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Microsoft Corporation Earnings: The Good, the Bad, and the Ugly

Microsoft (NASDAQ: MSFT  ) stock is up about 1% this morning after the company reported fourth-quarter results yesterday after market close. While this small boost may not seem impressive, zooming out a bit to see that the stock is at 52-week highs, and up about 41% year to date, shows that not losing any ground at these levels is a feat in and of itself.

MSFT Chart

MSFT data by YCharts.

Overall, Microsoft's fiscal fourth-quarter results were solid. The software giant's $23.4 billion handily beat the consensus estimate for $23 billion. But Microsoft underperformed on EPS, reporting $0.55 compared to an estimate for $0.60.

What drove revenue gains? Why did EPS suffer more than expected? Here are the details.

The good: Cloud business looks hot
Microsoft continues to focus on transitioning as much of its business as possible to the cloud. And this is undoubtedly where the company shined during the quarter.

Image source: Microsoft.

"I'm proud that our aggressive move to the cloud is paying off -- our commercial cloud revenue doubled again this year to a $4.4 billion annual run rate," Microsoft's new CEO Satya Nadella said in the Q4 press release.

The 147% gain in cloud revenue during the quarter stemmed from soaring sales of Microsoft's Office 365 and its Azure computing service -- both of which grew triple digits, year over year.

The bad: Mobile progress is weak
Despite Microsoft's acquisition in April of Nokia that cost more than $7 billion, the company looks crippled in the important smartphone market. Nokia only sold about 5.8 million smartphones through the Lumia brand. Adding some perspective, Apple (NASDAQ: AAPL  ) just reported that it sold a record 35.2 million smartphones at an impressive average selling price of $561 during the same period.

Even worse, "Low price point devices drove a majority of the Lumia Smartphone volumes." Of course, this shouldn't be a surprise given Nokia's focus on the low-end. But it's another reminder that it's incredibly difficult to justify why Microsoft thought Nokia was worth more than $7 billion. The Nokia business brought in only $1.99 billion in revenue -- nothing compared to Apple's $19.75 billion in iPhone revenue.

Surface Pro 3. Image source: Microsoft.

The question remains: Is mobile hardware even worth pursuing for Microsoft? Even its Surface revenue was wildly weak, at just $409 million. Apple brought in $5.89 billion in iPad sales during the same period.

The ugly: Nokia is still weighing on Microsoft
Microsoft's EPS took a major hit from the Nokia segment. On the segment's $1.99 billion in revenue, it managed to report an operating loss of $652 million, or $0.08 per share. This ugly news follows more ugly Nokia news last week that surfaced when Microsoft announced it was cutting 18,000 jobs -- the majority of which were Nokia jobs. Though the market rejoiced on news of the cuts, it doesn't bode well for the price the company paid to acquire Nokia.

Apple likely hasn't broken a sweat in regards to Microsoft's Nokia acquisition -- or even the company's Surface line. And, at this point, it seems possible that Microsoft will never truly rival Apple in mobile hardware. While Microsoft could turn out to look like a winner if it somehow begins to gain traction in mobile hardware, this outcome doesn't appear likely.

Despite Microsoft's mobile hardware headache, the company's excellent execution on a transition to a profitable cloud-centric business is enough to at least make the case for holding the stock at these levels. Microsoft is growing revenue today, and its EPS is poised to grow after this Nokia mess is sorted out; therefore, 17 times earnings isn't a bad price for this market leader.

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Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

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