The old Microsoft had an almost unmatched ability to chug out profits by selling software on discs to customers. The new Microsoft has an expanding portfolio of hardware products with decidedly lower margins.
That was clear when the company reported a happy 14% increase in revenue - in large part from brisk holiday sales of its new Xbox game console and Surface tablets - and a less happy 3% rise in profit.
The changing image of Microsoft was greeted positively by investors, who sent the company's shares up more than 3% in after-hours trading after the release of its financial results.
Microsoft management has been coaching Wall Street for some time to expect major changes in its business as it refashions itself to what it calls a devices and services company.
Apple, of course, is emblematic for that type of company. Apple's success in new product categories like tablets and mobile phones - and Microsoft's weakness in those areas - is a big reason Microsoft has taken the once unthinkable step of making its own computers and mobile phones, although both crimp profit margins.
The person driving that change at Microsoft has been Steven Ballmer, the chief executive. But if the vision is going to be seen through to the end, it will be by someone other than Ballmer, who is stepping down in the coming months. His successor was not named Thursday as the search for a new leader dragged on.
The holidays are an especially strong time for hardware sales, and they offered a good test of the company's evolving focus. The new Xbox One turned out to be one of the most highly sought gifts this year, and Microsoft's new versions of the Surface tablet received better reviews than its first tablet offerings.
Those sentiments translated into sales. Microsoft sold 7.4 million Xbox consoles, including the Xbox One and the older Xbox 360, up from 5.9 million a year ago. And revenue from the Surface tablet more than doubled to $893 million from the previous quarter. In the last quarter, which was Microsoft's second fiscal quarter and ended December 31, revenue from devices and consumer hardware rose 68%, to $4.73 billion, growing far faster than any other part of the company.
The company reported net income in the quarter of $6.56 billion, or 78 cents a share. That was up from $6.38 billion, or 76 cents a share, a year ago. Microsoft's revenue jumped 14%, to $24.52 billion.
Analysts surveyed by Thomson Reuters on average had expected the company to report earnings of 68 cents a share and revenue of $23.68 billion.
"The real growth you see is hardware," said Brendan Barnicle, an analyst at Pacific Crest Securities. "It was the devices and consumer business driving everything in the quarter."
The bad, though, is that Microsoft's gross profit from the hardware business actually fell to $411 million, compared with $762 million a year ago, despite the surge in sales. One of the big reasons for the fall is that profit from new consoles like the Xbox One is almost always nonexistent when the devices are introduced, but they improve as component prices fall, manufacturing becomes more efficient and the audience of game buyers expands.
Microsoft's performance in recent years has been hurt by slowing demand for PCs, and many consumers moved to mobile devices. Microsoft has tried to adapt to the rise of mobile devices by redesigning its Windows operating system to work better on touch devices, though the product has not yet incited a PC buying spree.
In an interview, Amy E Hood, Microsoft's chief financial officer, said the PC market showed "signs of stabilization" but consumer demand for PCs was still soft.
Even if the 9% gross profit margin that Microsoft earned from its hardware business gets better, it is a long way from matching the profit of Microsoft's commercial segment, the 83% gross profit margin business that encompasses the software and services it sells to corporate customers.
"It's never going to be at 83% gross margins," Hood said on a conference call with analysts. "It's just a different business."
Microsoft's hardware ambitions are only getting bigger, too. The company is nearing the completion of its $7.2 billion deal to acquire Nokia's handset business. Nokia ended the year on a down note, reporting on Thursday that its smartphone sales declined 7% despite major marketing efforts.
Hood advised analysts and investors to consider the profit of Microsoft's overall business, rather than focusing in on one part of it. For all its challenges, Microsoft's bottom line remains enviable compared with those of some more lionized companies, including Amazon.com and Salesforce.com.
Microsoft's commercial business, which includes databases, Office software for organizations and cloud computing services, rose 10%, to $12.67 billion, more than half of overall revenue.
Ted Schadler, an analyst at Forrester Research, said Microsoft's results spoke to the growing appeal of products like the Surface in which hardware and software are tightly coupled, rather than Microsoft's traditional approach of shipping software to independent hardware makers to put on their devices.
"What those numbers reflect to me is that people want that," Schadler said.
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