Cloud is silver lining for Microsoft earnings, hardware drags
- Summary:
- Nadella spoke about how he will “responsibly” make the market for the Windows phone going forward, but stated that Microsoft will no longer be doing hardware for hardware's sake.
It's been a busy old couple of weeks for Nadella and Microsoft. First there was the rambling memo that was 'leaked' to the media, then came the massacre of
18,000 employees from across the business (although mostly from the Nokia division) and now the company has released its much anticipated fourth quarter results. These are of particular interest as they are the first results to include figures from Microsoft's purchase of Nokia, which it acquired for $7.3 billion back in April.But let's do the headline figures first. It's worth noting that although Microsoft earnings results missed their profit estimate of 60 cents a share and have not particularly excited Wall Street, there are some things (namely cloud) that Microsoft should be pleased with. Here are the results:
- Revenue for the quarter ended June 30 was $23.4 billion, up from $19.9 billion the previous year.
- Net income stood at $4.61 billion, or 55 cents a share, for the period.
- Nokia's device business contributed $1.99 billion of revenue in the fourth quarter, but saw an operating loss of $692 million.
- Commercial cloud revenue was up 147% to a $4.4 billion run rate (driven by Office365 and Azure)
- Licensing revenue for premium versions of on-premise server products, such as Windows Server, System Center and SQL, also grew 14% this quarter.
So as you can see from the above, Microsoft has had a pretty decent response to its cloud business and this is largely being supported by its commitment to the Azure platform. Nadella recognises this as Microsoft's strongest bet,. He said during the analyst call:
Now let’s transition to the Cloud OS. Our Cloud OS represents the fastest growing opportunity for Microsoft. Quarter-after-quarter, we drive growth and customer adoption. Our server products benefit from our public cloud. The fact that we use our servers to run our cloud make our server software, the most capable enabling others to build and operate their clouds.
Elizabeth Hedstrom Henlin, senior analyst Technology Business Research, said the following on Microsoft's cloud pursuits:
Microsoft has definitively established Microsoft Azure as a platform that will last in the cloud era – and has created a foundation for reinventing delivery and consumption of its legacy applications business including Microsoft Dynamics. 16% year to year revenue growth in server products which Microsoft notes as inclusive of Azure, SQL Server, and System Center, emphasizes that Microsoft is monetizing recent launches.
[We feel] that Azure, SQL Server, and System Center are positioned to be the core of a unified Microsoft that can deliver business solutions spanning on and off-premise consumption. For that vision to become a reality, Microsoft will need to accelerate its own reinvention by consolidating not only product teams but sales and marketing teams, creating a unified message and approach to market that will serve as the two levers to change the perception of Microsoft in the minds of customers and partners as an innovative, business-value oriented partner for growth.
Consolidation on all fronts
To Hedstrom's latter point, it seems that Nadella has begun this process of consolidation already. Since the announcement last week of the 18,000 layoffs that Microsoft expects to make over the coming year (the cost of which weren't reflected in today's results), many have deliberated about how Microsoft is planning to reorganise and restructure itself to go to market. Nadella gave some hints that suggest that this will at least at present focus on aligning teams and technology groups that have common interests and architectures. For example, he said:Everything we do starts with digital work and life experiences to delight dual users; these are users who use technology both at work and in their personal life. This is how we reinvent productivity. Last year, we started to take steps in this direction, now OneDrive and OneDrive for business are one team. Outlook and Exchange are one team, Skype and Lync are one team all focused on those dual user scenarios.
The statement I made about bringing together our productivity applications across work and life is to really reflect the notion of dual use because when I think about productivity it doesn’t separate out what I use as a tool for communication with my family and what I use to collaborate at work. So that’s why having this one team that thinks about outlook.com as well as Exchange helps us think about those dual use. Same thing with files and OneDrive and OneDrive for business because we want to have...the smart about separating out the state carrying about IT control and data protection while me as an end user get to have the experiences that I want.
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This all makes sense and is a smart move. Bringing together areas of common interest will streamline processes for the end user and hopefully boost productivity, which is ultimately what Nadella is aiming for. However, consolidation isn't just happening within the structure of the organisation – Microsoft is also planning a consolidation of Windows in the coming months, to bring together the various code bases that it has for the platform. This will ultimately give developers a much broader reach when developing Windows apps. What this means for the company's hardware business is up for debate, but more on that later. Nadella said:
The reality is that we actually did not have one Windows; we had multiple Windows operating systems inside of Microsoft. We had one for phone, one for tablets and PCs, one for Xbox, one for even embedded. So we had many, many of these efforts. So now we have one team with the layered architecture that enables us to in fact one for developers bring that collective opportunity with one store, one commerce system, one discoverability mechanism. It also allows us to scale the UI across all screen sizes; it allows us to create this notion of universal Windows apps and being coherent there.
Yes. One of beauties of universal Windows app is, it aggregates for the first time for us all of our Windows volume. The fact that even what is an app that runs with a mouse and keyboard on the desktop can be in the store and you can have the same app run in the touch-first on a mobile-first way gives developers the entire volume of Windows which is 300 plus million units as opposed to just our 4% share of mobile in the U.S. or 10% in some country.
Being 'responsible' with Windows phone
But what does this all mean for Nokia and Windows Phone? Analysts and investors have been particularly downbeat about the Nokia acquisition in recent weeks, where they believe that Nadella's focus on cutting staff from the Nokia division signals a less enthused approach to taking on Apple and Samsung with hardware. Nadella's comments today will do nothing to change that, as he made a case for “responsibly” making the market for Windows Phone – whatever that means. He said;
Our approach to first party hardware going forward is clear. At times, we will develop new categories like we did with Surface and we will responsibly make the market for Windows phone. However, we are not in the hardware for hardware sake, and the first party device portfolio will be aligned to our strategic direction as the productivity and platform company.
As I said before, going forward all the devices will be created with an explicit purpose to light up our digital work and life experiences. Good examples of this today are what we are doing with Surface Pro 3 for note taking and PPI for meetings. You can expect to see this type of innovation in our hardware including phones.
So it doesn't really sound like a great push behind making Microsoft/Nokia the next smartphone giant, despite making modest gains in certain markets – including Europe. Jack Narcotta, analyst at Technology Business Research, said that Microsoft's recent approach to Nokia, combined with Nadella's “productivity and platform” mantra, suggests that the company's flagship Lumia handsets could soon be fading out of the market altogether. And any attempts to drive Lumia into the enterprise market could hamper investments elsewhere in the business, which should be a worry. He said:
With Microsoft shifting from focusing on devices and services to providing productivity tools and platforms, TBR believes that the Windows Phone platform is becoming non-competitive in the consumer market.
Nokia remains one of the world’s largest handset vendors, but its product mix – 84% of Nokia’s handset shipments in 2Q14 were feature
phones – is out of sync in a market where smartphones are the dominant device. Nokia continues to aggressively market its newly expanded range of Lumia devices into emerging markets, but lukewarm sales of Lumia smartphones compelled Nokia to rely on a rapidly shrinking feature phone customer base for its handset revenue and profits.However, with Microsoft’s announcement in July 2014 that it is exiting the feature phone business – and aims to replace them with budget-priced, entry-level Windows Phone smartphones – and that Microsoft is ending Nokia’s Android development, TBR believes the Lumia consumer brand is at risk of fading completely from the market. Lumia devices may evolve into business tools, a la BlackBerry at the height of its success, but Nokia’s sustained operating losses combined with declining revenue threaten to dent Microsoft’s cash reserves, hampering the company’s ability to make investments or acquisitions necessary to reach its “mobile-first, cloud-first” goal.