Q3 Results: How’s Microsoft doing in its cloud and mobile transition?
Following Microsoft's Q3 FY2014 earnings report from last night I thought we should take a look at the big picture behind the numbers and address some of the key themes from the company's analyst conference call (which you can find here (opens in new tab))
Let's have a quick look at the numbers for Q3. Revenue was $20.4 billion, gross profit was $14.5 billion and operating income was $7.0 billion. While adjusted revenue grew 8%, earnings per share (which came in at $0.68) grew slightly less at 5%.
Clearly Microsoft is not in any kind of financial trouble. I say this despite not exactly being a Microsoft fan. I own and use exactly zero of their products so I'm simply looking at the business as a technology investor here. Microsoft is growing slowly. No, they're not even growing as fast as Apple and they certainly are not growing anywhere close to as fast as deeply mobile companies like Facebook. But they're growing and are on very strong financial footing.
What makes Microsoft unique is its deeply entrenched position into the market. They're also making progress shifting the business model to align with their new "cloud first, mobile first" mantra. Yeah, I know the phrase is already getting tiring, but I think it says a lot about what the PC giant is doing and what they've admitted to themselves.
What have they admitted? I think they know that Apple and Android have the mobile hardware and operating systems pretty well locked up at this point. It's a very tough uphill climb for anyone to compete, including Microsoft. And because the desktop / notebook market will be deeply affected by mobile trends, the Windows OS franchise is not as valuable as it once was.
The solution? Move business IT functions into the cloud and support them from any device whether it runs Windows, Android or iOS. Sell subscriptions to cloud-based software like Office 365 rather than old licenses for Microsoft Office installed on Windows boxes. Sell the infrastructure to build apps in the Azure cloud instead of selling server boxes. Allow corporate clients to downsize their IT departments and pay part of the old equipment and staffing bill to Microsoft instead.
The migration of Microsoft to this new cloud and mobile model is in its very early days, to be clear. The "Commercial Other" line, where all cloud revenue falls, amounted to $1.9 billion, or less than 10% of total company sales in the last quarter. But the big pieces (Azure and Office 365) both grew at least 100%, so by this time next year it's possible Microsoft could be significantly further along in its transformation.
One year ago I was very bearish on Microsoft. I felt they had no chance of being a #1 or #2 in the mobile platform wars, which would hurt them compared to theoretical world where Windows Mobile was the dominant operating system. But I neglected to consider just how powerful Microsoft is with its large enterprise customer base. These are businesses that (generally) move quite slowly when it comes to IT strategy. So Microsoft just needs to move faster than its customers need them to, which I think is happening.
Microsoft is highly profitable and last night they reported $88 billion of cash offset partly by $21 billion of long term debt. They are well equipped, financially, to transform themselves over the next decade. At the end of that decade, it's possible many of its big customers may not use Windows anymore. But if they still use Office (in the cloud) and run enterprise apps via Azure, then Microsoft should make out like a bandit. However, I'm still keeping my eyes open to the possibility of Amazon, Google and others accelerating their competitive efforts against Microsoft.
What's your take? Do you think I'm too concerned about Windows market share erosion? Or maybe I'm not being aggressive enough in describing the risk? What do you think the likelihood is that Nadella's team can radically transform an old-world computing company into a cloud and mobile leader? Is it reasonable to pay 14x next year's earnings for Microsoft at this point in the turnaround when you consider the risks? Drop us a comment.
(Chris Umiastowski is a contributing financial writer to the Mobile Nations network. You can see the rest of his posts here at AndroidCentral, iMore and CrackBerry.)
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Everyone in the room said "yeah! I want that" And here we are years later, MS still piling billions into the bank and growning. Will they ever be a hyper growth get rich quick investment opportunity? No. MS are like a utility company, stable steady growth, steady share dividends.
Not like our life depends on a web search about corn sirup and lemonade brands.
They moved faster with Windows 8. People freaked out. Got scared and angry. Asked for one of the same. Next suggestion?
Could you explain "doesn't even make a usable tablet" ?
Thank you for going through the effort of digging up of of my many mistakes. I'm sure it didn't take very long. You could have put forth a more impressive effort and made a much longer list. I have been investing in tech stocks (and writing about it) for nearly 20 years. As successful as I've been, I've made countless mistakes. I'd contratulate you on your findings, but given how much I've published it is not hard to find a call that's gone wrong.
I'm disappointed in Dan. This article is way off topic for WPC in the first place, but then isn't even good.
There is an exciting new play by MS to sell off-premises IT, with Office365 for mobile as catalyst, but I see no redeeming features in this article.
The offering is summed up perfectly here:
Moverover, the final form-factor is not smartphone or tablet anyways. Its wearables, but not the google glass does it. It has to be aprt of the person, and extention of them, invisible, but to the wearer. Most important it jas to totally intuitive. The company to crack will win. Posted via the WPC App for Android!
Becuass office 365 does not have a run rate of 2.5 billion with office in the empire still raking it in. And apple has its own sql server, virtual machine business, and countless business foucus partners. Yeah apple is going for the enterprise. But i am sure they make less than money than msft will make for phones and tablet and msft is still not significant there. So who is n more trouble. Posted via the WPC App for Android!
I trust MSFT than any other company out there, I will never use google, or even an iPhone, but WP has a long to go to catch up, I think MSFT knows that as long as they keep improving the products people will eventually take notice not just FOLLOW..
I see plenty of non Apple and Android users debating and commenting on those products, companies and services here.
Irony.....look it up in the dictionary sometime ;)
As for the article, I found a good read and definitely better than some "fan boyish" articles some others here expect to read obviously!
Article is very relevant, and fandom clouds ones judgement.
There are a lot of small minded people here on WP Central it seems.
...dont let them fool u