Over the past four years, Microsoft (MSFT, Financial) has been experiencing a consistent revenue slide and is already down nearly 9% year-over-year between 2015 and the current full fiscal. This is a company undergoing major upheaval, just like IBM (IBM, Financial). And just like IBM, their revenue is a mixed bag of declining legacy revenues and growing future bets.
From a failed mobile business to triple-digit growth in cloud over the past few quarters, Microsoft has come a long way, but still has the most challenging part of its turnaround ahead of it. Fortunately, they have some very strong growth drivers to make that transition in as smooth a manner as possible. Office 365 and the newly acquired LinkedIn being just two of them.
But when you look at things from the perspective of stock price, you would think revenues were actually growing. That upward movement over the last two years can be attributed to the high expectations and the faith that the market has in CEO Satya Nadella.
Not only has Nadella kept the good news flowing, but he has shown strong growth on several fronts and initiated a new philosophy that the company is strictly adhering to for the sake of future success. In fact, as I have written before, Nadella’s mandate of mobile first, cloud first are taking the company in an entire new direction - one that I call Microsoft-as-a-Service. Every one of their new initiatives is being delivered on the cloud and that is partly the reason Azure itself is showing such stellar growth.
But what are the hoops that Microsoft has yet to go through before it can be in the clear on growth? To find that out, we need to look at their More Personal Computing segment.
Trouble at More Personal Computing
As their largest revenue earner so far, this is the segment we want to look at closely. As you can see from their segment revenues, they Ă‚ have dropped nearly $3 billion over the past year in this critical part of their business.
This segment contains their core revenue earners such as Windows OEM and volume licensing. With PC sales on the decline and not having found a bottom as yet, this part of their business will not fully recover. However, the way Microsoft is reporting puts search advertising, devices and gaming into the same bucket. These are growing and have contributed greatly to the segment’s performance.
For example, gaming saw an increase of 12 million active users on Xbox Live, while search advertising has consistently grown in double digits. Surface products are also picking up the pace, and with rave reviews on the Surface Pro 4 tab and the new Surface Pro 5 coming soon, things should stabilize for this sub-segment. Not to forget the recent success they have had with the Surface Hub, an interactive board for collaborative sharing of content.
Over the past quarter, you will see that they are showing positive growth for both OEM and volume licensing, but that is only relative compared to the year before when they incurred heavy losses in both sub-segments. The nearly $3 billion dip in segment revenues for the year shows that recovery is still a few quarters away.
So What’s the Good News About Microsoft?
On the positive side, PC sales are showing some signs of stability, an indication that we could be close to the first bottom of the great decline in desktops. It won’t stop, but if it slows down for a few quarters, it will give Microsoft the breathing time it needs to realize its efforts in Windows 10 and the entire UWP initiative, as well as artificial intelligence (with its latest acquisition of Genee), virtual reality and so on.
A full recovery may take a few more quarters or a few more fiscals, depending on how well they execute their newer initiatives, but the signs are definitely there.
The advantage with Microsoft, however, is that the company has clearly shown how it is planning to get that done - and it is already working. Their plan is simple, instead of just being a company that offers an operating system for a fee, the company is transforming itself into a software provider to address different needs of business customers. As-a-service for a fee seems to be the mantra Microsoft is after and this is what will take them strongly into the future.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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