Did Microsoft hand Nokia second-guessers a new reason for old critique?
Microsoft says its newly acquired Nokia handset business is on track to hit breakeven by fiscal 2016. In the meantime, it's the proverbial work in progress as management looks to cut costs.
Any Microsoft investor who hated the Nokia deal before today woke up today hating it that much more.
The good news for Microsoft is that most of its myriad businesses are generally in solid shape. One day after Microsoft reported its fiscal fourth-quarter earnings, several Wall Street firms upgraded the stock and offered upbeat comments about the way management is handling things.
In the quarter, Microsoft's earning per share grew 12 percent to $0.66, while total revenues rose a better-than-expected 18 percent to $23.4 billion from $19.9 billion. Not spectacular but good enough to provide CEO Satya Nadella with air cover to go about his long-term strategy to grow Microsoft's cloud and productivity businesses.
Then there's the matter of Microsoft's $7 billion-plus acquisition of Nokia's handset business.
This promises to be the big question mark as Microsoft heads into the second half of the year. In offering the first scorecard since the completion of the acquisition in April, Microsoft did its best to spin a positive story. Microsoft said the Nokia group was on track to hit breakeven by fiscal 2016. Maybe so, but in the meantime, it's costing Microsoft dearly: the former Nokia business cut into operating income in the quarter by nearly $700 million, reducing earnings per share by $0.08.
This deal could one day will be remembered as a stroke of strategic genius, but for now, the best that Microsoft can do is present the results of the acquisition as the proverbial work in progress. Atlantic Securities' Chris Hickey said the Nokia results made Microsoft's earnings report "predictably messy."
Indeed, investors were already aware of Nokia's operating costs and margin structure before the deal went through. The extent of the cost revealed yesterday was more than analysts had been led to believe.
Nomura Securities analyst Rick Sherlund, no fan of the Nokia deal, now says that "the potential revenues required to get to breakeven" are "optimistic." He even mused that Microsoft might be better off shutting the operation down if Microsoft's revenue forecast fails to get Nokia to breakeven in fiscal 2016.
That's not likely going to happen, but the company is taking out the meat cleaver and whacking headcount to reduce expenses. Last week Microsoft warned that it would incur pre-tax charges of $1.1 billion to $1.6 billion over the next four quarters related to the elimination of up to 18,000 jobs over the next year. Most of those jobs -- some 12,500 positions -- relate to the Nokia acquisition.
The only other revealing statistic offered up: Microsoft said it shipped 5.8 million Lumia units after the deal closed April 25, which put it on par with the last year's rate of quarterly Lumia unit shipments, ranging between six million and nine million, according to Hickey.
The rest of the quarterly report offered Microsoft bulls reason to be pleased, particularly regarding the performance of the company's cloud business. Those are key parts of Nadella's vision for the company. The 147 percent growth in what Microsoft describes as its commercial cloud services reinforced the view on Wall Street that he's steering the company in the right direction.
Another highlight: Microsoft's Windows sales broke free of the continuing declines in PC shipments and sales to original equipment manufacturers actually grew 3 percent from a year earlier.