It has certainly been awhile since an earnings report from technology giant Microsoft (MSFT) got people talking. According to the company's earnings report released on Oct. 24, 2013, Microsoft blew past many analysts' estimates, registering a 16% growth in revenue and a 17% year-over-year jump in EPS. Following the release of the, report the company's stock rose by as much as 7% on the following day (Oct. 25, 2013). Currently, the company's shares are now nearing a decade high, a strong indication that Microsoft's long-term strategy is working -- specifically, its decision to restructure and entrance into the mobile device market.
Focus on Device and Service Business
According to the aforementioned report, the devices and consumer division of Microsoft recorded 4% growth in revenues on a year-over-year basis. This accounts for about 40% of its total revenue. However, the report also indicated a general decline in sales from devices and consumer licensing revenue by a margin of 7%, to about $4.34 billion. This includes sales from Windows and Windows Phones.
Impressively, the company reported quarterly Surface tablet sales totaling $400 million, helped in part by consumer interest in the smaller and heavily discounted Surface RT. Also, earlier the same week Microsoft announced the launch of its latest tablet models, Surface 2 and Surface Pro 2. In addition, Microsoft announced its intentions to acquire the smartphone business from Nokia (NOK) for close to $7.2 billion. This is in addition to its latest game console, the Xbox One, which is set to be launched in November.
However, I won't shy away from agreeing just a bit with those of you who would like to take shots at Microsoft -- at least for the basic reason that the company was late to the mobile party. It is true that the Windows phone hasn't a gained much traction and the demand for its Surface tablet has been lukewarm. But the company has not deviated from its intentions to transform into a device and services company.
Entrance Into the Tablet Market
This is one area that many want to see how Microsoft will manage in the long run. To some, the entrance of Microsoft into a market that has been largely dominated by Android and Apple (AAPL) is nothing but a bold strategy to establish itself as a force in the technology sector. To me, such a move is nothing short of brilliant on Microsoft's part considering the one huge advantage the company has in the tablet market. The reason for this is actually quite simple: Currently, most companies are already relying on Microsoft for Windows, Office, servers, etc. It is thus sensible for such companies to opt for Windows tablets over the competition, as it makes integration with the existing IT infrastructure cheap and simple.
In fact, competitors have never stopped trying to displace Microsoft's products -- especially Office-related products. For instance, in a desperate attempt to push into the enterprise space and safeguard its grip on mobile software as Microsoft revs up its Windows-powered Surface Pro, Apple will be launching its new iPad Air come this November. According to this report, Apple also intends to issue free upgrades for its iWork Office software suite for all MacBooks and Mac computers. What this means is that Apple is bringing its model of free system software upgrades on phones and tablets to the computer market, an area where it is still playing catch-up to Microsoft's Windows.
Many can agree with me that when it comes to the enterprise PC market, Microsoft's Windows is dominant and free office software won't be enough to change that. In fact, for quite some time now, Google (GOOG) has been trying with limited success to supplant Microsoft's Office with its Google Docs. Currently, Microsoft owns the enterprise space and not just with Windows and its Office suite, but also with other products. The entrance of Microsoft into the tablet market is just one way to establish dominance in a market that is already saturated with inexpensive tablets running on Google's Android software.
For a good portion of the last decade, Microsoft has been setting an example of doing things the wrong way rather than the right way. However, since outgoing CEO Steve Ballmer announced a dramatic restructuring of the company back in July, Microsoft has not hesitated in showcasing a number of really smart decisions and best practices.
Judging by the results of the last quarter, I can say that the company had a decent quarter. Its consumer side was decent and its commercial side was exceptionally strong. Microsoft's strategies are taking shape, with its Surface tablets slowly gaining traction and Azure and Office 365 growing at impressive rates. Therefore, investors have a reason to believe in a brighter future for the company.