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Apple Results Embarrass Microsoft: Is Nadella's Honeymoon Over?

One day after Microsoft delivered a disappointing quarterly earnings report, Apple Tuesday did the complete opposite by posting its best quarter ever -- far exceeding expectations. In fact Apple is said to have posted the most profitable quarter of any publicly traded company ever, buoyed by the fact that it sold 74.5 million iPhones between Oct. 1 and Dec. 27.

Apple recorded $74.6 billion in revenues with a record $18 billion profit (gross margin of 39.9%). This topped the previous record of ExxonMobil in the second quarter of 2002. The company's shares are soaring a day after Microsoft stock sunk about 9% (making it a key contributor to a down day for the stock market on Monday).

It's not that Microsoft had a horrible quarter -- revenues of $26.5 billion were up 8% year over year -- but profits were down and the growth outlook for next quarter was considerably slower than Wall Street had anticipated. The results have led many to question whether Satya Nadella's honeymoon is over as he approaches his one-year anniversary as CEO. During his first year, Nadella made some major moves to turn Microsoft around, as Mary Jo Foley noted in her monthly Redmond magazine column posted this week.

In addition, Microsoft posted only a 5% increase in commercial licensing and an overall operating income decline of 2%. Impacting earnings were the restructuring of its Nokia business unit and the transition to cloud computing, the company said.

Microsoft also blamed the strong dollar and weakness in China and Japan as well, which could further impact the current quarter should the dollar continue to strengthen, CFO Amy Hood warned on the earnings call. Ironically strong results in China were a key contributor for Apple's growth, while the company indicated only modest impact from the dollar's surge.

Among some other noteworthy improvements that Microsoft reported:

  • 9.2 million Office 365 Home and Personal licenses were sold. This is up 30% since last quarter.
  • $1.1 billion in  Surface sales (24% increase in sales).
  • 10.5 million Lumia smartphones sold, up 30 percent. However, Windows Phone still accounts for just 3 percent of the smartphone market.

But despite those improvements, Apple outshined Microsoft in a number of ways. Apple said it sold its 1 billionth iOS device in November. Average selling prices of iPhones increased $50 as customers opted for more expensive devices equipped with more storage. Not that any major market shifts were expected, but its huge spike in iPhone sales aided by the larger form factor of the latest models continues to leave Windows Phone in the dust.

For Microsoft, while Windows Pro OEM revenue declined 13 percent as did non-Pro revenue, sales of Apple Macintoshes rose 14% to total 5.5 million. Apple App Store revenues also jumped 41 percent. One weak spot for Apple was the decline of iPad sales -- 21.6 million units were sold, which is down from 26 million during the same period last year. The decline in iPads is not surprising given the release of the iPhone 6 Plus, which many might substitute an iPad Mini for due to the fact it's only slightly larger. Also recent upgrades have only had modest new features, giving existing users little incentive to replace the iPads they now have.

Still, iPads are becoming a formidable device in the enterprise and Apple CEO Tim Cook said on Tuesday's call that the company's partnership with IBM has helped boost the use of them in the workplace. "I'm really excited about the apps that are coming out and how fast the partnership is getting up and running," he said.

Many are expecting Apple to increase its enterprise push with the release of a larger iPad. For its part, Microsoft is rumored to have a new Surface device coming later this year, though the company has yet to confirm its plans.

Perhaps Cook is having a better week than Nadella but Microsoft has many other fish to fry where Apple is not in its path. Nadella's turnaround for Microsoft is very much still in progress. If the honeymoon is over, as some pundits suggest, then Nadella's success will ride on his ability to keep the marriage strong.


Posted by Jeffrey Schwartz on 01/28/2015 at 12:32 PM


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