Brobdingnagian software biz Microsoft wrote down the biggest quarterly loss of its corporate history on Tuesday, reluctantly gulping down another $8.44bn of red ink - mostly associated with its train-wreck acquisition of Nokia.
The latest writedown left Redmond with a net loss of $3.20bn for the three months ending on June 30. It was only the second time it has been forced to report a quarterly loss in its 29 years as a public company. The last time was in 2012, following another botched acquisition.
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Yet excluding the impact of those charges – which comprised $7.5bn in impairment and another $780m in restructuring fees – Microsoft didn't actually have that terrible of a quarter, or a year.
Had it not written off a total of $10bn in charges for fiscal 2015, Redmond's net income for the full year would have been flat from 2014. And had it not been for the fourth-quarter writedown, its net income for Q4 actually would have been up 10.6 per cent.
Microsoft posted earnings of $0.62 per diluted share for the fourth quarter, which beat the analysts' estimates handily. Its fourth-quarter revenue of $22.18bn also outperformed estimates, and the same was true for both earnings and revenue for the full fiscal year.
But let's not get ahead of ourselves. Microsoft's revenue picture isn't great. Total revenue for fiscal 2015 was up 7.8 per cent, at $93.58bn. But total revenue for the fourth quarter was $22.18bn, a 5.1 per cent decline annually.
Mixed results for Q4
Once again, Microsoft's soft performance in its core software markets for the fourth quarter was worrying. The consumer and commercial software divisions both saw their revenue shrink, year-on-year, and in the case of consumer software it shrank significantly.
The Devices and Consumer Licensing reporting segment, which includes sales of Windows and Office to consumers, reported revenue of $3.23bn for the quarter, which was down 34.06 per cent from the year-ago period. Maybe everyone is putting off their purchases until Microsoft ships Windows 10 and Office 2016; maybe not.
Almost as troubling, the Commercial Licensing division, which is the largest single segment of Microsoft's business, was also down 7 per cent. Total Commercial Licensing revenue for the quarter was $10.45bn.
Phone Hardware was down 37.7 per cent in Q4, with $1.23bn in revenue. Worse, the division's gross margin was down 292.6 per cent, causing it to post a loss of $104m. During a conference call with financial analysts on Tuesday, Microsoft CFO Amy Hood attributed the decline to the company's more targeted approach to phones, going forward. We tend to see it as people just not buying Windows phones.
But a few other divisions performed well. Computing and Gaming hardware, for example, saw its revenues climb 44 per cent in the quarter. Of its $1.93bn in total sales, $888m were attributed to the Surface fondleslab line, which represented 117.1 per cent growth from last year.
Devices and Consumer Other was up 30.5 per cent and Commercial Other was up 36 per cent from the year-ago quarter. These divisions wrap together various odds and ends but most notably they include revenue from Microsoft's cloud services. Combined, they brought in $5.38bn in the fourth quarter.
Don't be fooled by these successes, though. As usual, the problem is that the divisions that account for the lion's share of Microsoft's revenues are not growing, but shrinking. Combined, the segments that grew in Q4 still only accounted for 33 per cent of the software giant's total revenue for the quarter.
Onward to 2016
If the fourth quarter was a little rough, though, the year as a whole wasn't bad. Total revenue for fiscal 2015 came to $93.58bn, which as we mentioned was up 7.8 per cent. Net income for the full year was $12.19bn, a 44.8 per cent decline, but the dip is all but erased if you exclude all the one-time charges throughout the year.
Most of Redmond's reporting segments managed to grow their sales over the full year, as well. The only losers were Devices and Consumer Licensing (down 23.4 per cent to $14.97bn) and Commercial Licensing (down 2.5 per cent to $41.04bn). Mind you, those two divisions combined accounted for 60 per cent of the year's business, but the other divisions were mostly able to offset the shrinkage.
Computing and gaming hardware grew 12 per cent since the end of 2014, with revenue of $10.18bn for the full year. The Surface line brought in $3.61bn in 2015.
While phone sales declined annually in the fourth quarter, they were up for the year as a whole – way up, in fact, with revenue 280 per cent higher than in 2014. We should remember, however, that Microsoft's acquisition of Nokia's Devices and Services business didn't close until April 2014, so the numbers are a little skewed. Total Phone Hardware sales for 2015 were a respectable $7.52bn.
And as for the two "Other" categories – which roll up revenue from Azure, Office 365, Dynamics CRM, and Redmond's other cloudy offerings – combined they brought in $19.66bn, which was up 35 per cent from 2014. Commercial Other fared better of the two, with its revenue climbing 43.6 per cent in the year to reach $10.84bn.
The real question is where does Microsoft go from here? We're closing in on 18 months into Satya Nadella's tenure as the software giant's CEO, and it still hasn't returned to the kind of growth that investors would like to see. We begin Redmond's fiscal 2016 with the Windows 10 launch next week, and it's very much a make-or-break moment. If the new OS is received as coolly as Windows 8 was, expect a very bloody year indeed for Microsoft.
Microsoft's share price dipped by more than 4 per cent in after-hours trading on the news. ®