Microsoft Warns of Gloom Ahead Amid Mixed FQ2, China Worries

Written by DH Kass 1
January 28, 2015

Microsoft posted $26.5 billion in sales and earnings per share of 71 cents for its FQ2 2015, an 8 percent climb in revenue but a 9 percent slide in earnings, barely beating analysts’ sales expectations.

Microsoft (MSFT) posted $26.5 billion in sales and earnings per share of 71 cents for its FQ2 2015, an 8 percent climb in revenue but a 9 percent slide in earnings, barely beating analysts’ sales expectations.

The company’s results for the period included a $243 million charge for laying off some 18,000 workers last summer along with expenses associated with integrating Nokia’s former mobile phone business.

Here’s the upshot of Microsoft’s quarter: Devices and cloud did well; Windows, not so much.

It wasn’t the company’s performance for the quarter but rather its downbeat guidance that prompted the stock to tumble some 9 percent one day later. Microsoft chief financial officer Amy Hood projected total revenue for FQ3 2015 in a range from $20.6 billion to $21.4 billion, at best 10 percent below consensus estimates.

Within its business units, Microsoft posted some impressive numbers for the quarter:

The wide look:

Devices and Consumer sales at $12.9 billion, up 8 percent
Commercial revenue at $13.3 billion, up 5 percent

Up:

Surface sales of $1.1 billion, up 24 percent. Why? Surface Pro 3
Lumia handsets at 10.5 million units for $2.3 billion
Windows volume licensing revenue up 3 percent
Commercial cloud revenue up 114 percent to an annualized run rate of $5.5 billion
Server products and services revenue up 9 percent

Down:

Windows OEM Pro revenue down 13 percent. Why? The market returned to pre-Windows XP end of support levels, new lower-priced licenses for education market
Windows OEM non-Pro revenue down 13 percent
Office Commercial products and services revenue down 1 percent. Why? Transition to Office 365 slowed PC sales

What’s worrisome for Microsoft going forward? Not lost Windows revenue but China. Chief executive Satya Nadella said on the company’s earnings call that it’s wrestling with the China market, owing to the anti-trust and tax investigations by Chinese regulators and difficulties battening down piracy of its software.

“We have in China currently a set of geopolitical issues that we are working through,” Nadella said. “We are very committed to China as a market.”