Tag Archives: financials

microsoft, windows

Microsoft financials: strong quarter especially in cloud services. We have a very different way to think about Windows says Nadella

Microsoft has released its financial results for the first quarter of 2014. The year on year segment figures look like this:

Quarter ending March 31st 2014 vs quarter ending March 31st 2013, $millions

Segment Revenue Change Gross margin Change
Devices and Consumer Licensing 4382 +30 3906 -23
Devices and Consumer Hardware 1973 +571 258 -135
Devices and Consumer Other 1950 +294 541 +111
Commercial Licensing 10323 +344 9430 +345
Commercial Other 1902 +453 475 +211

The “Gross margin” figures above do not tell us much other than for hardware, since Microsoft no longer allocates its research and development costs against specific segments.

Overall revenue is slightly down year on year but only because of a $1778 million decline in the “corporate and other” segment. This means it was a better quarter than the overall revenue suggests.

So what is notable? Windows OEM revenue is up, but only thanks to the business market, and partly thanks to upgrades driven by the end of support for Windows XP. Consumer OEM Windows is down by 15%.

Xbox revenue is up 45% thanks to the launch of Xbox One (and I have a hunch we will see less positive figures in future since Sony’s PS4 seems to be winning the console wars).

Surface (Microsoft’s own-brand tablet) revenue is up by over 50% year on year, to $494 million. It is a significant business, though apparently not a profitable one. Cost of sales was $539 million, says Microsoft in its notes.

Windows volume licensing, which accounts for most enterprise usage, is up 11%, also no doubt influenced by the end of XP support. SQL Server revenue is up by 15%, though in relation to server products Microsoft notes the impact of “the transition of customers to Cloud Services.”

The big winner is cloud services. Microsoft says:

  • Office 365 revenue grew more than 100%
  • Microsoft Azure revenue grew more than 150%
  • Cloud services revenue grew $367 million or 101%

These sums are a little puzzling. If growth was 101% overall, and Office 365 grew by more than 100%, where is the Microsoft Azure growth hiding, or was it from a very small base?

Note that consumer Office 365 is accounted for separately, it seems, as part of “Devices and Consumer other”. There are now 4.4 million Office 365 Home subscribers, growing by around 1 million in this quarter.

Questioned in the earnings call, CEO Satya Nadella talked about mobile-first and cloud-first, adding that the strategy goes across “devices some ours, some not ours.” He also mentioned how the advent of Universal Apps means that “we have a very different way to think about [Windows].” That is partly wishful thinking of course: the Universal App framework is still in preview and targets a still unreleased update to Windows Phone (8.1). Still, that is the strategy, even if it means giving Windows away on smaller devices – we have “monetization on the back end,” said Nadella, presumably thinking of Office 365 subscriptions and the like.

On the business and enterprise side (where Microsoft can be more confident) Nadella also spoke of the synergy between Office 365 and Azure; every Office 365 sign-up enables Azure as a business cloud platform, thanks to Azure Active Directory and other integration points.

Microsoft’s segments summarised

Devices and Consumer Licensing: non-volume and non-subscription licensing of Windows, Office, Windows Phone, and “ related patent licensing; and certain other patent licensing revenue” – all those Android royalties?

Devices and Consumer Hardware: the Xbox 360, Xbox Live subscriptions, Surface, and Microsoft PC accessories.

Devices and Consumer Other: Resale, including Windows Store, Xbox Live transactions (other than subscriptions), Windows Phone Marketplace; search advertising; display advertising; Office 365 Home Premium subscriptions; Microsoft Studios (games), retail stores.

Commercial Licensing: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and Windows Embedded; volume licensing of Windows, Office, Exchange, SharePoint, and Lync; Microsoft Dynamics business solutions, excluding Dynamics CRM Online; Skype.

