Microsoft Earnings: Growth In Right Areas Help With Transition

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L&F Capital Management
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Summary

  • From our standpoint, Microsoft grew in the areas it needed to during the quarter and shrunk in areas where we expected negative YoY growth.
  • We believe Bing's market share growth is significant for Microsoft as it shows that despite Google's success, Bing is able to co-exist and continue to penetrate the market.
  • Commercial cloud accelerated sequential growth of 27% vs. 15% the quarter before representing ramped up adoption of Microsoft's cloud products.
  • Off-balance sheet revenue was $24.5 billion, which essentially means Microsoft has $24.5 billion in revenues under contract that were not recognized in Q4 that will be recognized in future quarters.
  • We believe certain metrics in the report signaled strong future tailwinds from Microsoft's cloud transition.

Microsoft (NASDAQ:MSFT) announced Q4 earnings July 21 after the close and investors weren't too thrilled by the results.

From our standpoint, Microsoft grew in the areas it needed to during the quarter and shrunk in areas where we expected negative YoY growth. We believe the quarter is an accurate representation of a company in transition to a cloud-based business.

Office Consumer revenues were down 42% YoY, which is to be expected as the company transitions its user base to Office 365. The numbers show that Microsoft is doing as the Office 265 subs base grew by 3 million sequentially to 15.2 million by quarter's end. Office 365 revenues also grew $58 million in the quarter. While this is much less than the revenue lost by Office Consumer YoY, this is to be expected as Office 365 is ARR, or annual recurring revenue.

Xbox sales were up 10% driven by volume growth from 1.1 million to 1.4 million. This represents Microsoft's continued ability to distinguish Xbox from the Playstation platform. Xbox Live sales grew with hardware sales, a good sign of growing ARR.

Lumia phone revenue was down, but volume was up from 5.8 million to 8.4 million. We are concerned about Microsoft's mobile performance, though believe Cloud ARR could offset these losses soon.

Surface sales grew 117%, starkly contrasting Apple's poor iPad performance MRQ. The difference between consumer demand for the Surface vs. the iPad in the tablet market only continues to widen, and we believe this benefits Microsoft as the technology world continues to transition away from PC.

Bing grew market share to 20.2%, representing Microsoft's successful execution to a new-look business. With Google (GOOG) (GOOGL) soaring past results this past week, we believe Bing's market share growth is significant for Microsoft as it shows that despite

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L&F Capital Management profile picture
5.76K Followers
L&F Capital Management, LLC, is a quantitative investment management group located in San Diego, California. Our multi-strategy investment approach comprises a mix of event-driven trades and long-term value investments, utilized together to maximize profit in both short and long term scenarios. We maintain consistency in portfolio mix through our long-term value holdings, but stress flexibility in portfolio mix from our daily event-driven trades. We believe this mix of flexibility and value generates both short and long term profits while reducing exposure to market volatility. L&F also shares various trade and investment opportunities through Seeking Alpha. For more information, visit www.lfcapitalmanagement.com.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MSFT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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