) fiscal fourth quarter earnings were short of the Zacks Consensus
Estimate. But the recent restructuring announcement, directional
clarity and the decision to focus on fast-growing segments that
play to its strengths have increased optimism about Microsoft's
shares. As a result, shares appreciated 1.4% in extended
Nadella's vision includes the repositioning of Microsoft in a
cloud-first mobile-first world where Microsoft's services and
technology will reach a larger number of devices across the
existing PC and mobile platforms, as well as emerging platforms
like wearables and the Internet of Things (IoT).
Revenue of $23.38 billion was up 14.6% sequentially and 17.5%
from last year, roughly in line with our estimates.
Devices & Consumer Segment
Following the acquisition of the Nokia Devices and Services
(NDS) business that closed on Apr 25, management changed the
reporting structure to add a sub-segment called Phone Hardware to
the Devices & Consumer (D&C) segment. They also renamed the
D&C Hardware segment as Computing and Gaming Hardware.
Accordingly, D&C Licensing, Computing and Gaming Hardware,
Phone Hardware and D&C Other revenue made up 20%, 6%, 8% and 8%
of quarterly revenue, respectively taking the contribution of the
Devices & Consumer segment to 43%.
Nokia contributed 1% of total revenue (included in
) and all of the Phone Hardware revenue in the last quarter. Since
Nokia has been acquired, it will not make any contribution to
D&C Licensing revenue going forward.
The ex-Nokia licensing revenue of $4.31 billion was slightly
ahead of the guided $4.1-4.3 billion. Office Consumer revenue
accounted for most of the strength, jumping 21% and outgrowing the
consumer PC market. Windows OEM revenue grew at a much slower rate
of 3% as OEM Pro revenue growth of 11% was largely offset by the
OEM non-Pro decline of 9%. Both OEM Pro and consumer licensing
benefited from the withdrawal of XP support. Phone licensing
revenue jumped 95% due to the recognition of $382 million of
revenue upon the ending of the Nokia licensing agreement.
Computing and Gaming Hardware
declined sequentially but grew 23.2% year over to $1.44 billion.
Management expected revenue of $1.3-1.5 billion from the segment,
which includes the Xbox and Surface platforms. The company sold 1.1
million Xbox consoles during the quarter driving platform revenue
up 14%. Management said that channel inventories were worked down
during the quarter. While growth rates for the Surface platform
were not mentioned, management did say that the revenue of $409
million was driven by second generation devices and Surface Pro 3,
which has seen stronger uptake than its other products.
The $1.99 billion contribution from
was driven by lower-priced devices (500 and 600 series Lumia
phones). Overall, 5.8 million Lumia smartphones and 30.3 million
non-Lumia devices were sold during the quarter. Management said
that non-Lumia phones performed in line with the market.
revenue jumped 20.5% year over year although it was down
sequentially. Both Office 365 Consumer and Bing showed positive
year-over-year trends. Office 365 subscribers grew by more than a
million. Additionally, search advertising revenue grew 40% due to
RPS growth, volume increases and the expiration of the North
America RPS guarantee payments to
). Bing has gained 190 bps of U.S. market share over the past
revenues grew more than 8.7% from the previous quarter and 5.6%
from a year ago. Server and Office commercial revenues were up 16%
and 4%, respectively from the year-ago quarter. Server products
grew 14% with SQL Server and System Center growing double-digits.
Windows volume licensing was up 11%, with both annuity and
non-annuity revenue growing.
revenues saw extremely strong growth of 18.9% and 43.7% from the
previous and year-ago quarters, respectively. Commercial Cloud
services grew 147% from last year, the main driver of the increase.
Enterprise service revenue growth was also very strong at 11%.