Commercial Other: Enterprise Services, including support and consulting; Office 365 (excluding Office 365 Home Premium), other Microsoft Office online offerings, and Dynamics CRM Online; Windows Azure.

cloud computing, microsoft, windows

Microsoft proves resilience with bumper quarter, but is not yet a devices and services business

Microsoft delivered record revenue of $18.53 billion in the quarter ended September 30th 2013 – which might come as a surprise if you have been focusing on the companies failings in tablets and smartphones versus Apple and Android, the steep decline in PC sales, and its small market share in search versus Google, but less so if you have been watching the advance of products like Office 365, Windows Azure, SQL Server and Windows Server, all of which have been making good progress.

In its report, the company says the Windows OEM revenue declined 7% (reflecting PC malaise) but Surface revenue grew to $400 million. Search advertising revenue grew 47% reflecting some degree of success for Bing.

SQL Server “grew double digits”, as did “Lync, SharePoint and Exchange.”

Commercial cloud revenue grew 103%, though bear in mind that Microsoft is not telling us the absolute figures; you can easily grow fast if you start from a small number.

Microsoft has changed the way it segments its revenue, making it difficult to track, especially with large sums of money ($1.6 billion) reported as “Commercial Other”. Here is how the new segments look:

Quarter ending September 30th 2013 vs quarter ending September 30th 2012, $millions

Segment Revenue Change Profit Change
Devices and Consumer Licensing 4343 -335 3925 -178
Devices and Consumer Hardware 1485 +401 206 -242
Devices and Consumer Other 1635 +235 352 -10
Commercial Licensing 9594 +645 8801 +618
Commercial Other 1603 +355 275 +170

Now, how to make sense of this? The segment changes are detailed here (Word document). In summary:

Devices and Consumer Licensing: non-volume and non-subscription licensing of Windows, Office, Windows Phone, and “ related patent licensing; and certain other patent licensing revenue” – all those Android royalties?

Devices and Consumer Hardware: the Xbox 360, Xbox Live subscriptions, Surface, and Microsoft PC accessories.

Devices and Consumer Other: Resale, including Windows Store, Xbox Live transactions (other than subscriptions), Windows Phone Marketplace; search advertising; display advertising; Office 365 Home Premium subscriptions; Microsoft Studios (games), retail stores.

Commercial Licensing: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and Windows Embedded; volume licensing of Windows, Office, Exchange, SharePoint, and Lync; Microsoft Dynamics business solutions, excluding Dynamics CRM Online; Skype.

Commercial Other: Enterprise Services, including support and consulting; Office 365 (excluding Office 365 Home Premium), other Microsoft Office online offerings, and Dynamics CRM Online; Windows Azure.

From this you can see that despite 103% growth, Azure and Office 365 remain relatively small, many times exceeded by the on-premise software licensing which is mainly in “Commercial Licensing”. However Microsoft is reporting a contribution to profits from this segment, though with smaller margins than from software licensing.

Simple addition also tells us that consumer revenue ($7,463 million) is less than business revenue ($11,197 million).

Overall it is obvious that Microsoft is not yet a “devices and services” company even if it has set that as its goal. Most of its revenue comes from traditional software licensing. Can it ever make that transition without shrinking in the process? A good question, and despite excellent figures, one that will ensure Microsoft’s future remains the subject of intense debate.

microsoft, windows, xbox

Microsoft shrugs off Windows 8 issues with record revenue

Yesterday Microsoft released its financial figures for the first three months of 2013.

Quarter ending March 31st 2013 vs quarter ending March 31st 2012, $millions

Segment Revenue Change Profit Change
Client (Windows + Live) 5703 +1070 3459 +480
Server and Tools 5039 +508 1979 +293
Online 832 +125 -262 +218
Business (Office) 6319 +477 4104 +307
Entertainment and devices 2531 +913 342 +570

Note that the figures for Windows and Office are boosted by deferred revenue from upgrade offers. The PC sales decline will be reflected in Windows client sales next time round.

CFO Peter Klein spoke of hoped-for improvements in Windows 8 device fortunes based on refinements coming in Windows “Blue” as well as more power-efficient CPUs coming from Intel. “We are confident we are moving in the right direction,” he said.

