Microsoft Overhaul

Jan 26 2014, 23:53 IST
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SummaryThe firm seems to be successfully navigating the shift to hardware. But lower margins are a concern

Microsoft’s transformation is almost complete. Going by its Q2 results announced on Thursday, the company is successfully shifting its focus from software to hardware. The tech giant became almost synonymous with personal computing with its ubiquitous Windows operating system and Office software. But that was when PCs were all the rage. That day has passed, and predominantly software companies have had to struggle with consistently declining PC sales and the simultaneous rise of tablets, smartphones and phablets. Initially, even Microsoft had trouble with this transition, with its Surface tablet failing to gain traction. But its most recent quarterly results show that the company seems to be getting a handle of the hardware market. The firm reported revenues of $24.52 billion, up 14% yoy. Profits, however, were up only 2.8%, at $6.56 billion. It’s great news for the company that a large part of its revenues were driven by sales of its Xbox gaming console line, and the Surface (which has seen quite a resurgence). According to the company, it sold 7.4 million Xbox consoles and 3.5 million Xbox 360 consoles during the quarter—the Xbox One, released five weeks ago, sold 3.9 million units since that time. The Surface tablet saw revenue from sales more than doubling qoq from $400 million to $893 million. And that’s not counting sales from the Surface 2, numbers for which Microsoft did not divulge.

All of this is great for Microsoft—it shows that it is not captive to the PC market. But there is a downside. As the revenue and profit number show, margins on hardware are much lower than those on software. Microsoft will have to figure out how to handle this new situation. There’s also the fact that its sales were probably boosted to a great extent due to the recently-concluded holiday season. Still, these results will go a long way in boosting slightly flagging investor confidence.

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