Microsoft’s Q2 2015 – Hardware Surprises and Windows Slips

Microsoft’s Q2 2015 – Hardware Surprises and Windows Slips

Microsoft’s Q2 2015 didn’t give us too many surprises. This is obviously still a period of transition for many of its business units, notably Windows. 0.71 EPS was as expected by analysts and $26.47 billion of revenue beat expectations of $26.33 billion. This is a profit decline from the year-ago period, as expected.

Investors are slightly alarmed due to the fact that Microsoft expects to grow only 4 to 5 percent during the fiscal year. This is a result of foreign-exchange issues, weak foreign markets, and the XP effect ending.

Surface

Surface had its highest revenue yet, totaling $1.1 billion, up from $900 million the previous quarter. An interesting stat that was shared was that Surface Pro 3 is selling three times faster than the Surface Pro 2 is. It appears that the Surface line is fast becoming a popular choice for luxury PC hardware. The Surface division has become substantially more profitable, as well.

Lumia

Microsoft sold 10.5 million Lumia smartphones, a new high. Phone revenue fell to $2.3 billion from $2.6 billion, showing that low-end devices are driving growth here. For those interested, 30 million non-Lumia handsets were also sold.

Xbox

Thanks to holiday promotions, it’s common knowledge that the Xbox has recently been selling faster than the PlayStation competition in the USA. A total of 6.6 million devices were sold. As a result of these promotions, it isn’t surprising that revenue fell 20%.

Cloud

Consumer Office 365 gained 2.2 million new subscribers, up 31% and reaching 9.2 million subscribers. This is equivalent to approximately $1.1 billion of recurring SaaS revenue.

Commercial cloud revenue had its sixth consecutive quarter of doubling revenues, an impressive feat that should be difficult to maintain. This is now at a $5.5 billion run rate, up $1.1 billion over two quarters.

Total cloud revenue is approximately $7 billion.

Bing

Bing advertising revenues grew by 23% and USA market share is now up to approximately 20%.

Windows

Windows didn’t so well because the XP effect ended. Both Pro and non-Pro revenue fell by 13%. Volume licensing increased by 3%. Explaining how Windows would be monetized going forward, CEO Satya Nadella pointed to services revenue and sales on the Windows Store, Bing, Xbox Live, etc. The lower licensing costs for OEMs have droven “meaningful platform growth,” as stated by CFO Amy Hood.

There are now more than 2 million people testing Windows 10, up from the 1.7 million announced during the recent event.

Summary

Forex issues due to a strengthening dollar and weak foreign demand should impact Microsoft revenues going forward.

Hardware is the most pleasant surprise of Microsoft’s product range. It appears that the strategy going forward is to push low prices to grow Microsoft’s platform and reach, to later on increase app revenue for developers. The cloud continues to be a reliable growth driver. Windows is the most unstable part of the company, as expected. It’ll be interesting to see how Windows 10 affects hardware and app sales as its launch draws near.