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Microsoft Firing on All Cylinders

Posted on Monday, Nov 3rd 2014

According to Gartner, PC shipments in the third quarter this year fell 0.5% over the year even as there was growth in Western Europe and North America. IDC had a worse estimate as they saw PC shipments fall 1.7% over the year. Declining PC sales are a continuing catalyst for Microsoft to switch to other revenue sources.

Microsoft’s Financials
Microsoft’s (Nasdaq: MSFT) first quarter revenues grew 25% over the year to $23.2 billion, ahead of the market’s projections of $22.01 billion. EPS of $0.54 was also significantly ahead of the Street’s target of $0.49 for the quarter. Excluding the $0.11 per share of restructuring expenses, Microsoft would have earned $0.65 per share compared with analyst estimates of an EPS of $0.55.

By segment, revenues from the devices and consumer revenues grew 47% to $10.96 billion. The segment included Nokia phone sales revenues of $2.6 billion and a strong growth in the online segments. Revenues from the Surface Pro 3 tablet computer doubled over the year to $908 million. Total Xbox console sales grew 102% to 2.4 million, driven by the launch of Xbox One in 28 new markets.

Total commercial sales increased 10% to $12.28 billion with Server products and services revenue growing 13% over the year. Office Commercial products and services revenue grew 5% and Windows volume licensing revenue increased 10%.

Microsoft’s Cloud First Move
Microsoft has been focusing their efforts on improving their cloud offerings to the market. They are already seeing positive results from their efforts. They ended the quarter with online subscribers to the Office 365 suite growing 25% over the year to 7 million. Within the Commercial segment, Azure’s revenues grew 128% over the year.

To further strengthen their cloud offerings, Microsoft recently removed storage limits on cloud storage. As per the offer, all customers of their Office 365 Suite will now be able to get unlimited storage within the OneDrive cloud synchronization and storage product. Thus, by paying a monthly fee of $6.99, customers not only have access to all the Office applications, but also access to unlimited cloud storage.

Microsoft’s Gaming Focus 
Microsoft may have delivered strong console sales, but Sony’s PS4 has given it a run for its money. As of August this year, PS4 was a clear leader in console sales globally with more than 10 million console sales since its release in November 2013. In September though, XBox One finally caught up and outsold PS4 by nearly 75,000 units.

Microsoft’s XBox One’s launch late last year was riddled with troubles. At the onset, the console had DRM issues and Microsoft had priced it higher than the PS4 because they bundled it with Kinect. Since then, Microsoft has managed the product better. The DRM issues have been fixed, prices have been reduced by unbundling Kinect, and users no longer need to subscribe to the Gold Membership to access their third party apps. To maintain the pressure on PS4, Microsoft recently announced another price cut. They are now reducing XBox One’s price by $50 to sell it at $349. Experts believe that the price reduction will make it a tough decision for buyers because while PS4 is still a superior product, at the lower price XBox may offer a better deal.

Microsoft continues to add to their gaming portfolio and in September this year announced the $2.5 billion acquisition of Mojang. Mojang is best known for the vastly popular Minecraft game. Analysts believe that the acquisition will help Microsoft build deeper inroads into a younger demographic which they were gradually losing to the likes of Apple and Samsung. Additionally, the game comes with good interface for the iOS, Android, and traditional desktop devices.

Microsoft’s Windows 10
Microsoft is also working on releasing a new version of Windows soon. They are skipping Windows 9 and instead will be releasing Windows 10 which will help them get over some of the missteps they had with Windows 8. The OS is also expected to help strengthen sales for Windows and PCs.

According to market reports, one of the big issues with Windows 8 was that it was focused on touch-screen devices while ignoring that most users who still use Windows use it on a standard desktop. Microsoft plans to change the interface back to making it more friendly for desktop users. But they are going a step ahead by ensuring that for devices with detachable keyboards, the OS will transform to a touch screen friendly mode when the keyboard is disconnected. More details of the new OS will be available as time for the release approaches.

Microsoft Enters Wearables
To make sure Microsoft does not get behind some of the newer market trends, Microsoft recently announced the launch of their wearable device. Called the Microsoft Band, they released a smartwatch that will not only let wearers track their heart rate, UV light, sleep and distance traveled, but will also be able to make payments at Starbucks outlets through stored gift cards.

It will work with their Microsoft Health system and consolidate the wearer’s health and fitness data from the gadgets and mobile apps to give a more comprehensive view. The Band will work on multiple health systems including iOS- and Android-based devices. It will gain some competitive edge over the much awaited Apple Watch.  Band is much more reasonably priced at $199 compared with Apple’s $349 and will be available for the holiday season.

Microsoft’s stock is trading at $46.95 with a market capitalization of $387 billion. It touched a 52-week high of $47.57 in September this year.

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