Yesterday, Microsoft released its 2nd quarter earnings statement, reporting revenues for the quarter of $26.5 billion, and earnings of 71 cents per share. As we reported yesterday, Surface sales topped $1 billion, and Microsoft sold 10.5 million Lumia devices and 6.6 million Xbox consoles. However, the company’s commercial license segment, which sells Windows and Office to enterprises, failed to meet expectations, and was down some 2%. Microsoft also has reached near the end of the XP upgrade cycle, and sales of Windows to OEMs was down, too.
Those changes, and more, have investors rethinking Microsoft, and according to reports coming from Street Insider Microsoft uber-analyst Rick Sherlund has downgraded the stock from “buy” to “hold”, as have at least three other analysts. The effect of all of this is that the stock is down some 10% in today’s trading, after taking a nosedive last night after hours:
Some more bad news filtered out of the earnings report yesterday, too. Microsoft has been in a bit of a battle with the US Internal Revenue Service over some tactics involving moving reported sales to regions where the tax rate is lower. In the earnings report, Microsoft reported higher income tax costs of 25%, and warned that there could be even higher taxes coming still, although not in the next twelve months:
As of December 31, 2014, the primary unresolved issue relates to transfer pricing which could have a significant adverse impact on our consolidated financial statements if it is not resolved favorably.
The IRS has been pursuing not only Microsoft but others, including Amazon, on this practice of moving earnings reporting offshore to places like Bermuda and Puerto Rico, and late last year brought suit against former CEO Steve Ballmer and others, seeking to compel them to testify about the company’s tax practices. The issue remains unsolved, and Microsoft doesn’t expect it to be resolved this year, although they maintain their innocence, saying in response to the Ballmer suit “(a)s a global business, Microsoft adheres carefully to the laws and regulations of every country in which we operate”.
In some more positive news, new CEO Satya Nadella took the opportunity with yesterday’s earnings call to tout Microsoft’s latest venture, the HoloLens, as a “mind-blowing experience”:
It’s also getting clear how games people love today will evolve to mind-blowing experiences in the future when designed for mixed reality that Windows 10 and HoloLens create. Just imagine what’s possible with Minecraft. Gaming truly is a valuable part of millions of people’s lives and Microsoft will excel and increase our lead.
So while there were many positive aspects of yesterday’s report, with revenues for Surface, Windows Phone, games, and Bing ads all up, Microsoft’s transition from an old model of selling Windows and Office to the enterprise and raking in the money to a new, cloud and subscription based model focused more on consumers, is going to be turbulent, at best.