Microsoft’s hardware plan under scrutiny after record loss

23 Jul 2015 | Author: | No comments yet »

4 takeaways from Microsoft’s big quarterly loss.

“Unless Microsoft can get to hardware break-even within two years or demonstrate sufficient offsetting value elsewhere in the portfolio, we think the company should exit the hardware business,” RBC Capital Markets analysts said in a client note. The Microsoft logo is displayed over the Microsoft booth at the 2010 International Consumer Electronics Show at the Las Vegas Hilton January 7, 2010 in Las Vegas, Nevada. (credit: Justin Sullivan/Getty Images) LOS ANGELES (AP) — Microsoft booked an $8.4 billion charge in the fourth quarter, swallowing a bitter pill by writing off the Nokia phone business it bought just over a year ago.

According to Microsoft’s developer website, Windows 10 Mobile will require at least a Qualcomm Snapdragon 208 processor, 512MB of RAM, 4GB of storage, and a VGA (640-by-480) resolution rear-facing camera.By and large, sales in the company’s key businesses showed dramatic changes compared with last year as chief executive Satya Nadella looks to retool the tech giant. In fact, when I received an official, Microsoft-approved, Lenovo Yoga 12 laptop with Windows 10 on it last night, I thought there would be some sort of official stamp of completion. It narrowly beat analysts’ depressed expectations for a quarter that also saw a steep decline in personal computer sales even as it prepares to launch its latest operating system, Windows 10. Analysts agree that investing in cloud and Windows 10 makes strategic sense, but some say the rationale behind pouring more money into hardware is less clear. “Hardware remains a more commoditised piece across tech,” said FBR Capital Markets analyst Daniel Ives, who thinks all of Microsoft’s resources should be going into software.

Markets were disappointed by the numbers — sending Microsoft’s stock lower in early Wednesday morning trade – adding to Wall Street’s anxiety, which tried to cope with Apple’s report. The Redmond, Washington-based software giant posted a net loss of $3.20 billion, or 40 cents per share, reversing a profit of $4.61 billion, or 55 cents per share, a year ago. Oddly enough, there’s no lower limit on screen size, though Microsoft says a 3.5-inch or larger screen is necessary to run existing apps built for Windows Phone 8.

Microsoft doesn’t break out operating margins for its hardware business, but Jefferies & Co analyst John DiFucci told Reuters he believed the Xbox business was at best break-even and that Surface was unprofitable on an operating basis. Surface revenue grew 117% to $888 million, driven by Surface Pro 3 and launch of the Surface 3. “Our approach to investing in areas where we have differentiation and opportunity is paying off with Surface, Xbox, Bing, Office 365, Azure and Dynamics CRM Online all growing by at least double-digits,” said Satya Nadella, chief executive officer at Microsoft. But in the last two years the company has had some success in making its presence felt in the tablet market, grabbing market share from iOS and Android. Nadella told analysts on a conference call he’d like Windows phones to be more targeted at high-end businesses and their employees, much like its Surface tablet, which saw upbeat sales.

Microsoft is all but jettisoning its phone business, which never managed to take a big slice of the smartphone market as iPhones and Android devices reigned supreme. The company indicated as much when it announced plans this month to lay off nearly 8,000 employees, mostly in the smartphone business, and said it was cutting the value of its Nokia division on its books by about 80 percent. On July 29, those that haven’t caught up will receive Windows 10 Build 10240—or whatever Microsoft is calling it then—and possibly even an entirely new build (or patch). The company hopes that better integrating its store into the revamped Start button and powering more Internet searches through Bing will compensate for the temporary dip in Windows revenue.

Microsoft plans for Windows 10 to be its last version of Windows before transitioning the business to a fee-for-service model down the road, although how that will work is unclear. With its Windows operating systems, Office Suite and keyboard, Surface 2 bridged the gap between laptop and tablet, appealing to users who seek the full functionality of a laptop rather than a smartphone in a tablet – and the convenience of carrying one device rather than two. The company gave an outlook for revenue of $20.7 billion to $21.3 billion for the first fiscal quarter through September that was below the $22.6 billion expected by analysts polled by FactSet. That’s not exactly a surprise: The research firm Gartner says PC sales worldwide have slumped so far this year, including a 9.5 percent drop in shipments in the second quarter. Part of the decline owes to the looming Windows 10 release, Gartner says, as sales jumped when Microsoft dropped Windows XP support last year and retailers sought to move inventory.

Those fixes have produced notable improvements—for example, the Windows 10 Mail app used to be unable to dig up an old email that it would have to search the server for. The decline was exacerbated by a temporary bump last year when Microsoft ended support for Windows XP, which resulted in a one-time boost to Windows 7 sales. The sales picture was quite different at Walmart, where Apple AAPL -0.33%’s iPad Mini 16GB topped the list, and Target TGT +0.09%, where Apple’s iPad Air 16GB topped the list. Nadella, the chief executive, told investors that the Surface’s success showed that it had clicked with consumers and businesses. “Surface is clearly a product where we’ve gotten the formula right, earned fans and can apply this formula to other parts of our hardware portfolio,” Nadella said. Microsoft also pointed to increasing revenue on its search engine, Bing, which has swelled its market share and now accounts for one in five searches in the United States, according to comScore.

Why this matters: As blogger Paul Thurrott noted earlier today, it’s a matter of semantics: we’re used to buying completed products off a shelf, rather than services which are always being worked on.

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