Microsoft Posts Record Loss Despite Booming Cloud Business

The recent quarter result was a new kind of a record quarter for Microsoft (Nasdaq: MSFT) as the company recorded its biggest quarterly loss ever. While Microsoft continues to make several advances in the cloud technology, it is still being bogged down by its acquisition of Nokia. But its recent results were a clear indicator of how the company is continuing to shift its focus from the consumer to the enterprise business.

Microsoft’s Financials

Microsoft’s fourth quarter revenues fell 5% over the year to $22.18 billion, ahead of the Street’s forecast of $22.05 billion. Adjusted EPS of $0.62 was also ahead of the market’s forecast of $0.58 for the quarter. Net income, however, was a completely different story. Microsoft took a write-off of $7.6 billion toward their devices and services unit, which includes the Nokia business. They also incurred a restructuring charge of $780 million during the quarter. Including these expenses, they ended the quarter with a loss of $0.40 per share.

By segment, Devices and Consumer revenues fell 13% to $8.7 billion. The decline was attributed to a 22% decrease in Windows OEM revenues which were impacted by PC market declines following the XP end-of-support refresh cycle. Surface revenues grew 117% to $888 million and Xbox revenues increased 27% over the year. Their Search advertising revenues increased 21% as Bing’s market share of the US search market grew 110 basis points to 20.3%. They are projecting that Bing will turn into a profitable business during the current fiscal. In the previous quarter, Microsoft added 3 million subscribers to Office 365, ending with 15.2 million subscribers.

For the quarter, Commercial revenues increased marginally to $13.5 billion with commercial cloud revenues improving 88%. Commercial cloud revenues are currently trending at an annual run rate of more than $8 billion. Server products and services revenue grew 4%, Dynamics revenues were up 6% and Office Commercial products and services fell 4% over the year. Windows volume licensing revenue also registered a decline of 8% due to the XP end-of-support refresh cycle.

They ended the year with revenues growing 8% to $93.58 billion and an adjusted EPS of $1.48.

For the current quarter, Microsoft forecast revenues of $20.7 billion-$21.3 billion, falling significantly short of the Street’s forecast of $22.58 billion.

Microsoft’s Windows 10

Microsoft is focusing on the July 29^th release of Windows 10. The software will be available in 190 countries and will include their latest productivity software suite and Office 2016, which have the newest versions of Word, Excel, PowerPoint, and Outlook. The OS will be offered as a free upgrade to existing Windows 7 and 8 users. Both Microsoft and their users are looking forward to the latest upgrade.

Microsoft’s customers had reported issues with Windows 8, which are expected to have been resolved in this version. Windows 10 will no longer operate only on 32 and 64 bit machines, it has also been made capable of operating on the ARM platform and phones. The OS will feature Universal apps which will be able to run across devices including PCs, phones, Internet-of-Things devices and even the Xbox. They have also improved HTML5 and the Internet Explorer to increase the browsing speed. For the end users, the biggest relief is that the Start menu button is back so that users can customize their apps.

July 29^th will also be the big day for Cortana’s, their first digital personal assistant’s upgrade. The service will be launched in the US, UK, China, France, Italy, Germany, and Spain and will gradually be released in Japan, Australia, Canada, Brazil, Mexico, and India. They will also be releasing a French version of Cortana in Canada. The new Cortana has been developed with local customs and behavior in mind. For instance, in Canada, Cortana prefers Hockey and in India, cricket.

Microsoft’s Cloud Acquisitions

As part of their cloud focus, Microsoft continued to make strategic cloud acquisitions. Earlier this quarter, they announced the acquisition of BlueStripe Software, a leading provider of application management technology. BlueStripe’s offerings help map, monitor, and troubleshoot distributed applications across multiple operating systems, datacenter, and cloud environments. Their enterprise grade solution allows IT professionals to gain insight into applications at the transaction level. They help discover and map applications and dependencies, identify problems for faster resolution, track SLAs, and even help with updating and migrating applications to modern platforms and the cloud. Microsoft plans to integrate BlueStripe’s offerings to their System Center and Operations Management Suite. Terms of the deal were not disclosed.

Earlier this week, they also announced the acquisition of Israeli cloud security firm Adallom for an estimated $320 million. Adallom’s offerings help companies monitor the use of the cloud application by individual employees, seeing patterns, and identifying breaches in the use. Adallom’s system helps monitor applications from Salesforce and Google and had helped Microsoft uncover an Office 365 security flaw in 2013. The cloud has been a key focus for Microsoft and cloud security a cornerstone of its cloud strategy. They had acquired enterprise security startup Aorato for $200 million in November 2014.

The market wasn’t particularly impressed with their results. Their stock is trading at $47.28 with a market capitalization of $383.5 billion. It touched a 52-week high of $50.05 in November last year.