He also discussed the new subscription-based model for Office. Office 365 has added five times more subscribers this quarter than in the same period last year, he said, and revenue exceeds $1 billion.

Suh said that System Center revenue is up 22% and that Hyper-V has gained 4 points of market share in the year. Lync and SharePoint are also growing.

In answer to a question about Surface, Microsoft’s own-brand tablet, Klein spoke about a coming “broader array of Windows 8 devices including lower price points.” 

The deferred revenues disguise what would otherwise be a decline in Windows sales, but in other respects these figures are remarkable, particularly in a difficult economy.

Isn’t Windows 8 a failure, and won’t declining PC sales take Microsoft down too? It is possible, but so far the company has proved resilient. Perhaps the most significant positive here is that both Office 365 and Azure are working for the company, which means that cloud computing is not killing Microsoft’s business in the way that some speculated.

cloud computing, microsoft, professional

Microsoft financials: record revenue, signs of Windows 8 concern

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Yesterday Microsoft released its financial figures for the last three months of 2012.

Quarter ending December 31st 2012 vs quarter ending December 31st 2011, $millions

Segment Revenue Change Profit Change
Client (Windows + Live) 5881 +1140 3296 +416
Server and Tools 5186 +171 2121 +409
Online 869 +85 -283 +176
Business (Office) 5691 -619 3565 -623
Entertainment and devices 3772 -466 596 +79

Although Microsoft reported record revenue, I do not consider these figures all that revealing. The transcript of the earnings call is more to the point. A few notable remarks from CFO Peter Klein and General Manager Investor Relations Chris Suh

  • 60 million Windows 8 licenses sold and 100 million apps downloaded. At 1.66 apps per license that shows lack of interest in the new Windows Store and raises suspicions that some of those sales may actually be downgraded to Windows 7. The remarks from Klein confirm that the new platform is off to a slow start:

It’s early days and an ambitious endeavor like this takes time. Together with our partners, we remain focused on fully delivering the promise of Windows 8.

…

While the number of apps in the Windows Store has quadrupled since launch, we clearly have more work to do. We need more rich, immersive apps that give users’ access to content that informs, entertains and inspires.

  • Suh states that Windows is selling better to businesses than consumers. Declining interest from consumers is obvious if you walk around a few retailers selling Windows PCs:

Within the x86 PC market, we saw similar trends to prior quarters, with emerging markets outperforming developed markets, and business outperforming consumer. The consumer segment was most impacted by the ecosystem transition, as demand exceeded the limited assortment of touch devices available.

  • System Center 18% revenue growth
  • SQL Server revenue 16% growth
  • Online revenue (this is Bing not Azure) up 11%
  • Windows Phone sales 4 times higher than last year
  • Skype calls up 59%

The company says little about Office 365 and Azure, but my perception is that both are growing fast though how significant they are versus traditional software license sales is less clear.

Trouble ahead? With Windows 8 struggling for acceptance, Office under threat from online and device alternatives, the games console business (overall not just Microsoft) probably in permanent decline, and Windows Phone not yet quite mainstream, you would think so. On the other hand, this is a company with a broad and deep product range and looking at the solid performance of the server products and continuing strength of Windows and Office in business, we may continue to be surprised at its resilience.

microsoft

Microsoft financials: still growing in the cloud era, but watch out for tablets

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I am in the habit of putting Microsoft’s results into a simple table. Here are the latest:

Quarter ending June 30th 2012 vs quarter ending June 30th 2011, $millions

Segment Revenue Change Profit Change
Client (Windows + Live) 4145 -598 2397 -511
Server and Tools 5092 +568 2095 +409
Online 735 +55 -6672 -5927
Business (Office) 6291 +339 4100 +399
Entertainment and devices 1779 +292 -263 -276

It is easy to spot the stars: Server and Office.

It is also easy to spot the weaklings, especially Online, which reported a breathtaking loss thanks to what the accounts call a “goodwill impairment charge”. This translates to an admission that the 2007 acquisition of aQuantive was a complete waste of money.

