Microsoft Q2 results: Surface brings in a billion, low cost Lumia sales solid

Eighteen months ago, the Microsoft Surface looked like it was dead in the water. Weak sales had forced the Redmond-based technology giant to take a US$900-million writedown on the device and people were questioning whether it would ever be able to take on the likes of Apple in any kind of meaningful way. Today, the various incarnations of the Surface might not be selling in quite the same numbers as the iPad, but it is worth a billion dollars to the company.

That was probably the most significant piece of information to come out of a healthy set of Q2 results for Microsoft. Over all, the company brought in US$26.5 billion worth of revenue for the quarter. Gross margin, operating income, and diluted earnings per share (“EPS”) for the quarter were US$16.3 billion, US$7.8-billion, and US$0.71 per share, respectively.

That’s not bad, especially when you factor in the fact that the results include US$243-million of integration and restructuring expenses related to both Microsoft’s restructuring plan announced in July 2014 and the ongoing integration of the Nokia Devices and Services (“NDS”) business as well as a US$0.04 per share negative impact related to income tax expense resulting from an IRS audit adjustment.

Read more: All of a sudden, things aren’t looking so bad for Microsoft

“Microsoft is continuing to transform, executing against our strategic priorities and extending our cloud leadership,” said Satya Nadella, chief executive officer of Microsoft. “We are taking bold steps forward across our business, and specifically with Windows 10, to deliver new experiences, new categories, and new opportunities to our customers.”

While the enterprise remains Microsoft’s largest revenue source, its consumer offerings are catching up. As we’ve already mentioned, Surface revenue was US$1.1-billion for the quarter, up 24% and primarily driven by sales of the Surface Pro 3 and accessories.

Other hardware categories that saw growth include Phone Hardware, which saw revenue of US$2.3-billion thanks largely to it selling some 10.5-million Lumias, many of which were at the low end of the market.

Xbox console sales meanwhile totaled 6.6-million units.

On the software front, Office 365 Home and Personal subscribers increased to over 9.2 million, up 30% sequentially over prior quarter. Search advertising revenue also grew (by 23%), with Bing’s US market share at 19.7%.

Read more: Microsoft’s HoloLens looks better than Google Glass, but can it escape the same fate?

That does not however mean that the company didn’t take a few hits this quarter.

Windows OEM Pro revenue, for instance, declined 13% with Microsoft suggesting that revenue was impacted by the business PC market and Pro mix returning to pre-Windows XP end of support levels and by new lower-priced licenses for devices sold to academic customers. Windows OEM non-Pro revenue declined 13%, with license growth from opening price point devices.

The company should also be pleased with the fact that the increasing importance of its consumer business hasn’t come at the cost of its commercial ventures. Revenue on that side of the business grew five percent to US$13.3-billion, with the strongest growth coming from its commercial cloud offerings. Revenue on that front grew 114% driven by Office 365, Azure and Dynamic CRM Online, and is now on an annualized revenue run rate of US$5.5-billion.

“We again saw enthusiasm and demand around our cloud offerings like Office 365, Dynamics CRM Online and Azure, as well as Surface Pro 3,” said Kevin Turner, chief operating officer at Microsoft. “Our sales engagement worldwide continues to focus on helping customers and partners transition to the cloud and navigate the shifting product mix related to our services and solutions.”

If nothing else, the results suggest that the market likes the company Microsoft is becoming under Satya Nadella. That goodwill is also only likely to increase if it manages to pull off the vision it showed off with the recent unveiling of its HoloLens augmented reality device.