Microsoft Posts Strong Deferred Revenue, But Dinged by Troubled Nokia Sales
July 23, 2014 11:28 AM
Microsoft pockets nearly $7B USD, but falls short of lofty expectations
The results of Microsoft Corp.'s (
) fiscal Q4 2014 (calendar Q2 2014, which runs through June) were
yesterday and the picture is mostly bright as Microsoft sees rising revenue and profit on the back of its cloud computing push.
I. Terrific Cloud/Software Performance, Weak Mobile Performance
But if very cloud has its silver lining, this one had a bit of a gray one. Microsoft's smartphone efforts saw some progress, but continued to experience pains in their effort to reach maturity. And Microsoft fell slightly short of analyst growth expectations on some metrics, marring an otherwise stellar report card.
It's safe to say that a Microsoft miss would be considered a hit for most corporations...
For Microsoft (inc. Nokia Devices)
Revenue: $23.38B USD (up 2.4 percent year-on-year (YoY))
Gross Profit (margin): $15.79B (up 10.5 percent YoY)
Operating Income: $6.48B (up 6.8 percent YoY)
Net Income: $4.61B (down 7.2 percent YoY)
Diluted EPS: $0.55 USD/share (down 6.8 percent YoY)
Nokia Devices unit (9 weeks)
Gross Profit (margin): $54M USD
Operating Income: -$692M USD
Net Income: -$671M
Diluted EPS: -$0.08 USD/share
Thomson Reuters I/B/E/S
showed an average analyst expectation of $0.60 USD/share. Excluding taxes and the impact from Nokia, the total diluted EPS of $0.66 USD/share beat the analyst expectation of $0.64 USD/share.
Combined, these two data points suggest that Nokia Devices in its first couple months with Microsoft performed substantially worse than analysts expected, while Microsoft's pre-existing businesses performed modestly better than expected.
Revenue marginally beat the analyst expectation of $23B USD. And deferred revenue -- which stems from Microsoft's multi-year deals for Windows, Office, System Center, SQL server, Azure, Visual Studio Professional, and other products -- came in at $25.2B USD, nearly 3 percent higher than the analyst expectation of $24.9B USD.
II. To the Cloud
“The cloud” has driven Microsoft’s success. Microsoft's monetization path is similar to Google Inc.'s (
) when it comes to cloud/internet services -- popularize the service with free consumer offerings weakly monetized by advertising, while monetizing more aggressively with subscription enterprise offerings.
Office 365 is still growing fast
, adding over 1 million customers to reach 5.6 million at the end of June. Bing -- long considered a lost cause -- climbed to a 19.2 percent search stake, and was rewarded with a 40 percent increase in advertising revenue.
losing nearly $1B USD per quarter
for a number of years, Bing may finally be profitable although Microsoft did not discuss specifics. In addition to
serving as the search/indexing backend to Yahoo!
) popular web portal, Bing is powering internet search on Apple, Inc.'s (
OS X 10.10 "Yosemite"
, displacing Google search.
Just how remarkable is Bing's turnaround? Bing likely operated in Q4 at only a loss of around $50M USD, trimmed from $372M USD in Q4 FY2013 and $6.672B USD in Q4 FY2012. In Q4 FY2012 Microsoft's "Internet Services" division had revenue of $735M USD. In Q4 FY2013 it had revenue of $804M USD. In Q4 FY2014, Bing had an estimated revenue of around $1.125B USD.
With the Apple deal almost at hand, Bing is poised to achieve profitability sometime in Q3 and Q4 -- once a seemingly impossible feat. That's
a testament to the acumen of new CEO Satya Nadella
who was appointed on Feb. 4 to lead the company. A key reason for his appointment was Mr. Nadella's successful campaign to turn around Microsoft's struggling online business, perhaps a microcosm of the macrocosm of problems at the aging firm.
Satya Nadella was promoted to CEO after turning around Microsoft's struggling internet services.
[Image Source: Sean Ludwig/VentureBeat]
an open letter
to employees published last Tuesday, Mr. Nadella writes:
Recently, we have described ourselves as a "devices and services" company. While the devices and services description was helpful in starting our transformation, we now need to hone in on our unique strategy.
At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.