Mixed signals from Entertainment and devices, where revenue is up but a loss is reported. Since this segment munges together Xbox and Windows Phone, it seems plausible that the phone is the main culprit here. Microsoft identifies payments made to Nokia and the addition of Skype as factors.

Windows is down, in part because Microsoft’s upgrade offer for Windows 8 means some revenue is deferred, though one would imagine that worldwide reports of stagnant PC sales are a contributory factor as well.

If you add up the figures, and allow for overheads, it comes to a wafer-thin operating income of $192 million and a $0.06 loss per share.

What do the figures tell us? Two things: Microsoft still makes a ton of money, and that it is exceedingly bad at acquisitions. I am not sure how a company can mislay $6.2bn without heads rolling somewhere, but that is not my area of expertise.

Microsoft’s Server 2012 family has impressed me so my instinct is that we will see good figures continue there.

On the Office side, it is not all Word and Excel. “Exchange, SharePoint and Lync together grew double-digits,” Microsoft said in its earnings call, adding that Lync revenue is up 45%.

That said, how many server licences can you sell in the cloud era? How can Microsoft grow Azure without cannibalising its server sales?

It is tempting to state, like James Governor at Redmonk, that this is The End of Software: Microsoft Posts a Loss for the First Time ever. Microsoft’s figures have stubbornly refused to prove this though; and a quarter where revenue has risen though poisoned by an acquisition disaster is not the moment to call it.

Microsoft has survived the cloud. The bigger question now is whether it can also survive tablets eating into its Windows sales, not helped by Google pushing out Nexus 7 at casual purchase price – see my first take here.

All eyes then on the new Windows 8 and Office 2013.

microsoft, windows, xbox

Microsoft financials: Windows under stress, Server and Office making up

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If we are really in the post-PC era, then one of two things will happen. Either Microsoft will make a big success of non-PC products, or it will start delivering shocking financial results. Neither is yet true. Here are the results just announced, broken down into a simple table.

Quarter ending December 31st 2011 vs quarter ending December 31st 2010, $millions

Segment Revenue Change Profit Change
Client (Windows + Live) 4736 -320 2850 -64
Server and Tools 4772 +484 1996 +285
Online 784 +71 -458 +101
Business (Office) 6279 +169 4152 +65
Entertainment and devices 4237 +539 528 -138

A few observations. Server revenue (though not profit) exceeded client revenue; I am not sure if this is the first time it has done so, but it is unusual. The Office division enjoyed a remarkable quarter, and the press release mentions 10% growth in Exchange and SharePoint, and 30% growth (from a smaller base) in Lync and Dynamics CRM. Azure? Not mentioned so I presume revenue is small.

Where is Office 365? Somewhere in the Office figures I would guess; and once again, since it is not mentioned, I think we can assume it is not delivering a large amount of revenue yet. I would like to know more though.

What Microsoft calls Online is formed of Bing search and services and advertising income. Another hefty loss, but revenue is up, loss somewhat reduced, and Microsoft claims that  “Bing-powered US market share, including Yahoo! properties, was approximately 27%”. Not bad.

This is the big quarter for gaming and Xbox delivered accordingly. The faltering Windows Mobile and Windows Phone 7 are somewhere lost in those Xbox numbers, and again its revenue is not mentioned in the press release.

microsoft, mobile, windows

Microsoft financials: Server and Office business still growing

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Microsoft has announced its quarterly figures for July-September 2011. Despite its problems in mobile and in search, and the declaration of a post-PC era by competitors, the company is still a huge money-making machine. Here is my at-a-glance summary of the segment breakdown:

Quarter ending September 30th 2011 vs quarter ending September 30th 2010, $millions

Segment Revenue Change Profit Change
Client (Windows + Live) 4868 +83 3251 -335
Server and Tools 4250 +386 1597 +57
Online 625 +98 -494 +64
Business (Office) 5622 +401 3661 +196
Entertainment and devices 1963 +168 352 -34

These look like decent figures to me, though Microsoft’s broad-brush breakdown disguises trouble spots like the poor sales of Windows Phone 7. The online business, which includes Bing and ad sales, continues to bleed money, though slightly less than for the same quarter last year.

