Microsoft announced numbers for the quarter to 31 December 2014 which highlight the challenges it is facing on a number of fronts, with Satya Nadella, CEO, stating it is making “bold steps forward” across its businesses.
“We saw success in a number of our strategic areas including cloud adoption; redefining and revitalising the Windows ecosystem; and improving economics in our hardware portfolio,” he said.
“As expected, the onetime benefit from Windows XP end of life PC refresh cycle has now tailed off. Additionally, we ran into unexpected issues in select geographies – where there are execution issues, we will address them; and where there are macro-economic challenges, we will weather them,” the executive continued.
For Microsoft’s mobile phone handset business, 10.5 million Lumia units were sold, which it said was “driven by growth in affordable smartphones”.
“In this segment of the market, with the combination of our brand and value standout, we plan to continue to build a beachhead here,” Nadella said.
It sold 39.7 million non-Lumia phones, declining as the feature phone market continued to contract. Nadella said Microsoft is “making changes to the product portfolio and managing this business for profitability”.
As observers swiftly noted, this could mean that Nokia slips further down the global handset charts, with the very real possibility that the smartphone-only Apple will have shifted more devices in Q4 than all of Microsoft’s smartphone and feature phone products – marking the continued decline of what was once the comfortable global number one handset business.
Apple’s shipment volumes are somewhat lumpy, but with the bumper Christmas holiday sales period and the global rollout of iPhone 6 and iPhone 6 Plus, the signs are good for a strong quarter.
Revenue for Microsoft’s phone hardware business was $2.28 billion, down from $2.61 billion in the previous sequential quarter (year-on-year comparisons are as-yet unavailable). Gross margin was 14 per cent.
Windows Phone licencing revenue declined 61 per cent, due primarily to the end of the commercial agreement which saw Nokia paying revenue for the platform until its Devices & Services unit was acquired by Microsoft.
Revenue for the much maligned Surface product line of $1.1 billion was up 24 per cent (the first period past the $1 billion milestone), driven by sales of Surface Pro 3 and accessories. This prosumer device certainly appears to be generating more momentum than earlier products in the company’s line, perhaps indicating that there is a market for productivity-driven tablets in addition to more consumer-oriented products.
On a group level, the company reported a net profit of $5.86 billion for the quarter, down from $6.56 billion, on revenue of $26.47 billion, up 8 per cent.
The company noted $243 million of integration and restructuring charges, following a shake-up announced after the Nokia Devices & Services acquisition closed.
Looking forward, phone hardware revenue is expected to be $1.4 billion to $1.5 billion. This anticipates accelerated growth in Lumia units “driven by our affordable smartphone devices”.
But it also expects volumes and average selling prices of non-Lumia devices to continue to decline in Q3, with the lower aggregate revenue base impacting gross margin.