According to Mr. Nadella's comments in a press release Microsoft now earns $4.4B USD in revenue -- or roughly 18.8 percent of its revenue -- from cloud services. Cloud revenue more than doubled, growing 147 percent on a year-to-year basis. Both commercial Office 365 subscriptions and Azure -- Microsoft's cloud-hosted enterprise computing environment -- grew by "triple digit" amounts.
Microsoft's veteran software efforts were boosted by the cloud success. Commercial Windows volume licensing increased 11 percent on the commercial front. OEM Windows licensing grew a small 3 percent, driven by an 11 percent growth in Windows 8 Pro licensing by PC makers. That's a relatively good turnaround, considering that excluding an upgrade offer Windows OEM revenue fell 6 percent in Q4 FY2013.
Things should further improve with the release of
Windows 8.1 Update 2
Windows 9 ("Threshold)
(spring) (dates are based on rumor and may change). When it comes to services Nadella's Microsoft is earning high marks.
III. Xbox One and Surface 3 -- Mixed Bag
But for Microsoft to be a "devices and services" firm as its CEO envisions, it will have to turnaround its hardware division.
Microsoft's Xbox One was outsold by Sony
) even after it dropped its
always-on Kinect 2 sensor
shave $100 USD
off the console's price. According to the earnings report only 1.1 million Xbox Ones were sold in April, May, and June, bringing its lifetime console total to 6.1 million units (see: April 2014,
Microsoft hits 5 million
). Sony is estimated to have sold 2.5-3.5 million consoles in the quarter, with a lifetime total of around 8.5-9.5 million PlayStation 4 consoles in the wild [
]. That indicates a nearly 3-to-2 edge for Sony in the sales race.
But game sales were relatively strong, driving Microsoft to a modest 14 percent YoY growth. Microsoft's press release states that it's "drawing down" sales volume in current markets after facing disappointing sales. The $399 Kinect-free SKU of the Xbox One
did manage to double sales volume
. Microsoft appears resigned that it may not be able to catch up to Sony, but it writes that it is looking forward to releasing the Xbox One "in additional markets beginning this fall."
Surface revenue was similarly a mixed bag. After the disastrous
$900M USD write-down
a year ago amidst
weak Surface 2 sales
, the brand appeared to stabilize with the release of
third generation product
third generation Surface tablet
Microsoft cut the price of its Intel Corp. (
) powered tablet -- similar to a traditional PC -- by $100 USD (to reach $799). Screen size (10.2 in. --> 12 in.), screen resolution (1920x1080 pixel à 2160x1440 pixel), weight (2 lb --> 1.76 lb), and thickness (11.7 mm --> 9.1 mm) were all improved.
The Surface 3 Pro also added a new hinge, an improved stylus, and a tweaked keyboard for improved "lapability". Memory and storage (4 GB DRAM / 64 GB of NAND) remained frozen from the Surface 2 Pro.
Still Surface isn't out of the woods yet.
The 7.5-inch Surface "Mini"
axed in the eleventh hour
amidst internal issues. And Microsoft
continues to offer massive subsidies (up to $650 USD)
to try to promote Surface adoption, a sign of lingering sales difficulties. That said things with Surface look headed in the right direction, at least.
IV. Nokia Device Sales Stagnate, Layoffs Land, Losses Balloon.
The biggest struggles came in the phone department.
Microsoft closed its
blockbuster €5.44B ($7.33B USD) purchase
of Nokia Devices and related intellectual property rights from Nokia Oyj. (
on April 25th
. But the financials for its first several weeks at the helm of the devicemaker aren't pretty.
Nokia Devices in (calendar) Q2 2013 -- then under the tent of Nokia Oyj. -- posted €2.7B ($3.6B USD) in revenue with an operating loss of €33M. Compared to Microsoft's quarter, this indicates revenue dropped by 45 percent and operating losses soared nearly 16-fold (1,556 percent). Notably, that's more than Nokia Devices lost in Q2 2012 even, at the height of its struggles.
Device sales remained relatively flat with 5.8m Lumia and 30.3m non-Lumia phones sold in the nine weeks in Q4 FY2014 that Microsoft owned Nokia Devices, for a projected total of 7.7m Lumias and 40.4m non-Lumia devices sold in the quarter. Compared to Nokia's Q2 2014 when 7.4m Lumias and 53.7m non-Lumias were sold, this represents relatively flat sales on Windows Phone end and a substantial drop of approximate 25 percent on the feature phone (Asha and Nokia X) end.
