Microsoft CEO Steve Ballmer has reason to be excited

Microsoft Corp. surprised the market with a stronger-than-expected earnings report that shows a jump in its business-class software and cloud products, as well as an uptick in adoption of its Surface tablets and other devices.

Earnings for the first quarter ending in September were up 17 percent to $18.5 billion over the same period in 2012. Moreover, profits rose a strong 16 percent to $4.5 billion, driven mostly on the sale of its cloud services — Office 365, hosted servers and Azure platform — as well as server software.

Even better for Microsoft: Its Surface 2 and Surface Pro 2 are seeing stronger than expected sales. The uptick in demand shows Microsoft can compete in the mobile device segment as fading interest in traditional desktop and laptop PCs continues to drag down demand for its Windows operating system.

“We are seeing lots of consumer excitement for Xbox One, Surface 2 and Surface Pro 2, and the full spectrum of Windows 8.1 and Windows Phone devices,” outgoing Microsoft CEO Steve Ballmer said in a statement.

“We saw strong focus across our teams, generating record first-quarter revenue even as we navigate a fundamental business transition. Our enterprise renewals were very healthy and our devices and consumer business continued to improve,” said Microsoft CFO Amy Hood. “We are making strategic investments in areas like technological innovation, supply chain management, and global cloud operations to build for the future and create long-term shareholder value.”

Microsoft has been pressing hard on its cloud services and mobile devices. Office 365 is picking up steam in the channel and market, as Microsoft is enabling more partners to resell and support its cloud productivity suite. Additionally, a host of new tools are available to give solution providers and MSPs greater ability to deliver professional and managed services around Office 365 (see “Kaseya Buys 365 Command to Tap Microsoft Cloud”). Commercial cloud revenue grew a whopping 103 percent.

Additionally, Microsoft has expanded availability of Surface, which saw sales climb to $400 million. In July, Microsoft finally released Surface tablets to a limited number of solution providers — mostly direct market and volume resellers — to expand sales. Rumors persist Microsoft is gearing up to make Surface available to the general channel.

While sales of Windows through OEM partners such as Hewlett-Packard Co., Dell Inc. and Lenovo declined 7 percent, Microsoft saw SQL Server Premium sales jump 30 percent. And sales of Lync, SharePoint, Exchange and productivity server offerings drew in double digits.

“We continue to execute well across our businesses and we are seeing robust demand for our enterprise products and cloud services. Strong customer adoption of Office 365, Azure and Dynamics CRM Online is accelerating our business transition to the cloud,” said Microsoft COO Kevin Turner.

Microsoft’s strong quarterly earnings report comes as other vendors struggle through their cloud transitions. Last week, IBM Corp. filed a weak earnings report in which slow growth in cloud products failed to offset losses in hardware sales. Symantec Corp. also reported a decline in sales and revenue, dragged down by the continuing slowdown in PC sales.

Microsoft has interated it was playing a long-ball game in its transformation to a services and device company. The first quarter earnings may prove a foundation for what the future Microsoft will look like. However, Microsoft’s success in cloud and devices isn’t sitting well with its traditional vendor partners. Companies such as HP, Dell and Lenovo see themselves in competition with their longtime ally because of products such as Surface and Azure.

The real proof of whether Microsoft’s strategy is paying off will come in January when it reports the results of its second quarter (October to December), the critically important holiday and end-of-year period. If Microsoft can maintain momentum, it may show that its strategy is not just sound, but that it can reinvent itself for the next epoch of the Information Age.