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Microsoft financials April-June 2015: loss from Nokia write-down, comments on future direction

Microsoft has reported its financials for its fourth quarter. The company made a loss of over three billion dollars ($bn 3.195) but this was because of an eight billion dollar write-down mostly on the phone business – in effect, writing off the value of its Nokia acquisition. It still has plenty of cash in the bank – over $96 bn according to its balance sheet. Perhaps it is too easy for companies of this size to make bad business decisions (I leave open whether it was the acquisition or the way it was handled that was the bad decision, but one of them was).

Here are the latest figures:

Quarter ending  June 30th 2015 vs quarter ending June 30th 2014, $millions

Segment Revenue Change Gross margin Change
Devices and Consumer Licensing 3233 -1670 2966 -1555
Computing and Gaming Hardware 1933 +591 435 +417
Phone Hardware 1234 -748 -104 -158
Devices and Consumer Other 2300 +538 594 +303
Commercial Licensing 10451 -782 9529 -769
Commercial Other 3076 +814 1350 +659

A few points to note. The confusing segment names are summarised at the end of this post. Revenue was slightly down quarter on quarter, from $bn 23.4 to 22.2, largely because of a decline in consumer Windows (weak PC sales). Commercial licensing was also down, which Microsoft attributes to the end of the XP migration boom.

Phone aside, Microsoft’s hardware is performing well, thanks to Surface Pro 3 and Xbox One. Although Xbox One has been outsold by Sony’s PlayStation 4, it is holding its own and Microsoft says that Xbox Live usage has grown by over 30% over the year. The company says this is “deeper user engagement”; another way of looking at this is that playing games without an Xbox Live subscription is often disappointing.

Microsoft’s cloud and server projects are both growing. Business cloud revenue (Office 365, Azure and Dynamics CRM) is up 106% over the year and server products up 12%.

A bright spot is that search advertising revenue grew by 21% and Bing is expected to be profitable in the next financial year. The search wars are last year’s thing but Microsoft’s determination has won it a small but viable slice of the market. It is important because the data from search is essential for high quality predictive analysis and personalisation services, which is still a coming thing (Cortana, Siri, Google Now).

In the earnings call, CEO Satya Nadella revealed some data:

  • 15 million consumer Office 365 subscribers growing by 1 million per month
  • 50,000 new SMB customers for Office 365 per month
  • Paid seats for Dynamics CRM up 140% year on year
  • 17,000 customers for Enterprise Mobility Services (Mobile Device Management)
  • Over 100% growth in Azure both in revenue and compute usage

Of Windows 10, Nadella says:

While the PC ecosystem has been under pressure recently, I do believe that Windows 10 will broaden our economic opportunity and return Windows to growth.

A short-term boost from Windows 10 would not be surprising, but does he think that Microsoft can reverse the trend from PC to mobile, or that Windows can be successful enough in the mobile category (tablets and phones) to benefit from that trend? If the latter, perhaps destroying the Nokia acquisition was not the best move (but I must not harp on about this).

On Windows 10, Nadella described three phases:

Upgrade phase: From July 29th when free Windows 10 upgrades begin.

OEM device phase: From “the fall” when Windows 10 PCs and devices go on sale.

Enterprise upgrade phase: Piloting and deployments from January 2016

Note from the last that Windows 10 is not fully business-ready yet. Enterprise Store, OneDrive for Business client, “Project Centennial” which lets you wrap Win32 apps for Store deployment, none of these are done.

How is Microsoft hoping to grow its business? CFO Amy Hood identified three areas, in response to a question on operational expenditure:

The first one is Windows 10. The second is the first party hardware where we just had such terrific performance again this Q4. And then, finally, the third bucket was about accelerating our commercial cloud leads.

Of these, the third looks a sure bet, the other two are more speculative. Microsoft will continue to be a fascinating business to watch.

Microsoft’s segments summarised

Devices and Consumer Licensing: non-volume and non-subscription licensing of Windows, Office, Windows Phone, and “ related patent licensing; and certain other patent licensing revenue” – all those Android royalties?

Computing and Gaming Hardware: the Xbox One and 360, Xbox Live subscriptions, Surface, and Microsoft PC accessories.

Devices and Consumer Other: Resale, including Windows Store, Xbox Live transactions (other than subscriptions), Windows Phone Marketplace; search advertising; display advertising; Office 365 Home Premium subscriptions; Microsoft Studios (games), retail stores.

Commercial Licensing: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and Windows Embedded; volume licensing of Windows, Office, Exchange, SharePoint, and Lync; Microsoft Dynamics business solutions, excluding Dynamics CRM Online; Skype.

Commercial Other: Enterprise Services, including support and consulting; Office 365 (excluding Office 365 Home Premium), other Microsoft Office online offerings, and Dynamics CRM Online; Windows Azure.

Related posts:

  1. Microsoft Financials show cloud growth, Nokia loss
  2. Microsoft financials Jan-March 2015
  3. Microsoft financials: strong quarter especially in cloud services. We have a very different way to think about Windows says Nadella
  4. Windows on ARM: Microsoft can write Desktop apps, but you cannot
  5. Microsoft Financials

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