Microsoft: Is Nokia on the Bubble?

U.S. stocks are mixed this morning, but they could yet put in a new record high today after yesterday closing within a tenth of a percent of their early July high. The benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  )  were up 0.07% and down 0.18%, respectively, at 10:15 a.m. EDT. In company-specific news, shares of Microsoft (NASDAQ: MSFT  ) are outperforming this morning on the back of yesterday afternoon's fiscal fourth-quarter results.

On the face of it, Microsoft's results were mixed, since it managed to beat Wall Street's expectations on revenue but fell short on earnings per share:


Actual/ Year-on-year growth

Analysts' consensus estimate


$23.4 billion


$23.0 billion

Earnings per share (adjusted)




Sources: Microsoft, Thomson Financial Network.

But note that the eye-popping 18% year-on-year rise in revenue owes much to the acquisition of Nokia's handset business, which contributed $2 billion -- more than half of the increase in revenue. Nokia Devices and Services, or NDS, now has its own reporting segment named Phone Hardware.

However, the revenue from NDS was not profitable, producing an operating loss of $692 million and ultimately lopping off $0.08 from earnings per share. Those are disappointing figures, which prompted Microsoft to reduce costs sharply in that area. Last week, CEO Satya Nadella announced 18,000 job cuts, with 12,500 of those falling in NDS, effectively halving the number of employees that were brought on as a result of the acquisition.

I think it's entirely possible that the NDS business is on a probationary period at Microsoft. Remember that the Nokia acquisition was made by Nadella's predecessor, Steve Ballmer. In fact, Nadella initially opposed the deal, though in March he told Bloomberg that "this is the right move for Microsoft."

In an internal memo announcing the downsizing of NDS, former Nokia CEO Stephen Elop, who rejoined Microsoft following the acquisition and now heads up Microsoft's devices group, wrote:

It is particularly important to recognize that the role of phones within Microsoft is different than it was within Nokia. Whereas the hardware business of phones within Nokia was an end unto itself, within Microsoft all our devices are intended to embody the finest of Microsoft's digital work and digital life experiences, while accruing value to Microsoft's overall strategy.

That is the official line for now. However, Nadella looks like a good mix of visionary and pragmatic businessman. Giving NDS its own reporting segment means that Nokia's results will be available for all to judge and it will have to pull its own weight.

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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