Maybe Amy Hood, Microsoft’s chief financial officer, should stay in power a little longer – or not.
Microsoft (MSFT) posted great results for the just ended quarter, sending the stock up as much as 4% Friday. But there’s less than meets the eye to the software giant’s seeming resurgence.
With CEO Steve Ballmer on the way out, Hood oversaw Microsoft’s quarterly earnings and, oh, what a treat investors got. Revenue jumped 14% to a record $24.5 billion and earnings per share of 78 cents beat Wall Street estimates by 10 cents. Microsoft shares settled down after the initial surge and were up 2% at midday amid a falling overall market that hammered most other tech stocks.
A closer look
Looking closely, too much of the surprise came from one-time boosts, cost cutting and gains in weaker product lines that won’t help much in the future.
Starting with Microsoft’s most profitable niche, sales of Windows and Office software were higher than expected. Overall PC shipments dipped about 6% in the quarter, according to market research firm NPD, but Microsoft’s Windows revenue dropped just 3%.
Unfortunately, the surprise was all on the corporate side, where Microsoft’s decision to end support for Windows XP last year has given sales a short-term bump. Windows 8 remains a controversial product and some analysts say many companies have been asking to install Windows 7 when they upgrade. The shift also helped Office sales, as companies shifted to newer versions as they upgraded operating systems.
Microsoft’s hardware efforts, old and new, also came in above expectations but, again, digging into the details reveals more weakness.
For example, the company said it sold 7.4 million Xbox gaming consoles. But only 3.9 million were the new Xbox One – the rest were sales of the prior model. Xbox One consoles carry a negligible profit margin but should lead to sales of much higher-margin new games and online services down the road. The older Xbox 360 boxes, based on a design that’s now essentially nine years old, have a much higher immediate profit margin, helping this quarter's bottom line. But they won’t bring in nearly as much in future game sales, as the owners won’t be able to run fancy new games created for the new platform.
Another supposed bright spot was sales of the Surface tablet, which doubled from the prior quarter to $893 million. It’s good that Surface tablets are selling better but Hood admitted the effort is still losing money. And the numbers are still so miniscule as to be almost irrelevant in the overall tablet market. In the third quarter – before the holiday shopping period – Apple sold 14.1 million iPads worth $6.2 billion. It’s expected to report selling 23 million to 25 million worth well over $10 billion for the holiday period. And Apple may not even be the leader in tablets anymore, with Android-based devices selling at an even higher rate.
For Microsoft, going from complete tablet irrelevance to only mostly irrelevant isn’t going to make up for years of further declining PC sales.
And Microsoft’s other hardware play, Nokia’s handset division, reported earlier it barely sold more smartphones in the fourth quarter, 8.8 million, than in the prior quarter when it sold 8.2 million.
Not all bad
Not all the good news came filled with caveats. Microsoft’s server business grew 12% and its Hyper V virtualization program gained 5 points of market share. Those gains are in some of the fastest-growing segments of the entire IT landscape.
Finally, much of the earnings beat came from lower expenses, as Hood kept the company’s costs in check. Operating expenses grew only 3%, less than analysts expected and far less than the 11% increase in revenue.
On Wall Street, where quarterly results drive short-term views that may boost a stock price for a few months, that’s great progress. But for investors with a longer view, there are still few signs of real progress, making the CEO search all the more critical.
- Information Technology