Microsoft says Bing-powered US search share (which includes Yahoo!) is now 27%, which is impressive, though I look at stats for itwriting.com and see Bing and Yahoo! at 4.7% combined, even though it has more visits from the USA than from any other region. Bing must have some area of strength that does not include technology blogs.

Currently the stars of the show are Server and tools, where Microsoft reports a sixth consecutive quarter of double-digit growth, and the Business division, where Microsoft reports strong growth for SharePoint, Lync and Exchange.

Microsoft also says that Office 365 has “strong adoption from small businesses to large enterprises”, though there are no exact figures. It does not surprise me me as it is an excellent product, misreported by some media who exaggerated the importance of Office Web Apps. Forget Office Web Apps: this is hosted Exchange and SharePoint, with web conferencing thrown in.

Entertainment and devices is mainly Xbox. My observation here is first, to note how well Microsoft has done to take Xbox to the top spot in the US console market, overtaking both the previous generation champion Sony and the once-unstoppable Nintendo Wii; and second, to note how small the profits are relative to the rest of the business. This may be slightly unfair, as I imagine some of those Xbox profits have been poured into Windows Phone investment.

Finally, I was amused by the Metro-style design of the accompanying PowerPoint slides:

image

microsoft, professional, windows

Decent Microsoft results, but where is the cloud? where is mobile?

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Microsoft has released its results for the quarter ending March 31 2011. The figures are pretty good; but despite much talk about the cloud there is little sign that Microsoft is reinventing its business – unless you count Xbox, which has had another excellent quarter and is delivering meaningful operating income for the company.

Quarter ending March 31 2011 vs quarter ending March 31 2010, $millions

Segment Revenue Change Profit Change
Client (Windows + Live) 4445 -205 2764 -399
Server and Tools 4104 398 1419 149
Online 648 82 -726 -17
Business (Office) 5252 911 3165 623
Entertainment and devices 1935 725 225 75

Windows is a little down in the quarter, which Microsoft says in the press release is “in line with PC trends”; a small statement which disguises what must be real concern about the market drift towards iPads and SmartPhones that are made by other companies.

Server and tools put in a decent but unspectacular performance. Office on the other hand was a powerhouse this quarter. Again, the press release statement is telling:

the integrated innovation with SharePoint, Exchange, Lync and Dynamics CRM is driving significant growth for the division

If you substitute “lock-in” for “integrated” you will not be far wrong. As an aside, I spoke to a major UK retailer last week about its move towards desktop virtualization. The exec I spoke to mentioned in passing that as they rolled out SharePoint 2010, they also realised that they would have to upgrade to Office 2010 at the same time, otherwise too much stuff just would not work properly. From Microsoft’s point of view, that is “integration” working as designed.

Online on the other hand, which I understand is mainly Bing and advertising revenue, had yet another miserable quarter. Microsoft says it is pleased that revenue increased; but the loss is bigger too, and the loss is comfortably bigger than the revenue which means it spent more than twice what it earned in this segment. Perhaps it is worth it, if Google is rattled even slightly by Bing’s growing search share, up to a claimed 13.9% in the US, but this is the longest of hauls.

So where’s the cloud? Azure is not mentioned in the release, and I am not even sure in which segment it lives; my guess is Server and Tools. Office 365, which is not yet launched, does get a mention. I think Office 365 will be big business for Microsoft, though it is going to cannibalise the server business a little.

Mobile? Somewhere lost in Entertainment and devices, where clearly the major element is Xbox. Something curious happened when Kinect launched; as a hands-free controller the device is imperfect but its genuine innovation seems to have boosted the profile and sales of the Xbox generally. A couple of years ago when we were all talking about the red ring of death I would not have expected such excellent figures.

This company remains a powerhouse, but the fact that its fortunes remain closely tied to those of the PC, and its lack of progress in mobile devices, are a concern.