Microsoft earnings show plunging phone revenue and uncertain future for Lumias

23 Oct 2015 | Author: | No comments yet »

Cloud services bolster Microsoft results, shares soar.

While Microsoft’s cloud business may have carried the company through the second calendar quarter, it’s also seeing the first effects of the massive restructuring of its phone business. BENGALURU — Microsoft reported better-than-expected quarterly adjusted revenue for the ninth quarter in a row, boosted by burgeoning demand for its cloud products, sending its shares soaring in after-hours trading on Thursday.

Microsoft reported a modest rise in profits Thursday in the past quarter, beating most analyst forecasts, saying its new focus on cloud-based software is delivering results. The company, under Chief Executive Satya Nadella, has been shifting its focus to software and cloud services as demand for the Windows operating system slows in a weak PC market. “The job reductions were spread across more than one business area and country and reflect adaptations to business needs,” a spokeswoman said in an email. One of the biggest problems during that time was the rise of the iPhone and Android in 2008 and 2009, which seemed to catch Microsoft totally off guard.

Microsoft said that in the just-ended fiscal first quarter, “intelligent cloud” revenue grew eight percent while personal computing revenue slipped 17 percent. “We’re seeing great traction with businesses who want to bring Microsoft’s cloud, mobile device management technology and data analytics together to improve security and productivity,” said Kevin Turner, chief operating officer at Microsoft. The first-quarter results announced on Thursday were the first under a new reporting structure that reduced reporting segments to three from six, designed to help the software giant show off its cloud and mobile businesses. In July, Microsoft said it would slash 7,800 jobs and take a $7.6 billion impairment charge on a deal it originally valued at $7.2 billion, meaning the Nokia acquisition was worth less than the paper it was written on.

Although today’s earnings report was solid, mobile remains a weak spot — Microsoft’s revenue from phones declined 54% from a year ago, and it’s dramatically cut back the number of models it’s making following the writedown of its acquisition of Nokia. Excluding the impact of the strong dollar, revenue in the business rose 14%, accounting for about 29% of overall revenue in the quarter ended September 30. “It is a really strong quarter and these guys are ahead of most of the traditional software companies moving to the cloud in terms of where they are in the evolution,” Moerdler said. The Bing search business is now profitable—a real milestone for Microsoft, according to chief financial officer Amy Hood—and worth over a billion dollars.

The big test for Windows will be in coming quarters as Microsoft rolls out its latest devices, including its first laptop, a revamped Surface Pro tablet and new Lumia phones. Why this matters: Microsoft sees the Windows 10 operating system as a ‘halo’ that can help drive sales in businesses that may not be overtly tied to the OS. According to Nadella, Microsoft is “well on its way” toward powering a billion devices with Windows 10; so far, over 110 million devices have it installed, he said. Microsoft obviously hopes the same halo effects will power Windows 10 Mobile, with its ties to the desktop operating system via universal apps and new capabilities, such as being able to text via a Windows phone from your desktop PC.

The only other sour note in Microsoft’s device business was the fact that its other flagship device, the Surface tablet line, also saw revenue fall to its lowest point in five quarters, $672 million. Microsoft executives blamed the revenue decline on increased sales of its lower-margin Surface 3 tablet, and a lull while buyers waited for what they anticipated was a refresh of the Surface lineup, including the Surface Pro 4 and the Surface Book.

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