later this year, and the company has launched a number of low-cost handsets recently. Microsoft sold 8.6 million Lumia devices in the most recent quarter, and the company says that’s an 18 percent increase over the prior year. Microsoft completed its acquisition of Nokia around this time last year, and neither company revealed Lumia sales at the time, but it’s safe to say they’re rising again. Either way, Windows Phone revenue has dropped by 16 percent.

Windows revenues wobble ahead of Windows 10

While Microsoft is heading towards finalizing Windows 10 in the coming months, the PC market is still fragile. OEM revenue for Windows decreased by a massive 22 percent this quarter, following an equally bad quarter over the holiday period. Part of this decline is related to less business PC sales, and the general PC market as a whole. Office appears to be a mixed bag for Microsoft. While it's helping drive commercial revenues, Office consumer revenues declined 41 percent due to the transition to Office 365 and weaknesses in Japan where Office is popular on PCs. However, Office 365 Consumer subscriptions have grown to 12.4 million, so Microsoft is continuing to convince consumers that the cloud is the future.

Every cloud has a silver lining, or so the saying goes, and Microsoft's highlight is strong cloud growth. Commercial cloud revenue grew 106 percent thanks to Office 365, Azure, and Dynamics CRM Online. That's impressive growth, and it further underlines why Microsoft CEO Satya Nadella is focusing the software giant on cloud and mobile. "Customers continue to choose Microsoft to transform their business, and as a result we saw incredible growth across our cloud services this quarter," says Nadella. "Next week at Build we're excited to share more about how we're empowering every individual and organization on the planet to achieve more with the next generation of our platforms."

Microsoft has an earnings call scheduled for 5:30PM ET, and we'll update this article with any relevant information.

Correction: This article originally stated that Microsoft wasn't breaking out console sales. They're published in the 10-Q and have been added above.

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