Why Microsoft appears to be on the path to future success

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Aug. 7 2014, Updated 5:00 p.m. ET

Microsoft’s strategy Microsoft (MSFT), one of the leading global software company, has taken umpteen steps and reforms to increase its market presence, revenues, and profitability. The above chart shows Microsoft’s revenue and net interest margin (or NIM) growth. There is a steady but low growth in revenues. Margins are falling and are unable to provide any clear trends. To increase margins, Microsoft seems to have devised a strategy to stop funding programs with low margins and to focus on rapid growth areas.

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Future strategy is visionary The company chalked out its future strategy, “mobile first, cloud first,” which involved many strategic acquisitions, investments, and software and solution launches. Nokia was one such acquisition that has yet to generate positive effects on Microsoft’s earnings. However, the company drew lots of criticism, when it announced layoffs as a means to seek optimum distribution between the company’s resources and strategy. CEO Satya Nadella confirmed that hardware won’t decide Microsoft’s future and that future plans include the development of “one OS that covers all screen sizes.” A consolidated operating system that can run on a tablet, desktop, phone, or a laptop is revolutionary. It’s to be seen if Microsoft can be successful in its delivery.

Fierce competition and huge investments in mobile and cloud space Microsoft’s efforts in tapping the mobile and cloud market seem to be paying off. Its fourth quarter of 2014 results reported 147% jump in cloud revenues. This is definitely positive news. However, it leaves you to ponder if Microsoft is the only company who is taking vigorous efforts to capture the cloud space. The answer is no. The earnings and press releases of IBM (IBM) and Oracle (ORCL) clearly indicate their efforts. Niche players like EMC (EMC) and Teradata (TDC) are leaders in innovation and are stiff competition to the legacy players. Both Oracle and IBM leaders have disclosed their strategy of shifting their core businesses to rapidly growing mobile and cloud space. Their billion-dollar investment, acquisitions, and price wars indicate that none of them will leave any stone unturned to reach their goal. So, the competition is fierce.

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Skepticism about growth The shrinking and falling market of PCs, low margins in competitive hardware and device markets, and rise of cloud applications have all deeply impacted Microsoft’s brand reputation and revenue. Microsoft is continuously seeking revenue-generating areas and opportunities. But these areas and opportunities have yet to be realized.

Tools and applications gaining momentum Microsoft Azure and Office 365 have started gaining traction. Gartner reported that Amazon is already facing fierce competition from Microsoft Azure. Office suite subscribers have increased to 1 million, and Bing reported a 40% increase in ad revenue. Microsoft seems to be pursuing mobile and cloud space aggressively to reach its goal.

First quarter of fiscal year 2015 expectations For the first quarter of fiscal year 2015, commercial revenue is expected to be in the range of $14.2 billion to $14.5 billion. Licensing revenue is expected to contribute $4.1 billion to $4.2 billion. Collectively, computing, gaming, and phone hardware are expected to be in the range of $3.6 billion to $4.3 billion. Other devices and consumer products are expected to contribute $1.8 billion to $1.9 billion to total revenues. Gross margin is expected to be in the range of 68% to 71%. $300 million of the charges to be incurred in the first quarter of fiscal year 2015 will impact the financial operating expenses by $8.5 billion to $8.7 billion with tax rates between 21% to 23%. The company seems to be on its way of successful transformation. But future earnings reports will give a clear idea if Microsoft’s thoughts and strategies are really capable of producing results.

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