LAST NIGHT SAW Microsoft announce its earnings for the final quarter of 2014 and while it was rather positive, there are some aspects the company will be keeping an eye on for 2015.
While certain areas like devices and cloud services performed better than expected, Microsoft still has to contend with a stagnating PC market and a future where one of its major sources of revenue will likely experience a hit as it makes the latest version of Windows a free download (for the first year anyway).
The figures
The main figures for Microsoft during this period were as follows:
- Overall revenue was $26.5 billion (€23.4 billion).
- Gross margin was $16.3 billion (€14.4 billion).
- Operating Income was $7.8 billion (€6.88 billion).
- $1.1 billion (€971 million) in revenue from the Surface Pro.
- 10.5 million Lumia devices sold, phone hardware was $2.3 billion (€2.04 billion).
- 6.6 million Xbox consoles were sold.
Yet the company’s stock went down by 4% after-hours. Part of this was down to commercial software licensing – a major area for the company involving Windows – falling by 2% in the last quarter to $10.7 billion.
What went well
Investing in the cloud is beginning to pay off: Probably an area that people may have not suspected as a growth area for Microsoft, considering the number of rivals in the field, but seeing its revenue jump by 114% suggests otherwise. The success of Office 365, which now has 9.2 million subscribers in its Home and Personal Service, places it as one of the top corporate cloud services out there. The company’s expected it will make $5.5 billion (€4.88 billion) in revenue from it by the end of the year.
The Xbox One is making up lost ground: While the Playstation 4 had a strong start, the Xbox One hasn’t had as similar success. It’s beginning to change but while it was a positive quarter, there’s still some work to do.
Microsoft sold 6.6 million units between 1 October and 31 December while Sony said it sold 4.1 million PS4 consoles during the same period. The only problem is Microsoft didn’t offer a breakdown of the number between Xbox One and Xbox 360 which is a little concerning.
Microsoft had taken measures to make the Xbox One more appealing, like dropping its price by removing Kinect, but it’s been mostly reluctant to share figures at the best of times is noticeable. Still, the revenue generated from these sales will be more than enough to ease worries for now.
Devices are on the up: Despite Microsoft’s hybrid device trying to cater for both PC and tablet users and not entirely succeeding – mainly because of the software used, but that’s another story – the Surface is becoming more popular with users having experienced growth. the other surprising area would be Windows Phone or more specifically the Lumia devices which sold 10.5 million handsets.
This would likely be down to its focus on cheaper devices (it recently announced a budget device, the Lumia 435, which will cost €69), and it coming to the end of a painful restructuring since it bought Nokia’s handset division, but from first impressions, it looks like this strategy is bearing some fruit.
What didn’t go so well
Windows is beginning to slide and it could continue: The core of Microsoft’s business is its software and while $10.7 billion isn’t exactly a slide, this is going to drop further as Microsoft tries to bring everyone onto the same page with Windows 10, especially since it’s offering the upgrade in the first year for free.
At the earnings call, Microsoft’s Chief Financial Officer Amy Hood blamed the fall on the end of a once-off upgrade period concerning Windows XP. When Microsoft ended support for it last year, it prompted some corporate users to upgrade and pay for it. Also, it hasn’t performed as well as expected in certain territories like China, Japan and Russia.
However, the problems cited are deeper than that and are controllable by Microsoft, especially since the XP situation was a once-off situation. It’s likely that Microsoft is preparing for a world where Windows isn’t a revenue stream in itself but a facilitator as it relies more on cloud and device sales (and maybe app sales if it manages to grow) to drive up revenue.
There is the slight possibility that it will make Windows a paid product again but considering the direction software upgrades have been going, the one-year free window could easily be extended and apply to future upgrades.
The PC market continues to stagnate: Granted, this is less in Microsoft’s control but it certainly is something that it’s been keeping an eye on for a while. While the move to tablets hasn’t quite materialised the way most of us had expected, it’s means that is Microsoft has to prepare for all eventualities.
Again, this ties back to Windows 10 and how successful it will be when it’s released. Since it’s really designed to cater for both small and large screens, with the option to switch between the two modes, having that consistency would keep it insulated regardless of the direction the PC or tablet market heads.
HoloLens would be another device that will likely help out Microsoft in the long-run but for now, restoring faith in Windows is the main priority as without it, developers and users won’t be interested in using it.
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