How Microsoft Is Silencing Critics

Microsoft's superb cloud-based products and services have proven that it's a company that can thrive in the post-PC world.

Jan 30, 2014 at 11:00AM

Microsoft (NASDAQ:MSFT) has released its fiscal second-quarter results, and for the most part, had only great things to say. The company was successful across its major hardware products, including the recently released Xbox One console. Even the Surface tablet had some success in the most recent quarter. What really drove its quarterly results, though, were Microsoft's cloud-based offerings.

While Microsoft's quarterly report showed strength across many of its operating segments, there's a clear disparity emerging between its hardware and software businesses. The real story here is Microsoft's booming cloud-based and software operations.

Microsoft: A tale of two companies
To be sure, both of Microsoft's newly organized operating segments posted strong headline numbers. The devices and consumer segment posted strong sales gains, led by the Xbox and surprising growth from Bing. Microsoft sold 7.4 million Xbox units in the last quarter, half of which were the newly released Xbox One consoles. Bing grew search share to 18.2% and advertising revenue grew 34%.

There's an important caveat, however, when it comes to Microsoft's consumer-oriented hardware products, which is that they aren't very profitable. Gross margin on the devices and consumer hardware unit stood at just 10% over the past two quarters.

The real growth engine at Microsoft is its commercial licensing, which accounts for nearly half of the company's total revenue. Gross margin at that division clocked in at 92% over the past two quarters. Microsoft showed a tremendous ability to rise above what's amounted to relatively modest overall IT spending at the enterprise level, because it's taking share from competitors.

Microsoft's cloud-based offerings are performing tremendously. Its commercial cloud services, which include Office 365, Azure, and Dynamics CRM Online, more than doubled quarterly revenue versus the same quarter last year.

Is the cloud a modern-day gold rush?
By now, it's far from a secret how much potential the cloud holds. That's why a slew of large-cap technology giants are rushing to transition their business models away from hardware, and instead toward cloud-based offerings. Consider how hard International Business Machines (NYSE:IBM) has worked to get away from hardware. In the fourth quarter, its hardware revenue collapsed 26%. To its credit, the company's cloud revenue hit $4.4 billion during the quarter, representing a 69% increase. Unfortunately, IBM's fledgling cloud services couldn't offset weakness in its flagship segments, which caused total revenue to fall 5%.

Microsoft is excelling in its efforts to break away from hardware and the personal computer, and this needs to continue for positive momentum to last. Other "Old Tech" companies, which rose to prominence during the dawn of the PC, are struggling mightily now that the PC is past its prime. For example, chip giant Intel (NASDAQ:INTC) has flailed thus far in its attempts to meaningfully penetrate the mobile device and smartphone market.

No where are the troubles surrounding the PC market more evident than in Intel's operating results. Intel's full-year 2013 revenue and earnings per share dropped 1% and 11%, respectively, versus the prior year. Its gross margin fell more than 2 percentage points. The company continues to aggressively invest in its mobile technologies, but those efforts have failed to pay off so far.

Microsoft's cloud advantage a source of strength
Microsoft's most recent quarterly results show a company with a two-sided business model. One, cloud-based services, is performing much stronger than the other and is a window into Microsoft's future.

Technology giants that rose to power during the PC boom are at an important cross-road. Companies that execute their transitions away from hardware and toward the cloud the quickest will be the biggest winners. While IBM and Intel are still struggling in their attempts to cut ties with the old technology world, Microsoft is proving it's already successful in this regard.

Profit from breakthroughs in cloud computing
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Bob Ciura owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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