Is it time to take Microsoft off the distress list?

Larry Walsh asks if Microsoft's recent Q1 results show the firm is on the up - at least in the consumer space

Perhaps it's time to take Microsoft off the watch list of tech companies in distress. The first quarterly financial report by the tech giant revealed not just healthy revenue but also evidence the company is trending in the right direction - at least when it comes to consumer products.

As reported last week, Microsoft's quarterly earnings are up 25 per cent over the summer months compared to the same period in 2013, totaling $23.2bn (£14.41bn). Profitability is down slightly as the company continues to invest in marketing and developing new capacities.

Most of the company's growth is coming from consumer products, as sales of its Surface, home-edition cloud products, and Nokia handsets continue to rise. The consumer side of the business is up 47 percent, compared to just 10 percent growth in commercial product sales.

Surface topped the list of surprises, as Microsoft announced that the hybrid tablet, billed as a replacement for conventional notebooks, is now generating $908bn in sales. Microsoft went as far as to declare Surface "profitable" on a gross margin basis. In reality, Surface is likely losing money as Microsoft continues to spend heavily on marketing and promotions around the product.

Subscriptions of the cloud-based Office 365 Home and Personal edition, sold mostly through direct channels, topped seven million, growing 25 per cent over the last quarter of fiscal-year 2014. The increase shows that Microsoft is successfully converting legacy Office software buyers to cloud services.

And sales of Nokia handsets, which Microsoft acquired earlier this year when it purchased the Finnish company's devices and services business, exceeded expectations, generating $2.6bn in quarterly revenue on unit shipments of more than eight million. To put that in perspective: Apple's new iPhone 6 sold 10 million units. The difference between the two, though, is that Apple's sales happened over a weekend, while Nokia's sales were over the course of three months.

If Microsoft's goal is purely to compete with the likes of Apple and Google, the latest quarterly numbers show it's in a good spot. On the commercial side of the business, things are good, but not as rosy.

Overall commercial sales, which flow through OEMs and channel partners, grew 10 per cent in the summer months, piling up to $12.28bn. The standout performer is Microsoft's cloud product set - Office 365, Azure, and Dynamics - which posted an astounding 128 per cent growth over the same period the year prior. Most of the growth is coming from Azure and Dynamics, as Office 365 commercial sales tipped up just five per cent.

Other products, however, did not enjoy the same stellar growth. Server and services revenue increased 13 per cent - a decent growth rate - but server sales are expected to climb further with Microsoft discontinuing support for Windows Server 2003 in July 2015.

Commercial Windows licensing is up 10 per cent, as PC sales rebound slightly. The potential for increases, though, is unclear after Microsoft announced that Windows 10 will be released in 2015 to replace the beleaguered Windows 8 operating system. The period between announcement and launch usually pushes operating system sales into a lull.

On the whole, Microsoft is showing that it's not even close to dead. Profits are down, but that can be explained by the vendor's investments in new products and capabilities.

While Microsoft is satisfied with the quarterly numbers, it continues to look for growth in sales and profits in the coming quarter. The lingering question is whether commercial products sold through partners will keep pace with the consumer products sold direct.