Sales outlook for H2 2014 is uncertain. Microsoft recently
committed to massive layoffs of 12,500 Nokia Devices employees
-- roughly half the final workforce (~25,000) it received in the acquisition.
It's already announced it was cutting the
low-end non-Lumia (branched Android) Nokia X
, strong sellers if perhaps inconsistent with Microsoft's desired message. Combined with the massive layoffs, Asha is likely to see a gradual ride into the sunset, as well. The dilemma for Microsoft is what to with the phone unit, which still sees nearly 84 percent of its sales from non-Windows Phone devices.
V. McLaren, Rebranding, and Third Parties Question
With Surface Microsoft has
looked to set a gold standard
for third party OEMs. But it's less clear how Microsoft is going to use Nokia Devices to set the standard for Windows Phone. Multiple reports have indicated plans for
a flagship device called "McLaren"
have been shelved for (calendar) H2 2014 amidst disappointing performance of
its star feature "3D Touch"
At this point Microsoft's best bet would perhaps be to try a follow-up to
the Lumia 1020
-- a device that set the standard for high-resolution smartphone imaging when it launched in July 2013. Such an approach carries less risk, and better yet would be tenable even with Microsoft's cutbacks. Sales of the Lumia 1020 were less than stellar, but they at least showed the potential of the platform.
Still another uncertainty stems from
third party OEMs
China's Hisense Electric Comp., Ltd. (
) is among a new wave of Windows Phone licensees. Its Mira6 has drawn attention. [Image Source: Evolife]
When it comes to Windows tablets, Surface has been content to take a supporting role. In
Microsoft clearly hopes to move Nokia Devices into a similar role. But while
curiosity is clearly high
, actual hard commitments from OEMs have been harder to come by. Some partners have even
publicly admitted that Windows Phone is a low priority
. Until third party OEMs warm up to Windows Phone Microsoft will have to push Nokia Devices in a more prominent role.
Lastly there's the issue of
. Microsoft seems to have
reinvented its image on the service front
gained in brand strength
, so there's ample cause for confidence here, at least. But it has yet to show its hand conclusively on this front so we'll have to wait and see.
VI. Layoffs vs. Royalty Savings
A final thing worth noting is that the cost of Microsoft's Nokia layoff program (which come in addition to 6,500 layoffs within the pre-existing parts of Microsoft) is offset by the savings from the adoption/licensing agreements with Nokia.
Microsoft estimated in saved $382M USD in Q4 FY2014 for terminating 3/4 of its licensing commitment for the quarter. That hints it was paying around
a whopping half-billion dollars a quarter
, or $2B USD a year to keep on Nokia.
In Q4 FY2014 layoffs ("expenses... associated with the acquisition and integration of NDS") totaled $127M USD. In total the Microsoft layoffs are expected to cost $1.1B USD for 6,500 departing employees, while the Nokia Devices layoffs will run $1.6B USD for 12,500 employees. Microsoft indicates most of these costs should wrap up in the first half of 2015. Even at $1.6B USD, Microsoft may still save up to $400M USD once licensing commitments are considered.
Looking ahead to the second half of 2014, Lumia volume should rebound with new product announcements of some kind expected and with
the new budget Lumia 530 "Rock"
-- the replacement to the
best-selling Lumia 520/521
-- rolling out. And on the software front
Windows Phone 8.1 looks pretty impressive
Microsoft is in third place
roughly 4 percent of the market
, but Nokia Devices' Windows Phones are being
outsold roughly 5-to-1 by Apple
-- the biggest non-Android contender.
Microsoft can afford patience -- after all its "Devices and Consumer Licensing" business is pocketing
an estimated $250-500M USD per quarter off Android licensing fees
. An estimated 70 percent of Android OEMs
agree to pay Microsoft a fee
-- typically around $8 USD per device -- which precludes Microsoft from suing for infringement using its
300 most powerful mobile/OS patents
, which serve as the crown jewels of the licensing agreement.
The affects of the nearly $10 USD swing from Windows Phone (free) to Android (free, but with $8+ in licensing obligations) is likely to be felt most strongly on the budget end.
