When the entire world around you is tumbling down it is an achievement in itself to hold your head high. Sounds quite philosophic but is true with a company which had become a household name since the last decade and has been the lifeline of corporate world for more than just a decade. This quarter after the IT bigwigs have reported dismal performance and have been reeling under the pressure of volume sell resulting in their stock prices to plummet heavily this company from the same clan has moved against the trend and not only met but exceeded analyst’s expectation with a good margin.
The company also known as the king of operating systems, Microsoft (MSFT, Financial) has proved what it takes to challenge the trend. When IT giants like IBM (IBM, Financial) and SAP (SAP, Financial) reported heartbreaking Q3 results causing the whole IT sector take a trip southwards this company has reported results which has proved that this company can reverse trends. Let us take a look at the number churn and the equations behind the numbers of Microsoft in greater details.
Microsoft and its Peer group
Microsoft reported higher-than-expected quarterly revenue, helped by stronger sales of its cloud-computing products for companies, while keeping its profit margins largely intact. Though the new foray into the mobile device segment proves to be a laggard yet they too helped push the numbers to some extent due to the ongoing smartphone wave in the market.
The results on Thursday actually put a full stop to the fears of investors in recent days that the industry shift toward lower-margin cloud services was proving hard for established technology leaders to master keeping in mind their higher side cost bracket.
Microsoft shares, which have climbed 33 percent over the past year, rose another 3 percent in after-hours trading to $46.36.
“In light of recent negative earnings results from tech bellwethers Oracle (ORCL, Financial), IBM, SAP, VMware(VMW, Financial), and EMC Corporation (EMC, Financial), Microsoft is bucking the trend and we would label these September results as a solid accomplishment,” said Daniel Ives, an analyst at FBR Capital Markets (FBRC, Financial).
After the dismal performance by companies like International Business Machines and SAP this quarter and the kind of disaster that has been noticed in their earnings numbers with special focus on operating profits since they set their foot into the cloud computing arena analysts and investors had trained their lenses on Microsoft and have been waiting for its outcome since it is also amongst the IT clout that has set sail in the cloud computing area.
Microsoft Numbers
Though Microsoft did not disclose its cloud-based revenue figures for the first quarter of this fiscal year, but said commercial cloud sales rose by 128%, while sales of services based on its Azure cloud platform rose 121%. Even though the infrastructure cost of building datacenters to support the cloud system were on the rise yet Microsoft managed to make 194% of gross profit margin in the cloud segment the lion share of which was contributed by its Azure cloud platform.
But the tablet and phone section of Microsoft proved to be a cause of pulling down its north bound profit run in the last four years. Microsoft’s gross profit margin has drifted down to about 65 percent from above 80 percent, due to its foray into the tablet and smartphone segment as we had pointed out in our last article titled ’Microsoft Redressing Brand Lumia’. However the outperforming results of its cloud business kept the overall business ambience of Microsoft in the positive area. We have also mentioned in our last article that it would be best to wait and watch how Microsoft introduces change to the Lumia smartphone. If there is significant tech changes introduced in Lumia apart from name change to keep in pace with its android and iOS peers then in this quarter and the next quarter we might see the Microsoft numbers grow at a much faster pace than what it has been in the last quarter.
Rick Sherlund a Microsoft Analyst from Nomura (NMR, Financial) has worked out the equations for Microsoft based on its current performance and going by the equations Microsoft is on track to hit $6 billion a year in cloud revenue soon, which would make it the industry’s largest cloud vendor, a mark which represents only about 6 percent of overall expected revenue this fiscal year, but since cloud computing is a niche sector and the key to the future of IT sector investors are highly speculative in this segment.
“We’re the only company with cloud revenue at our scale that is growing at triple digit rates,” Satya Nadella was quoted as saying, on a conference call with analysts.
Nadella also stressed that Microsoft’s greater focus lies in selling higher-margin services via the cloud to its corporate clientele rather than just operating as a storage house and computing power service provider. “Our premium services on Azure create new monetization opportunities in media, data, machine learning, fast analytics, and enterprise mobility,” he said.
Microsoft Misses
Microsoft’s fiscal first-quarter profit actually fell 13%, on account of an expected $1.1 billion charge leveled against Microsoft of mass layoffs announced in July, which ate in 11 cents per share off earnings. Though a seemingly small amount but the cumulative value stands at a considerably high number.
In the face of the charge, the world’s largest software company managed to report profits of $4.5 billion, or 54 cents per share, compared with $5.2 billion, or 62 cents per share, in the year-ago quarter. Still, it easily exceeded Wall Street’s forecast of 49 cents per share without much sweat.
The profit and margin upswing resulted from Microsoft’s plan, launched in July this year, to cut 18,000 jobs, which amounts to about 14 percent of its workforce, with most of those cuts coming from its newly acquired Nokia (NOK, Financial) phone business, by shutting down its Chennai, India plant and withdrawing manufacturing functions from the subcontinent in totality.
Revenue rose 25 percent to $23.2 billion, helped by the phone business it bought from Nokia in April, handily exceeding analysts’ average estimate of $22 billion.
Owing to the current frenzy in the smartphone and tablet market sales of its Lumia smartphones hit 9.3 million in the first full quarter since the buyout of the phone section from Nokia. Sales of the Surface tablet more than doubled to $908 million from $400 million in the same quarter last year. These numbers did induce a marginal positive impact on the overall numbers of Microsoft but when compared with its peers from the android and even iOS segment the numbers get dwarfed by the figures of its peers. Hence Microsoft has to do some real tech workup on the Lumia to capitalize the agile smartphone market. The ball has already been set rolling in this segment by Microsoft declaring its intension officially to rebrand Lumia.
Final Take
While the whole sector is down trending Microsoft alone has the capacity to steer the sector northwards which evidences the strength in the company’s fundamentals and its focus towards margin enhancing business functionality.
The company has already established its successful strategy in the cloud computing domain and with the ongoing restructuring and rebranding process of its smartphone operation it will be able to cut in a bigger slice of the global smartphone fanfare pie. Thus the smartphone section restructuring could actually hold the key to greater future heights in terms of profitability in the coming quarters. Hence we suggest a strong buy in the company to enjoy the uphill joyride of the IT giant.
