Microsoft Makes Bold Moves

Microsoft has had an eventful beginning to the year 2015. The company is charging down the path of its mobile and cloud-first initiative and Windows gradually becomes a supporting actor in their movie.

According to Gartner, global PC shipments during the fourth quarter of 2014 grew 1.1% over the year to 83.7 million units. The modest growth is an improvement over the decline that was being recorded for the past two years. It was driven by US market, which saw the highest growth in the quarter followed by the Western European market. The emerging markets still showed weak PC growth as consumers in these regions continued to invest in mobile devices such as smartphones and tablets. But where once upon a time Microsoft’s (Nasdaq: MSFT) growth was directly linked to PC market growth, soon it may no longer be the case.

Microsoft’s Financials

Microsoft’s second quarter revenues grew 8% over the year to $26.47 billion, ahead of the market’s projections of $26.3 billion. EPS of $0.71 was in line with the Street’s target for the quarter. EPS was $0.78 a year ago. The decline in the earnings was attributed to the job cuts and the Nokia acquisition completed last year.

Microsoft continued to shift the focus in their business to the cloud. By segment, revenues from the devices and consumer revenues grew 8% to $12.9 billion with Surface revenues growing 24% to $1.1 billion. Office 365 Home and Personal subscribers increased 30% sequentially to 9.2 million. Search revenues also registered strong growth at 23%. Bing accounted for 19.7% of the US search market share, improving 150 basis points over the year. During the quarter, Microsoft reported sales of 10.5 million Lumia units. Revenues from sales of Phone Hardware was $2.3 billion.

Revenues from the Commercial segment improved 5% to $13.3 billion with Commercial cloud revenues growing 114% driven by Office 365, Azure, and Dynamic CRM Online. Microsoft’s commercial cloud segment is operating at an annualized revenue run rate of $5.5 billion. Office sales continued to decline and revenues from Office Commercial products and services fell 1% due to the the continued transition to Office 365 and declines in commercial PCs following the XP refresh cycle.

For the current quarter, Microsoft forecast revenues of $20.6 billion-$21.4 billion, falling significantly short of the Street’s forecast of $24 billion.

Microsoft’s Windows Strategy

Microsoft is gradually shifting their focus away from being a Windows-centric organization. Instead, they are increasing their efforts to becoming a services-focused company. As part of this move, Microsoft announced a deal that will let users upgrade to the latest Windows 10 for free. Users of Windows 7, Windows 8.1, and Windows Phone 8.1 will be able to upgrade to Windows 10 for free for the first year. Upgrades after the end of the year will be charged a fee, but users who availed of the offer during the year will be able to continue to use Windows 10.Windows 10 will also be made available for free to manufacturers for devices with screens smaller than nine inches.

Like others, Microsoft too is shifting to a subscription-based model instead of an upfront license fee-based model for their software offerings. For instance, they are pushing subscriptions such as the Work and Play bundle that include access to Office 365 Home, Xbox Live Gold, Xbox Live Music, and Skype Unlimited for a starting price of $199 per year.

Additionally, Microsoft will also benefit from a standardization of OS platforms. Assuming that most users will be upgrade to Windows 10, Microsoft could have 70% of the PC market operating on Windows 10, making it easier for them to deploy Cloud and Productivity solutions.

Microsoft’s Acquisitions

Last week, Microsoft announced the acquisition of data science specialist Revolution Analytics for an undisclosed sum. Revolution Analytics is the leading commercial provider of software and services for the open-source R programming language used for statistical computing and predictive analytics. Revolution Analytics has helped simplify the use of the R programming language and engineered it to run across Big Data systems such as Hadoop. Through the acquisition, Microsoft will be able to improve the data analytics offerings, especially to cater to larger volumes of data on a real-time basis. They are planning to leverage the acquisition to offer advanced analytics not only within Microsoft data platforms on-premises but also in hybrid cloud environments and on Microsoft Azure.

Earlier last week, they also acquired text analysis service Equivio for an estimated $200 million. Equivio is known for their Zoom line of products that uses machine-learning techniques to automatically identify and group documents for their legal and compliance needs. Through the acquisition, Microsoft will be able to improve their legal and compliance-related tools for Office 365 by enabling their customers to better manage large quantities of email and documents.

As part of their mobile focus, last month they acquired Accompli and HockeyApp. Accompli is a provider of innovative mobile email apps for both Android and iOS. Besides general email capabilities, the Accompli app lets users schedule meetings and work with attachments and files.

HockeyApp is a leading service for mobile crash analytics and app distribution for developers building apps on iOS, Android, and Windows Phone. Germany-based BitStadium owned HockeyApp prior to the acquisition. HockeyApp offers mobile development capabilities that help developers with the development, distribution, and beta testing of mobile applications.

Microsoft’s stock is trading at $41.19 with a market capitalization of $338.5 billion. It touched a 52-week high of $50.05 in November last year.