Short Takes: Microsoft Earnings Special Edition

Short Takes: Microsoft Earnings Special Edition

An often irreverent look at this week's Microsoft earnings and other news

An often irreverent look at this week's other news, including a ton of information from Microsoft's post-earnings conference call, the fate of Amazon's Fire Phone, and Paul Allen vs. Ebola.

Note: This special edition of Short Takes will focus largely but not exclusively on information Microsoft provided during its post-earnings conference call. If you've not yet read my report on the firm's quarterly earnings, please check out Microsoft Posts Solid Quarter, Makes Some Hardware Gains first. --Paul

MSFT earnings: Microsoft Mixes it up

In a nice touch, Microsoft's post-earnings conference call used Office Mix and I assume its new live mixing feature. This is a great way to present this information, both live and for future playback.

"Microsoft Offers Tantalizing Signs of Progress"

Maybe next quarter we can upgrade to "titillating."

MSFT earnings: Why profits were down

One of the interesting tidbits about Microsoft's quarterly results is that while revenues were up dramatically, operating income was actually down a bit. Here's why: Microsoft took a $1.1 billion charge related to the Nokia acquisition in the quarter. Folks, when you can subsume a company as big as Nokia and still turn a huge profit, there's only one conclusion. This was a blockbuster quarter. But it's worth noting, too, that Nokia will weigh on Microsoft's earnings going forward: In the past year, Microsoft recognized about $650 million of revenue from Nokia licensing payments. But now that Nokia's relevant businesses are part of Microsoft, those payments have of course ended.

"Microsoft Was Close To Buying LinkedIn For $2 Billion Prior To LinkedIn's IPO"

Thank God they bought Minecraft instead.

MSFT earnings: Surface Pro 3 success

Surface Pro 3 has been a major success story, especially compared to previous Surface models. Microsoft CFO Amy Hood said that Microsoft was "excited" by Surface Pro 3 sales performance. "Unit sales are pacing at twice the rate of what we saw with Pro 2," she said. "We are seeing strong interest from students, professionals and increasingly enterprises, who are replacing their laptops and tablets with Surface Pro 3 for their productivity needs.  Gross margin for Surface was positive this quarter." In other words, yes. Surface turned a profit in the quarter.

"Surface division on track to be Microsoft's next $1 billion business"

Um, no. Surface generated almost $1 billion in revenues in this past quarter alone. It was a billion dollar business pretty much from the get-go. (That's measured by fiscal year, obviously.)

"Microsoft's Surface tablet just isn't taking off yet"

Um. What?

MSFT earnings: Windows Phone will be unprofitable for at least the next 18 months

Microsoft's Windows Phone hardware business—i.e. the Lumia lineup, or what used to be the heart of Nokia—is going to lose money at least for the next year, and probably for longer than that. "We remain committed to reaching breakeven in fiscal 16," Ms. Hood said, referring to fiscal 2016, which starts in July 2015.  "As part of our restructuring efforts, we started right-sizing [what we might call "downsizing" –Paul] our manufacturing capacity, created one development team to accelerate the pace of innovation, and focused our sales and marketing efforts on Lumia, which grew in several key markets." Sales of Nokia-branded "dumb" phones continued to fall in the quarter, obviously.

"Microsoft Sells 2.4 Million Xbox Consoles in First Quarter of 2015"

News from the future? No. They mean first quarter of "fiscal" 2015. Or what we normal humans might call the third quarter of 2014.

MSFT earnings: Microsoft sees big success in the cloud

Microsoft's business cloud revenue grew 128 percent, which is incredible enough. But check out this stat: This was the "fifth consecutive quarter of triple digit growth for commercial cloud revenue," Hood noted. "In fact, we are the only company with cloud revenue at our scale that is growing at triple digit rates. And 80 percent of the Fortune 500 are now on the Microsoft cloud."

MSFT earnings: Office 365 continues to skyrocket

Lots of good Office 365 numbers on the call. Office 365 commercial seats "nearly doubled," and "two out of every three new subscribers are premium versions." That last figure is up over 25 percent from the previous quarter. And consumer Office 365 now exceeds 7 million active subscriptions alone. "Renewal rates were higher than what we've seen in recent first quarters," Hood said. "And in Office, one-third of renewals included Office 365.  Importantly, we are seeing a mix shift from on-prem to the cloud, from transactional purchasing to annuity, and from standard to premium versions."

MSFT earnings: Windows growth flat going forward

Looking over the next quarter, Microsoft sees the ongoing business PC refresh cycle continuing. And the firm expects that the consumer PC market will remain stable and be consistent with the results they just posted.

MSFT earnings: Phone hardware futures

Microsoft expects its Windows Phone hardware business to grow, unit sales-wise, both year-over-year and sequentially. This will be driven largely by the low-cost (sub-$200) Lumia 500 600 series devices, it said. And unit sales of "non-Lumia devices" (i.e. all Windows Phone handsets not made by Microsoft) will fall, while the average selling price will continue to plummet. The ASP bit doesn't surprise me. But you'd think that unit sales would rise in a holiday quarter. That could be troubling.

Amazon's Fire Phone goes down in flames

Well, it's official: The Amazon Fire Phone is a disaster. The online retailer posted a $170 million charge against earnings related to the utterly uninteresting smart phone and admitted that it is sitting on over $80 million of unwanted Fire Phone inventory. So the next time someone tells you that Windows Phone is doomed, you can point to this. And to the fact that Microsoft alone sold 9.3 million Windows Phone handsets in the same quarter.

"Microsoft to kill its free Xbox Music streaming service"

Ah, deceptive headlines. Microsoft is killing a limited free streaming feature that is part of its Xbox Music service. Which is not being killed.

Paul Allen vs. Ebola

Perhaps influenced by Bill Gates' efforts to combat malaria, the other Microsoft co-founder, Paul Allen, this week announced his plans to fight a more clear and present threat: He's going after Ebola. And he's attacking this problem the way he attacks every problem, by throwing a lot of money at it. He will invest $100 million in effort that will train doctors and build special containment units for the infected. "The Ebola virus is unlike any health crisis we have ever experienced and needs a response unlike anything we have ever seen," Mr. Allen said in a prepared statement. "To effectively contain this outbreak and prevent it from becoming a global epidemic, we must pool our efforts to raise the funds, coordinate the resources and develop the creative solutions needed to combat this problem. I am committed to doing my part in tackling this crisis." In other words, suck it, malaria.

Buy the books!

I'm trying to change the book publishing model, and would appreciate your support: Windows 8.1 Field Guide is available directly from me for only $2 in PDF, MOBI and EPUB formats. And it is now available on Amazon Kindle for $4.99 too. I also have other free and inexpensive e-books available too, including Windows Phone 8 Field Guide (free from that site, or available from both Kindle and Nook too) and the in-progress Windows Phone 8.1 Field Guide and Xbox Music Field Guide. Coming soon: Windows 10 Field Guide.

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