Microsoft's gross margin of 67.5% was down 336 basis points
(bps) sequentially and down 433 bps from the year-ago quarter. A
number of factors impacted the gross margin in the last
The Computing and Gaming Hardware margin shrank sequentially but
was up very strongly from the year-ago quarter when Microsoft took
a Surface RT inventory charge. The last quarter also included
inventory adjustments related to a transition to its latest Surface
products and charges for not shipping products at a certain form
factor. Rationalizing the device portfolio resulted in charges in
the newly-formed phone segment. A lower gross margin in the display
business offset the benefits of strong volumes in the rest of the
D&C Other business. Higher volumes and scale benefits drove a
huge increase in the commercial business, particularly the "Other"
side of the business.
Operating expenses of $9.18 billion were up 22.6% sequentially
and 11.6% from last year. The sequential increase in the last
quarter was related to S&M, which increased 266 bps
sequentially as a percentage of sales. All except COGS declined as
a percentage of sales from the year-ago quarter. As a result, the
operating margin shrank 592 bps sequentially and shrank 226 bps
year over year to 28.3%. The sequential decline was because of
higher COGS and SG&A while the decline from the year-ago
quarter was attributable to higher COGS.
Microsoft Corporation - Earnings Surprise |
The company generated a net income of $4.74 billion, or 20.3%
net income margin compared to $5.66 billion, or 27.7% in the
previous quarter and $4.97 billion, or 25.0% in the year-ago
quarter. Restructuring charges were $127 million of 2 cents a
share. So the pro forma earnings came to 57 cents a share compared
to 68 cents in the previous quarter and 59 cents in the year-ago
Inventories jumped 38.5%, with inventory turns sliding from
12.4X to 11.4X. Days sales outstanding (DSOs) went from 60 to
Microsoft ended with a cash and short term investments balance
of $85.71 billion, down $2.72 billion during the quarter. The net
cash position was around $63.06 billion ($7.63 a share), down from
$65.75 billion ($7.96 a share) at the beginning of the quarter. In
the last quarter, the company generated $9.51 billion in cash flow
from operations, spent $2.00 billion to repay its debt, $1.17
billion to repurchase shares, $2.31 billion to pay dividends, $5.63
billion on acquisitions and $1.33 billion to purchase capital
For the first quarter of 2015, the company expects D&C
Licensing revenue of $4.1-4.2 billion, Computing and Gaming
Hardware revenue of $1.7-2.0 billion, D&C Other revenue of
$1.8-1.9 billion, Commercial licensing revenue of $9.8-9.9 billion
and Commercial other revenue of $2.2-2.3 billion. Microsoft expects
COGS of $7.5-7.9 billion and opex excluding integration and
restructuring charges of $8.5-8.7 billion. The full year tax rate
is expected to be 21-23%.
Management expects to incur pre-tax restructuring costs of
$1.1-1.6 billion in fiscal year 2015, most of which will be charged
in the first half of the fiscal year. Expected synergies are $1
billion with the phone business achieving profitability in 2016.
Nokia integration costs are expected to be around $150 million a
Microsoft's fourth quarter was not too bad although missing our
expectations. Most encouraging is the improvement in its focus
areas: cloud and mobile.
While it may be too soon to comment, Microsoft does appear to be
delivering on its cloud-first mobile-first strategy. In the last
quarter, the company saw very strong triple digit growth in its
cloud services. It has also been leveraging the popularity of
Office to drive penetration on Apple and Google devices. At the
same time, it is doing all it can to drive Surface sales.
The hit to margins is not such a big negative considering the
fact that it now has a more sizeable hardware business. Moreover,
it is better to scrap a product that is either misaligned or
incapable of delivering on its goals. That said, the company is
still not making money on its Surface devices and management did
not say when the business was expected to break even. But in the
meantime, it is sparing no expense to succeed. Another headwind is
the declining benefit related to XP end-of-life that will impact
margins going forward.
carry a Zacks Rank #3 (Hold). Better-ranked technology stocks to
consider at this time are
), both of which carry a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
YAHOO! INC (YHOO): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis
NVIDIA CORP (NVDA): Free Stock Analysis Report
To read this article on Zacks.com click here.