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Microsoft’s Biggest Loss Encouraging

Microsoft CEO, Satya Nadella

Microsoft described its biggest-ever loss in results published a week ahead of the launch of Windows 10. This was the result of slowness in the PC market, the rise of the dollar and a large write-down from its acquisition of Nokia. However, the market was encouraged by CEO Satya Nadella’s (pictured) willingness to take decisive action, and by growth in other core parts of the business.

Revenue for the quarter was down 5% over the year to $22.2 billion, but would have fallen 2% without foreign exchange effects. Revenue for the full year was up 8%, at $93.6 billion.

Gross profit fell 7% over the year (or 3% with constant currency) to $14.7 billion, lowering gross margin from 67% to 66%. Microsoft took a $7.5 billion impairment charge on its acquisition of Nokia, a $780 million restructuring charge as it closed much of the acquired units down and an integration charge of $160 million. These led to an operating loss of $2.1 billion, down from profit of $6.5 billion a year ago. Net profit fell over the year, from $4.6 billion to a loss of $3.2 billion.

Commercial revenue grew 0.2% to $13.5 billion in spite of an unfavourable currency swing, and there is a significant and ongoing mix shift as Microsoft moves to new business models and services. Commercial licensing (mainly Office and Windows) fell 7% over the year, with Office commercial down 18% as transactional revenue dipped and the effects of the termination of Windows XP worked through. Server products and services revenue was up 4% — annuity growth that was faster than the market made up for lower product purchases.

Microsoft’s commercial cloud segment grew by 88%. Revenue for the quarter reached $1.78 billion, driven primarily by growth of Azure, Dynamics CRM and Office 365. Microsoft now has 17,000 customers for its Enterprise Mobility Suite, up from 13,000 the previous quarter. This area is a good example of what Mr Nadella hopes to achieve across other parts of the business.

The devices and consumer group had a difficult quarter, with revenue falling 13% to $8.7 billion and with a large mix shift underway. The decline was mainly the result of lower phone sales and Windows Phone licensing revenue, as well as reduced Windows OEM and consumer Office purchasing revenue as the PC market continued to slow.

Microsoft shipped 8.4 million Lumia smartphones in the quarter. This was up from 5.8 million a year ago, but down sequentially and increasingly skewed toward the lower end of the smartphone market. The company shipped 19.4 million non-smartphones, down 36% over the year as the market shrank. The phone hardware segment lost $104 million in the quarter, and the deteriorating losses coupled with difficult competitive dynamics led to the bulk of the phone business being shut down. Microsoft will continue to produce smartphones, but with a sales model similar to its approach with Surface devices — premium products will be released in limited volumes, without being a significant competitor to the company’s partners.

Commenting on the cloud business results, Piers Linney, Co-CEO of Cloud Services Provider (CSP) and Microsoft Gold partner Outsourcery, says that the results demonstrate the success of Microsoft’s strategy in putting cloud computing at the forefront of its commercial strategy, as customers shift away from traditional on-premises storage.

Linney states: “The growth of cloud brought a number of challenges to many of the established players in the industry who have had to rapidly adapt to new business models as a result. These latest results from Microsoft, while mixed, show that it has held its strong footing in what is a rapidly expanding cloud market.

“When we chose to position Microsoft’s product stack and the Microsoft cloud platform at the heart of our offering, Outsourcery was questioned as to why we were limiting our potential market and not taking a more agnostic approach. However, when you think that virtually every company uses some sort of Microsoft tool, we felt that this was a sensible move to grow our offering. Further to our Microsoft services, we have been passionate about developing our own public sector proposal and bringing added value to the table through our partner programme. Additionally, we have worked to create our own Ofcom-regulated, enterprise grade O-Cloud platform.

“Working with Microsoft enables us to deliver expertise in an offering that is always reliable and best-of-breed. Microsoft’s latest cloud sales result justifies our decision to remain Microsoft-centric and shows that the strength of Microsoft, and Outsourcery in turn, will only continue.”