In the aftermath of Microsoft’s Q2 FY 2015 earnings conference call and webcast, it is clear a number of well respected Wall Street Analysts–including Rick Sherlund of Nomura Securities–have re-calibrated their future earnings expectations for the company. Sherlund now has a “hold” on the stock. Walter H. Pritchard of Citi changed his rating to sell; readers can read about Pritchard’s opinion in an article published on the StreetInsider.com web site titled UPDATE: Citi Downgrades Microsoft (MSFT) to Sell.
The important points, for me, from the webcast include the following. These points lead me to change my own opinion as to the near term future performance of the business:
- Microsoft management (Satya Nadella) presented the Hololens in the context of Windows 10, “Universal Apps” and the consumer market for PC operating systems
- Satya Nadella also reported on serious obstacles to further growth for Microsoft for the China and Japan markets
- Big improvements in the subscriber numbers for Microsoft’s cloud, IaaS, SaaS, and PaaS businesses (Azure, Office 365) did not translate into big revenue numbers
- Management was sanguine about the near term future potential for the business, contributing to the downward revision of earning forecasts
- Lots of opinions have been voiced about just what the earnings statistics portend for the company. A writer for the Geekwire website identified weaknesses in the devices market. Pritchard’s rating, which I mentioned above, made references to the cost of new product launches (coming this year) as a big drag on revenue. There are many more, which I do not need to summarize here
These 5 points, when considered alongside Microsoft’s ability to still hit the earnings estimate and actually exceed the expected revenue performance for the quarter, lead me to surmise we are all watching a business do what it needs to do to hit its numbers in whatever manner it can. Blackberry is another example of this type of performance. The method may not please the analysts, but the achievement remains the same.
One comment on the drop in OEM revenue for hardware devices: perhaps a contributor to this drop was management’s decision not to charge for licensing the Windows O/S to hardware OEMs building devices with screens 8 inches in size, and smaller. Unfortunately I did not hear this question asked during the webcast. But if this is the case, the tactic still makes a lot of sense, in my opinion, to protect the low end of the market from further incursion by Google’s Chrome O/S.
On the topic of the target market for the Hololens: I was disappointed to hear Satya Nadella affirm a consumer market target, short term, for the device.
Ira Michael Blonder
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