Microsoft Corporation (NASDAQ:MSFT) would much rather forget about last week. There was a widely seen and unfavorable review of its premium hardware offerings.
Panos Panay, head of devices, seems very sour about the whole ordeal. Moving forward, the firm promises to disprove the CR report which called the Surface range a “failure”. However, even if it doesn’t, the software giant is still a sound investment. LearnBonds looks at why bad gadget reviews have a near zero effect on Microsoft’s core business.
Microsoft shares closed slightly lower last week. Dour reviews of the company’s high-end devices no doubt had a hand in its mid-week dip. Although, the company was never much of a hardware boffin despite its recent intentions. Moving into the current week, shares stand in the green, up some 1.5 percent during Monday trading.
Gadgets getting labeled a “failure” by reviewing organizations as trusted and respected as Consumer Reports would have dire consequences for sales. In turn, the event is likely to have an unfavorable effect on investment. Yet Microsoft began the week strong this Monday. Investors of the Redmond entity might be short-sighted. That, or they understand the minimal weighing Surface has on the company’s long-term business.
Followers of Microsoft Corporation have long accepted the company’s dwindling impact in hardware markets. The PC as we know it dying, which has not done a lot of good for Windows and its related businesses. The truth is that today’s Microsoft is a cloud and enterprise productivity giant through and through. Like any other major corporation, it keeps its hand in other ventures as well, like hardware. And on that particular front, CEO Satya Nadella and Panay do their utmost to innovate and derive whatever successes they can.
The Microsoft transition
Nadella took over the leading position at Microsoft a little over three years ago. With that came a dramatic shift to the stagnating software giant. As the company that virtually defines the modern computer, Microsoft was, and is still, feeling the worst of the PC’s downfall. Nadella thus saw it vital to redefine the corporation’s core business. It was him who coined the company’s new mantra: “mobile first, cloud first”.
Living up to those words, the company tore itself from its PC-focused business and set out new financial segmentation standards in 2015. The change had Microsoft Corporation chuck all its struggling and hardware-related ventures into one box. Proof that all those businesses unit took a back seat lies in the uninteresting title, “More Personal Computing”. It offers a sense of, “oh, and there’s that other stuff we have going on on the side.”
In short, 2015’s new financial segmentation worked twice-fold. It let investors clearly see where the company is growing without diluting results with stagnating and falling business units. More importantly, it isolated the Windows business, Microsoft’s least performing segment today.
Today’s Microsoft is divided into three business units. Productivity and Business Processes deals with Office 365 and Dynamic. The Intelligent Cloud unit is its best, corresponding with Windows Server, Azure other cloud infrastructure. And then there is More Personal Computing, which boxes Windows and Hardware.
The hardware writing is on the wall
Microsoft hides nothing though. The firm also does all it can to revive the Windows business. More Personal Computing remains stubborn, scoring only a 2 percent revenue climb at the last profit call. Panay might scoff if you said this, but his company is no longer a Windows-focused business. Hardware is relatively new for the company as well and it is yet to make a significant impact. The truth is that Microsoft has dedicated itself to mobile computing and cloud since Nadella took over. And that move is paying off spectacularly.
The Microsoft Corporation cloud is now the second most widely used public cloud worldwide. That is a pretty impressive climb, one which also proves the true focus of the company. Not to be overlooked, The Office 365 business is doing well too. The corporation has turned it into a subscription-intense product. More subscribers, enterprises in particular, come flooding to the firm’s productivity software year after year.
In fact, the MSFT third-quarter 2017 earnings report saw an impressive number come from its Productivity and Business Processes unit. Investors learned that enterprise-related Software as a Service has more than 100 million monthly active users globally.
Hardware is Microsoft truest bane. The company only sees losses on that front. Yet investors don’t seem to mind. It is odd that Panay is all touchy about a Surface review which might be accurate. If the premium gadget range was not a “failure” as Consumer Reports clearly points out, there would not be a $20 million decline Surface revenue last quarter.
Of course, the company might get defensive about the smartphones it wrote off a failure too. For those wondering, that segment featured a $360 million drop year over year.
Cloud is the focus
The sour news is that the fall in Windows-related revenue is not about to slow down. On the other hand, investors are not too fazed. They now know exactly how much of an impact More Personal Computing has on Microsoft’s overall revenue growth over the next few quarter. Beyond that, they able to see the phenomenal growth of the Microsoft cloud. Intelligent Cloud is up almost 100 percent last quarter, year on year.
This does not mean Windows deserves a spot on the scrap heap. The revenues it rakes in are far from insignificant. Quarterly revenues stand above $5-billion, so Windows remains sizable. However, when also considering Microsoft’s total cloud revenue run rate, which was more than $18.9 billion at the end of the fourth quarter of 2017, it equates to quarterly revenues of around $4.72 billion.
Predictions peg the Microsoft cloud business to overtake Windows in the next four quarter. That would make Intelligent Cloud revenue the best earner under the MSFT three-tier umbrella. The end of 2018 should see the company finish its turnaround successfully.
This matters because the more cloud revenues rise and those of Windows fall, the speedier total revenue growth will be. Investors kind of have a reason to cheer on the fall of Windows. Time after time, quarterly results prove the company succeeds best in the enterprise cloud market
Conclusion: Forget Microsoft Hardware
Consumer Reports might have been right. Hardware is not exactly Microsoft’s forte. That is clearly Azure and other cloud ventures. This strength didn’t come out of nowhere either. Nadella successfully utilized the firm’s deep integration in enterprise markets to bolster the MSFT cloud spike.
The Microsoft Corporation (NASDAQ:MSFT) Intelligent Cloud unit promises to grow along with the business market’s mass adoption of cloud services. Growth will be further fortified by that deep hold over the enterprise segment. It is a segment which represents longevity, if nothing else. It is truly what has kept Windows alive for so long. Now it will keep Microsoft’s cloud services growing for years to come.