Q4 results: Microsoft heading in the right direction

Microsoft reported fiscal Q4 earnings results yesterday. You can read the WPCentral recap of the numbers here. Overall the financial performance was decent, and Wall Street still seems to appreciate the work that Microsoft CEO Satya Nadella is doing to restructure the company for a successful future in cloud and mobile computing.

I've often talked about Microsoft as a turnaround story, and before I dive into my thoughts on the quarter (and the company) let me just explain this a bit. Microsoft is undergoing significant change. They are moving from a desktop-oriented OS and software company to a mobile and cloud computing company that mostly serves enterprise customers with productivity solutions. Some folks do not like the use of the word "turnaround" to describe what's happening, but I think it is appropriate nevertheless. Usually a turnaround is attempted once it is clearly that the business is failing. Microsoft has been very successful and isn't failing. However, it is also obvious that if they stayed on the old path much longer they would fail. So whether you prefer to call it a "massive change in direction" (or anything else) instead of "turnaround," be my guest. I am not going to argue about a label.

Microsoft posted $23.4 billion in revenue for the quarter. Because of the Nokia integration about two months of Nokia revenues are lumped in here, or $2 billion. If we adjust for this Microsoft still posted 10% year over year revenue growth, which is quite strong.

Earnings per share (EPS) were $0.55, but the Nokia business hurt them by $0.08 in the quarter meaning that core Microsoft earnings were actually $0.63 per share. Analysts were expecting $0.60, and having been an analyst for a long time I guess most analysts did not incorporate an estimated loss from Nokia in these numbers, so I think we can reasonably say that Microsoft posted stronger than expected earnings.

In keeping with the major shift away from desktop and towards cloud/mobile, Microsoft was very keen to share the 147% year over year growth they posted in "commercial cloud," which is mostly Azure and Office 365. They said revenue is now at a run rate of over $4.4 billion which means quarterly revenue was about $1.1 billion or almost 5% of the entire company's revenue. Considering the growth rate and the size of this revenue base as of today, I think it holds a lot of promise for Microsoft in the coming years. We are entering a world of software as a service (SaaS) and I think customers are becoming quite accepting of the idea they'll pay a recurring revenue for productivity software such as Office 365. In the long run, this SaaS works out better for Microsoft, and while customers spend more money they never have to worry about software installation or maintenance.

The Server and Cloud division, which houses the above-referenced "commercial cloud" stuff posted a total of $13.5 billion in revenue, or 58% of Microsoft's total. That is up 11% year over year.

Looking at the phone business, they sold 5.8 million Lumia phones in the quarter but remember this only accounts for a partial quarter under Microsoft's ownership. We can estimate that year over year Lumia growth was probably closer to 20% instead of the decline that the unadjusted numbers suggest. Microsoft was very clear that the Lumia growth is coming from the Lumia 52x/62x series phones, and I am happy to see they've finally embraced (successfully) the low end of the market. There is a lot of volume to capture here, and Microsoft is making steady progress. That said when an entire operating system has less than 10 million smartphones sold per quarter it is not making the kind of progress required to get anywhere close to narrowing the gap between the top two players (Apple and Google) and #3 (Microsoft ).

The 30 million non-Lumia phones sold in the quarter also remind us why the acquired Nokia division is taking the brunt of the job cuts recently announced. Yes it is unfortunate, but it is also very clear (when running a business) that feature phones have no place inside of Microsoft. As a reminder, when Microsoft cuts 18,000 jobs in the next few quarters about 5,500 (a minority of the total) are core Microsoft folks. Also keep in mind that in any given year Microsoft probably sees about 8,000 people resign, so they should be able to accomplish much of the non-Nokia cuts via normal attrition.

All things considered it looks to me like Microsoft is on pretty solid ground. They are making smart choices by consolidating teams to avoid duplication (OneDrive vs. OnDrive for Business, Skype vs. Lync, Exchange vs. Outlook). They expect operating costs to fall in 2015 despite seeing revenue rise. They are the clear leader in office productivity software, and they are using this position successfully to monetize the growth of other mobile platforms which mean they do not need to win the mobile OS war.

Financially, the stock trades at about $45 and analysts figure they'll report $3.15 in EPS next year. That puts the stock at a forward price to earnings multiple of 14, which also happens to be right in line with Apple. This is not an expensive stock, nor does it grab me as particularly risky.

For those of you who spend time looking at tech stocks what's your take? Leaving you own personal views of the products aside, which stock would you rather own at a 14 P/E multiple? Microsoft or Apple? Microsoft already has the enterprise penetration that Apple is after. However, Apple has the kind of mobile market share that Microsoft would love.

(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.)

Chris Umiastowski