Mr. Nadella has a long way to go before turning around Windows Phone like he did Surface and Microsoft's cloud services. But there are some positives that can be taken even from a generally disappointing quarter for Nokia Devices.
Microsoft [press release]
"If you mod me down, I will become more insightful than you can possibly imagine." -- Slashdot
Microsoft Rolls Out Budget Lumia 530 to Replace Hugely Successful Lumia 520
July 23, 2014, 7:47 AM
Apple Posts Record Fiscal Q3 Profit of $7.7B, Sells 35.2M iPhones
July 22, 2014, 4:57 PM
Microsoft Kills Entertainment Unit, May Shelve Flagship Lumia "McLaren"
July 18, 2014, 7:40 PM
Despite Doubling Sales, Xbox One Still Gets Beat in June Sales by PS4
July 18, 2014, 12:38 PM
Quick Note: Xbox One Sales Doubled After Introducing Kinect-less Bundle
July 17, 2014, 11:01 AM
Microsoft releases details of Project Scorpio console
April 7, 2017, 7:50 AM
More Security Issues for Yahoo
February 16, 2017, 7:45 AM
Android Instant Tethering Only Works for Pixel and Nexus Handsets
February 13, 2017, 7:30 AM
WhatsUp with WhatsApp?
August 29, 2016, 5:23 AM
Fuchsia – Google’s New Open Source Operating System
August 17, 2016, 6:30 AM
Windows 10: End of an Era & A New Beginning
August 1, 2016, 9:59 AM
Most Popular Articles
Surface Pro 5 Rumors - New Release Date and Price
April 22, 2017, 6:45 AM
Vivo V5 Plus – the Selfie Softlight is on You.
April 17, 2017, 7:05 AM
What is the Apple’s iPhone 8 specifications and release date?
April 14, 2017, 5:43 AM
Meet the Smartphone with four cameras - Alcatel Flashphone
April 5, 2017, 11:20 AM
ASUS RT-AC5300 – Ultimate Game & 4K Streaming
April 18, 2017, 7:45 AM
Latest Blog Posts
Samsung Galaxy S8 – Warning for Pet Owners
Apr 24, 2017, 5:59 AM
Sound Bars and the Costs?
Apr 23, 2017, 6:30 AM
Link your Brain to Your Computer – In Four Years…Maybe
Apr 22, 2017, 7:03 AM
Google Home can now identify users by their voice.
Apr 21, 2017, 7:15 AM
Amazon Lex – Now Available for Developers.
Apr 20, 2017, 6:58 AM
You can now use Instagram offline on your Android Smartphone
Apr 19, 2017, 8:00 AM
Now you can livestream to YouTube from your mobile device.
Apr 18, 2017, 8:05 AM
Google Home – Is It a Spy Device?
Apr 17, 2017, 7:30 AM
Apple added to self –driving test permit list
Apr 15, 2017, 6:21 AM
Project Scorpio – Coming on June 11
Apr 14, 2017, 6:20 AM
Looks Like Samsung Has Been Forgiven.
Apr 13, 2017, 6:50 AM
United Airlines - Blasted on China’s Social Network and the Stock Market
Apr 12, 2017, 6:50 AM
Amazon's Third-Party Sellers Hacked
Apr 11, 2017, 6:25 AM
Microsoft Surface Pro5 Details Revealed
Apr 9, 2017, 6:41 AM
Own An Android Phone? Then you could be hacked over Wi-FI
Apr 7, 2017, 6:47 AM
Apple confirms iOS 10.3 bug and its effect on iCloud Services
Apr 6, 2017, 6:30 AM
Apple Rolls Out New Version of Apple Music
Apr 5, 2017, 10:35 AM
Apple in the News
Apr 4, 2017, 9:03 AM
Apple iPhones Will Soon Feature Graphics Chips Designed BY Apple
Apr 3, 2017, 6:23 AM
AMD Ryzen Desktop Processors Performance
Apr 2, 2017, 6:30 AM
What makes a camera Lensless?
Apr 1, 2017, 7:45 AM
Google halts Android Wear 2.0 Update Due to Bug
Mar 31, 2017, 7:27 AM
More Blog Posts
Copyright 2017 DailyTech LLC. -
Terms, Conditions & Privacy Information