Saturday, 25 October 2014

Why Microsoft's results have impressed investors

SEATTLE: Sales in the PC business are still in the dumps. Traditional software sales are losing steam to cloud services. And many venerable technology companies are struggling to leap from the old way of doing things to the new.

Microsoft? Steady as she goes.

While the company still has much to prove in markets like mobile phones, Microsoft on Thursday offered tantalizing signs of progress in the transformation of its business. In the last quarter, the company had a 25 percent increase in sales, largely because of its acquisition of Nokia's mobile phone business.

"Overall, what we see is the increasing competitiveness of our products," Satya Nadella, Microsoft's chief executive, said in a conference call with analysts.

For the three months that ended Sept. 30, Microsoft's fiscal first quarter, the company said its net income was $4.54 billion, or 54 cents a share, compared with $5.24 billion, or 62 cents a share, a year ago.

The average estimate of analysts surveyed by Thomson Reuters was 49 cents a share for the period and $22.02 billion in revenue.

The dip in profit was largely the result of $1.14 billion in costs associated with the company's acquisition of Nokia's mobile phone business. Without that expense, Microsoft would have reported earnings of 65 cents a share.

In July, Microsoft announced plans to reduce costs by laying off up to 18,000 employees, or about 14 percent of its global workforce, by the end of June next year. Most of the cuts are related to the company's Nokia acquisition.

The results impressed investors, especially when compared with weak results from other technology bellwethers like IBM. "I thought these were stellar numbers in a choppy IT spending environment," said Daniel Ives, an analyst at FBR Capital Markets.

Microsoft shares rose 3 percent in after-hours trading.

Microsoft's resilience stems in part from the reluctance of corporate customers to abandon their deep investments in the company's products. Microsoft has also tried to differentiate itself from new competitors going after its corporate customers, like Amazon and Google, by giving them options to tiptoe into cloud computing while continuing to run their own software.

The addition of Nokia to its business added $2.6 billion in phone hardware revenue that did not exist for Microsoft during the year earlier period. Without that boost, Microsoft's revenue would have grown 11 percent in the quarter.

Microsoft has struggled to find its footing in recent years as the personal computer and traditional software businesses have shown signs of weakness and newer technologies, like mobile and cloud computing, have surged. Microsoft has stumbled badly in mobile. Nokia's share of the smartphone market has declined in recent quarters. Microsoft said it sold 9.3 million of its Lumia smartphones in the quarter, representing what it called modest growth from a year earlier.

"We have work to do in phone," Amy Hood, Microsoft's chief financial officer, said in a phone interview.

Microsoft's cloud business, though, is showing signs of strength that have encouraged investors. During the quarter, the company said its commercial cloud revenue grew 128 percent during the quarter from a year ago. Microsoft's commercial revenue, of which its corporate cloud business is a part, grew 10 percent, to $12.28 billion.

Microsoft has been trying to turn its traditional Office applications business into a cloud business, where customers pay a subscription fee for the product. Microsoft said it has 7 million subscribers to the home and personal version of Office, 25 percent more than in its fiscal fourth quarter.

Even Microsoft's Surface, its tablet computer, improved in the quarter, with sales rising to more than $900 million, from around $400 million a year earlier. "I'm very proud of Surface Pro 3," Hood said, referring to the latest version of the product.

Microsoft is hunting for growth opportunities beyond the PC, the device to which its fortunes have been tethered for most of its 39 years. According to IDC, the technology research firm, worldwide shipments of PCs declined 1.7 percent during the quarter, a poor showing for the industry but a smaller decline than the firm and many investors had previously expected.

Smartphones and tablets have begun to handle many of the computing chores that were once exclusively performed on PCs. Microsoft sought to reinvigorate the PC market two years ago with the release of Windows 8, an operating system that was designed to power both conventional PCs and touch-based devices like tablets.

But Windows 8 has delivered disappointing results. Recently Microsoft announced plans for a new operating system, Windows 10, that will backtrack from some of the more radical design changes the company made in Windows 8.