Microsoft Post-earnings Analysis

Edited by Vani Rao

Cloud services record revenue jump of over 100% during Q3

Microsoft Corp. (NASDAQ: MSFT) reported its third-quarter FY2014 results on April 24, 2014. This was the first quarterly earnings release after Mr. Satya Nadella took over as the new CEO on February 4, 2014. His commitment is to concentrate on developing software that uses more cloud technology and focus on smart phone or tablets.

Earnings Analysis

After the induction of its new CEO, Microsoft reported net profit of $5.66 billion in Q3 2014 and declared a cash dividend of $0.23 per share. Microsoft reported revenue growth of more than 100% in cloud services and Office 365, while revenue from Microsoft Azure grew 150%.

Revenue from the software came in at $18.55 billion compared to $17.43 billion in the year-ago quarter. In 2013, Windows Server and Windows Operating System accounted for almost 59.6% of the company’s total revenue. Skype accounted for 3.13% of the total revenue during the quarter under review, while X-Box and Windows Phone brought in 11.7%.

Microsoft’s Windows OEM revenue grew by 4%, while Consumer Office revenue grew by 15%.

Mainly due to higher volume of licenses sold. The advertising revenue grew 16% or $144 million due to increased revenue per search resulting from ongoing improvements in ad products and higher search volume.

In addition, Microsoft reported high sales growth from Japan due to government planning for higher national tax. Moreover, the impact of the expiration of Windows XP resulted in an increase in the revenue for the company. During the quarter under review, more than 10% of the total revenue was used for R&D, the company justifies that it is used for new product development.

Focus on Cloud Software

On the other hand, analysts forecast Microsoft’s market share in productivity software to decline due to the intense competition from cloud computing players like Google Inc. (NASDAQ: GOOG). However, Microsoft released Office 365, a cloud-based software, to compete with Google. Although Google Apps are priced at $5 user/month and is seen as a cheaper alternative, it lacks many features that are present in Office 365. Hence, Office 365 enjoys a price leadership in the cloud domain.

Source: Bloomberg
Source: Bloomberg

Devices and Consumer Hardware

In Q3 2014, only two million X-Box units was sold (includes X-box and X-Box One), whereas its competitor Sony sold seven million units of the PlayStation since launch. The number of X-Box units sold decreased 225% compared to previous quarter. This is mainly attributed to the higher pricing of the X-Box, which is priced $100 more than the PS4.

Note: X-Box One was launched in November 2013.

Revenue from Microsoft Surface

Source: Bloomberg
Source: Bloomberg

Revenue from the Microsoft Surface was about $500 million in Q3 2014, when compared to $893 million in Q2 2014. Microsoft is facing intense competition from iPad and other Android Tablets, which are priced lower than the Microsoft Surface. On the negative side, the Surface and X-Box was not able meet the company’s expectation in terms of building cost-effectiveness since these products incurred higher data center expenses.

As shown below, the dollar value depreciation had a negative impact on Microsoft’s revenue, decreasing it by 1% or $224 million.

Source: Bloomberg
Source: Bloomberg

Going forward, Microsoft should focus on its cloud services and should consider reducing the price of the Microsoft Surface, which is priced higher than similar products of rival companies.

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