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Microsoft’s earnings show a company in transition

Revenue is up, but hardware is proving to be a big drag on the company’s financials.

Satya Nadella, CEO of Microsoft. Photographed on MS Redmond Campus, February 1 2014.

The rationale for the urgency in Satya Nadella’s big plan to transform Microsoft became apparent Tuesday as Microsoft released its earnings results for the fourth quarter.

The company reported $23.38 billion in revenue for the fourth quarter, up from $19.9 billion in the same time last year. Overall earnings, however, were under the opinion of most Wall Street analysts coming in at $4.6 billion when $5 billion was expected. Earnings per share was at 55 cents, down four cents from the same time last year and five cents below what many analysts expected.

While strong PC sales pushed up Microsoft’s earnings, as they did Intel’s, with OEM revenue increasing by 3 percent.

Microsoft’s Commercial services division, which is home to its server and cloud products, had a solid quarter. Revenue was up 11 percent year-over-year, coming in at $13.48 billion. Azure,  Office 365 for business and enterprise, Windows volume licenses, and Exchange, all included in the division, increased their usercounts and sales.

Hardware, however, was not a bright spot in the company’s earnings report.

Microsoft’s Nokia division managed to sell a healthy amount of handsets, coming in at 36.1 million, but lost $700 million. This is because while Nokia was able to sell more phones than Apple (35.2 million) the best selling phones sold by Nokia — the Lumia and Lumia 520 — are low-margin when compared to the iPhone.

The Surface, which caused Microsoft to take a $900 million loss this time last year, remained something of an enigma in the company’s financial reporting. Microsoft reported that the Surface division posted $409 in revenue, but refused to elaborate on that. How many Surface units were sold, or if the division posted a profit or loss, remains a mystery.

As for the Xbox, Microsoft sold 1.1 million Xbox consoles this quarter — an increase of 100,000 units from the same time last year — which added an extra $104 million in revenue to the balance sheet. However it should be noted that this includes both the Xbox 360 and Xbox One. In the United States, the Xbox One remains in second place when compared to Sony’s Playstation 4.

Overall Microsoft looks to be a company in transition. The numbers from this quarter’s earnings show that. However, the overall extent to how much the company is willing to transform itself is in question as the party line from Nadella himself is to not expect jettisoning of any high-profile divisions — just an internal cultural shift.


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