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Ignore the Noise: Microsoft Corporation's Future Includes Devices

By Tim Brugger - Aug 31, 2015 at 8:20PM

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The king of the cloud, despite what some pundits have suggested, has no plans to leave the mobile hardware business.

You've likely heard about Microsoft's (MSFT 2.76%) decision to write off nearly $8.3 billion in both non-cash impairment and restructuring charges last quarter related to its acquisition of Nokia's devices and services unit. The move wasn't necessarily surprising: There had been quite a bit of speculation about the possibility of the charges on the horizon.

However, the reaction of many in the tech industry following CEO Satya Nadella's confirmation of the write-off was a bit surprising. There were reports almost instantaneously that Microsoft would soon be out of the hardware business.

That seemed a bit odd, given Microsoft's success in its tablet unit, the pending release of Windows 10, and even its inroads into fast-growing markets for lower-end smartphones. Turns out, the mobile hardware "sky is falling" reaction to the write-off was more than odd -- it looks like it was plain wrong.

A few facts
Cloud results are front and center in Nadella's "cloud-first" world, and Microsoft delivered yet again last quarter. With a run rate of over $8 billion, "75,000 partners transacting in our cloud" and a nearly triple-digit improvement last quarter after removing the impact of a strong dollar, if it's not the leader, Microsoft is certainly near the top of the list of cloud providers.

Last quarter also saw some strength in Nadella's other strategic pillar, "mobile-first." In addition to developing products including Office 365 for both iOS and Google's world-leading Android operating system, Microsoft enjoyed a solid quarter from its Surface unit. Revenue more than doubled to $888 million in the fiscal fourth quarter thanks in large part to Surface Pro 3. The new-ish, less expensive Surface 3 had just been introduced.

Even more importantly for Microsoft's Surface pseudo-tablet lineup are plans to align with a lot more reseller partners. Currently, Microsoft works with about 150 Surface resellers. That number will soon jump to over 4,500 around the world. Safe to say, Microsoft's Surface unit should break the $1 billion in quarterly revenue plateau before long.

As for phones, declining revenue in the phone hardware unit fed right into the naysayer's hands and almost certainly played a role in some pundit's claims that Microsoft was at least quitting the phone business, if not the hardware market altogether. However, Microsoft actually sold 8.4 million Lumia smartphones last quarter, a 45% increase compared to a year ago.

The reason for the bump in smartphone sales with declining revenue was Microsoft's emphasis on low-end units, particularly in the fastest-growing segment: emerging markets. What good are more sales, with less profit? Microsoft hasn't commented directly, but it seems awfully likely that at least one reason for the bump is Bing's solid results.

Up 21% last quarter, Bing is nearing the $1 billion in quarterly revenue level, too, just as Microsoft's Surface division is. The jump in Bing's fortunes were due to higher per-search revenue and "increased search volume." Just as Google gives its Android OS to smartphone manufacturers around the world for free to drive search results, Microsoft recognizes with a fast-growing Bing and its bevy of mobile software solutions, smartphone revenue isn't all about hardware. Getting Windows into as many hands as possible -- regardless of device -- will continue to drive Bing revenue and other Microsoft lines. Just ask Google -- it works.

The gala event
Which brings us to the latest news buzzing around and gaining steam over the last several days that speak directly to Microsoft leaving the hardware business. It seems more likely with each passing day that the "massive" gala event Microsoft is planning in Oct will come to pass. What makes the gathering intriguing is that its primary focus will likely be to unveil a couple of new Lumia phones, a Surface Pro 4 -- it's been over a year since the Pro 3 hit the streets -- and maybe even a couple of other hardware surprises.

The big event would appear to be in line with Nadella's mission statement issued a while back in which he alluded to focusing Microsoft's efforts in a more targeted way, as opposed to ditching strategic initiatives entirely. A couple of new Lumia phones -- the timing seems right for Windows 10 editions -- an updated Surface Pro tablet, and maybe even a mini-tablet are possibilities in October. The event, combined with the strides Microsoft is already making in mobile, should put to rest the idea that it's done with hardware.

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