Redmond, Washington-based tech goliath Microsoft Corporation (MSFT, Financial) came out with its fiscal 2015 second-quarter numbers on Jan. 26, and Wall Street wasn’t too happy about it, resulting in a 4% drop in the stock in after-hours. The Windows maker warned investors about revenue and profit potential for the current fiscal, which it expects to be quite ordinary. Several analysts and industry experts are still in doubt regarding a potential turnaround, especially because the interest surrounding the Windows brand is gradually fading. However, this hasn’t stopped the new CEO Satya Nadella from being optimistic. He believes “this quarter's results show the product and business transformation underway at Microsoft.” Here’s a quick look at the numbers and why you shouldn’t lose faith, yet.
A look at the numbers
The company reported total revenues of $26.5 billion, up 8% compared to the prior year period. Even the gross margin showed a 1% growth. However, operating margin plunged 2% and diluted earnings per share came to $0.71, resulting in a 9% drop from last year’s $0.78. The quarter’s performance was impacted by few one-time expenses such as the $243 million integration and restructuring expenses and impact of income tax expense resulting from IRS audit adjustment. These two items pulled down the earnings per share by $0.02 and $0.04 respectively.
From the below chart it’s easy to make out that revenue fell across all divisions, barring two – “Devices and Consumer Others” and “Commercial Others”. We can’t compare the Phone Hardware segment since this is a new addition to the company’s line of business via the Nokia acquisition.
Microsoft’s FY15 Q2 and FY14 Q2 revenue break-up. Source: Microsoft
But things aren’t all that bad, and that becomes clear on a closer analysis of the performance. Satya Nadella, during the earnings call, mentioned, “We saw success in a number of our strategic areas including cloud adoption, redefining and revitalizing the Windows Ecosystem and improving economics in our hardware portfolio.” The Devices and Consumer revenue increased during the three-month period by 8% and reached $12.9 billion, while the Commercial revenue surged by 5% to $13.3 billion. Primary factors behind the success of the Devices and Consumer division were the 25% hike in revenue from Surface tablets on the back of growing popularity of Surface 3, the 23% hike in the search advertising revenue, strong holiday demand boosting the sales of Xbox consoles, and sales of 10.5 million Lumia handsets.
The commercial division flourished on the back of increased demand for Office 365, Azure and Dynamic CRM Online. The division also got a boost from server services and products. Here it’s worth mentioning that the commercial Cloud revenue reported triple-digit growth for the sixth consecutive quarter and reached an annualized revenue run rate of $5.5 billion. The company also announced its plans to conclude the ongoing $40 billion share buy-back program by December 2016 – a move that many expect will boost the popularity of the stock.
Nadella’s efforts to steer Microsoft to a brighter tomorrow
The above were some positives about the quarter’s performance. But this is not the complete picture. All the developments will only make sense once the whole strategy that Satya Nadella has in place in understood. The man behind the tech giant has carefully laid out plans that are helping the company gain traction. Under the new leadership, Microsoft has become a totally new company. Right after taking the chain, Nadella scrapped the Scroogled project, launched Office for iPad, started focusing on Cloud computing and brought about a host of other changes.
The company is investing in technologies that will drive its future growth. For example, the Microsoft Enterprise Mobility Suite (EMS) is a key product innovation that will offer a comprehensive solution for all devices that brings together functions such as mobile device management, mobile application management, data protection. The company is also building its Cloud computing offerings through inorganic growth. This is also helping Microsoft in developing Windows 10. The latest version of the operating system is being built for a mobile-first, Cloud-first world. “We want people to love Windows and have made this our most collaborative project yet with more than 2 million insiders giving us feedback every day. I am very optimistic about Windows 10,” said Nadella during the earnings call.
To cut the long chase short, lots of developments are taking place at Microsoft. The company is trying to be more innovative, risk taking and agile. With so much going on, delivering a strong financial performance is only a matter of time. Investors shouldn’t worry about the current drop in the EPS. The company is undergoing a strong restructuring, and it’s a small price to pay for long-term gains.
