Microsoft Earnings: Hardware Sales And Cloud Services Boosts Revenues

27 Oct 2014 | Author: | No comments yet »

About That Microsoft Quarterly Report.

It’s a neat juxtaposition for sure: earlier in the week Apple’s fourth-quarter 2014 results showed that iPad sales sliding: 12.3 million sold, down from 14.1 million from the same period a year ago and in $5.3bn in revenue, down from $6.2bn — a decline of 13 and 14 percent respectively year-on-year.“[W]hat we’re doing across the company between devices and the cloud and services is the front and center priority for us, and we are well on our way with what that, given what we have done with Windows 8 and what we are doing with Windows Phone and Windows Azure.Microsoft has been a company which has been all about growth and expansion – and their entry into the tablet markets was quite a noticeable one as the ‘surface’ range of devices have been making quite a buzz in the markets because of its amazing features and high end tech involvement.

I think that represents the core of the reinvention and the re-imagination of the Windows franchise.” — Satya Nadella, then head of Microsoft’s Server and Tools division, in a 2012 interview. The company on Thursday announced $4.54 billion in net income, or 54 cents per share in earnings, on revenue of $23.2 billion for the third quarter, outpacing its competition. In terms of display the Microsoft Surface Pro 3 is the best device to come out in this range by Microsoft as it offers a display of a quad HD resolution featuring a 2160x1440pixel resolution. Over the past three months Microsoft has recorded more than $900 million in revenue just on Surface tablets, which is nearly 130 percent more over the same quarter from last year. The good financial news comes in despite the $1.14 billion of expenses connected to Microsoft’s restructuring plan announced in July 2014 and the ongoing integration of the Nokia Devices and Services business. “We are innovating faster, engaging more deeply across the industry, and putting our customers at the center of everything we do, all of which positions Microsoft for future growth,” said Satya Nadella, CEO of Microsoft. “Our teams are delivering on our core focus of reinventing productivity and creating platforms that empower every individual and organization.” On the commercial side, revenue grew 10 percent to $12.28 billion.

It comes in five different variants, and the configuration differs based on the pricing – a $799 model comes in with an i3 with an integrated GPU HD 4200, 4GB of RAM and 64GB storage. Add to this the unexpected resurgence of the PC market (in the US and Europe PC shipments are up year on year according to Gartner) and the increasing evidence that tablets are being squeezed between phablets and hybrid devices, and you have a very different scenario to the one a year or two back, when it looked like tablets were running rampant and the PC was doomed.

Taking into consideration the cost of revenue for this quarter—$786 million—Microsoft only made about $122 million in Surface tablet revenue, which is not terrible but not too great, really. The company’s cloud business continued to grow, Windows Phone put points on the board, Surface took off and Office 365 picked up a grip of new paying users. In reality, of course, it’s a little bit more complicated than that: Microsoft may have come up with a compelling product with the third generation of its Surface Pro, but it’s still growing from a very small base and it’s not clear how profitable the device is. It amounts to a profit margin of about 13.4 percent. “That’s a gross margin…which is not earth-shattering and in fact about half the gross margin of the phone business at Microsoft. The next model in the list is priced in at $1549 and provides the users with the latest intel i7 processor, and HD 5000 GPU, along with 256 GB of hard disk space.

Meanwhile, Apple CEO Tim Cook points to the 237 million iPads the company has sold over the last four years and describes the drop in iPad sales as “a speed bump”. His argument is that there’s still plenty of growth left for the tablet — especially in the enterprise, where Apple’s alliance with IBM could be a significant factor. In the same post, he also published his overall analysis of the financial performance of Microsoft’s tablet. “There’s a long way to go to get the kind of gross margins that would lead to true profitability once marketing and other costs are factored in.” Independent analyst of Stratchery.com, Ben Thompson, agrees that “What is all but certain, though, is that this segment, once you include advertising and channel, was still quite unprofitable, and likely unprofitable by a lot.” Thompson discussed, specifically, Microsoft’s Computing and Gaming Hardware division, which is the source of most of Surface and Xbox sales revenue. The disruption caused by tablets has been painful for some but also very positive — the PC world was dull and had been lacking in innovation for far too long. The emergence of hybrid devices like the Surface and Lenovo’s Yoga range shows that manufacturers are thinking much harder about how their devices will be used, which can only be a good thing for customers.

As such, there’s room for tablets, ultrabooks, hybrids and everything else in between: rather than focus on narrow battles between particular types of devices, we should celebrate the variety we now enjoy. When Microsoft’s former CEO Steve Ballmer announced that he would step down within a 12-month period, it capped a tenure that was as controversial as it was long. But Microsoft continues doing well with gaming and may continue looking for strategic buys. “Gaming is a top activity spanning devices, from PCs and consoles to tablets and mobile, with billions of hours spent each year,” Nadella said. “Minecraft is more than a great game franchise — it is an open world platform, driven by a vibrant community we care deeply about, and rich with new opportunities for that community and for Microsoft.” Let’s take a closer look at what’s driving the wins. However, if you moved past the Vista days, discount the company’s massive miss on phones, and a dozen other mistakes, Ballmer’s exit came after a number of damn important decisions were made and set into play. Strap on big investments into Azure, the launch of Office 365, a massive corporate restructuring, the green-lit construction of Office apps for rival platforms, and a picture of change emerges.

For its part, phone hardware revenue exceeded $2.6 billion with ongoing focus on execution discipline. “We delivered a strong start to the year, with continued cloud momentum and meaningful progress across our device businesses,” said Amy Hood, executive vice president and Microsoft’s CFO. “We will continue to invest in high-growth opportunities and drive efficiencies across the organization to deliver long-term shareholder value.” However, missteps included, the recent few years have been a fundamental shift for Microsoft, leading it to functional preparation for the future, which is to his credit. Presuming that Ballmer’s successor is competent, he or she will be inheriting a firm in transition, but one with a future that is quite interesting.

Now, some of that revenue comes from orders booked the preceding quarter that were not delivered until the fiscal first, but even with that the number was a surprise. Microsoft announced in the final quarter of its fiscal 2014 that its “commercial cloud” revenue was on a “$4.4 billion annual run rate.” Did we get a new number this time around? Microsoft noted during that event that only itself, Amazon and Google have put the billions into straight metal required to be a truly competitive cloud player. “Fundamentally, we’ve been at this platform business forever. But it’s worth noting that Azure started with Nadella under Ballmer and is growing what appears to be faster in dollar terms under Nadella’s CEO tenure.

To date, most of the conversation around Windows 10 has focused on surface-level niceties like the new Start menu and the ability to run Universal mobile apps on the desktop side-by-side with other applications. Microsoft’s Windows 10 must patch the consumer-facing flaws present in Windows 8.x, and also bring enterprise customers into the modern era of computing. The quarter saw the first release of something approaching Windows 10, an operating system that borrows on Windows 7 and 8 and 8.1, which all came under Ballmer. So what began under Ballmer continues under Nadella, reaching a point of chrysalis this quarter, as the culmination of the company’s Windows 8.x strategy, and its work to unite its platforms under a single Windows tag.

It’s only accelerated under Nadella, who was more than content to launch the iPad build of the productivity suite, and zip ahead with the Android build, even as the ever-missing, touch-based build of Office for Windows muddles along. If Microsoft can keep its hardware business growing, and continue executing on its transition to SaaS in its various forms, the company could pupate in motion.

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