Here’s How Microsoft Beat Wall Street’s Expectations

Steve Ballmer

The years of Microsoft (NASDAQ:MSFT) Chief Executive Officer Steve Ballmer’s tenure have been come to be known as the “lost decade” by technology writers and industry experts. Ballmer has taken a great deal of criticism for the poor performance of Microsoft’s stock since he assumed the leadership position in January 2000; the stock has lost more than 35 percent of its value in the past 14 years, a symptom of Microsoft’s inability to keep up with the changing technological trends. Since its software populates the majority of the world’s personal computers, Microsoft has suffered as a result of the shift in consumer and business spending to tablets and smartphones and away from personal computers.

At one time, the company dominated the tech industry, but since 2000, competition from rivals like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) — companies better positioned to profit off technology’s turn to mobile computing — has left Microsoft playing catch up. The company’s key releases in search and in tablets have fallen flat, or at least short of surpassing the competition. With each passing product launch, those competitors are pulling farther and farther ahead. Further, long-time business writer Kurt Eichenwald, in his August 2012 Vanity Fair piece, described Bill Gates’s successor — Ballmer — as the responsible party. Now, with Ballmer looking for his own replacement, the question of leadership has captured the imagination of technology analysts to such an extent that the company’s second fiscal quarter earnings were almost overshadowed by the absence of news on Microsoft’s search for a new chief executive officer.

Even though Microsoft has fallen behind its competitors, it is important to remember the maker of the Windows operating system is still a very profitable company, and its financial results for the last quarter of 2013 prove that point. Both revenue and profit beat Wall Street’s expectations; sales soared to $24.52 billion in the second fiscal quarter, an increase of 14 percent from the year-ago quarter and well above the consensus estimate of $23.5 billion. Operating income totaled $7.97 billion while net income came in $6.56 billion, pushing earnings to 78 cents per share. Comparatively, analysts had forecast Microsoft to generate earnings of 67 cents per share.

Investors reacted enthusiastically to the strong top line and bottom line numbers, bidding shares up as much as 4.17 percent — to $37.55 — in today’s trading. “Our commercial segment continues to outpace the overall market, and our devices and consumer segment had a great holiday quarter,” Ballmer said in the earnings statement. “The investments we are making in devices and services that deliver high-value experiences to our customers, and the work we are doing with our partners are driving strong results and positioning us well for long-term growth.”

The devices and consumer segment to which Ballmer referred recorded second-quarter revenue of $11.91 billion, a 13 percent increase from a year ago. That gain was largely thanks to sales of Microsoft’s Surface tablet, which more than doubled, and a 34 percent jump and search advertising revenue from Bing. However, revenue derived from the Windows operating system dropped 3 percent, evidence of continued weakness in the market for personal computers.

More specifically, commercial revenue increased 10 percent to $12.67 billion, due largely to strong revenue from Microsoft’s commercial cloud services, which the company said more than doubled. Microsoft Chief Operating Officer Kevin Turner noted that the strength in cloud services revenue came from customers “embracing” products like Microsoft Office 365, Azure, and Dynamics CRM Online. Plus, the company explained that Office 365 commercial seats and Azure customers “both grew by triple-digits.”

However, concerns for the future are still valid; Microsoft is at an important juncture, and investors and analysts alike will be inspecting the numbers for evidence that the company is on the edge of a revival rather than at the outer reaches of ebbing prosperity.

Changes are happening at Microsoft. Last September, Microsoft and Nokia (NYSE:NOK) — two companies whose mobile futures are already deeply intertwined — announced their plan to combine forces; the maker of the Windows operating system will purchase substantially all of Nokia’s Devices & Services business, license the company’s patents, and license and use its mapping services for 5.44 billion euros, or about $7.5 billion. In a bid to carve a niche in the increasingly mobile world, the company is also in the midst of remaking its software into Web-friendly (or, cloud) versions.

While Microsoft looks to become a stronger player in the mobile world, the company is also looking for a candidate — who will be only the third chief executive in its history — to lead that effort. The reason Wall Street expected the company to post a modest revenue of $23.7 billion is because it was believed Microsoft’s struggles would be reflected in its financial results.

The company’s future struggles were evident in Nokia’s results. The smartphone industry has heard rumors — very tentative rumors — that partnership between Microsoft’s Windows Phone mobile platform and Nokia’s Lumia handset has begun to gain on the competitive smartphone industry dominated by Samsung (SSNLF.PK) and Apple. Evidence that the market may have room for device that is not powered by Google’s Android or Apple’s iOS was delivered in the third-quarter by the research firm Gartner, whose summary of the smartphone industry noted that “the winner of this quarter is Microsoft, which grew 123 percent.” The news release further explained that Microsoft acquisition of Nokia’s devices and services business will serve to “unify effort and help drive appeal of Windows ecosystem.”

But the Windows Phone-powered Lumia has to make up a lot of ground before it can be considered a true contender for the smartphone crown. The fact that Android surpassed 80 percent market share in the third-quarter of 2013 confirms that reality, as did Nokia’s fourth-quarter earnings, which showed a 29 percent, year-over-year, sales decline in its soon-to-be-sold handset business. For Microsoft, that drop is a worrying sign

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