MSFT – Old Lady Not Sexy But…

Microsoft under Satya Nadella showed a new face by stating “As I have told our employees our industry does not respect tradition, it only respects innovation.” We used to call Microsoft “the Borg” for assimilating technologies, IBM was the dinosaur park and a few billion dollar acquisition was big (DEC’s $9.6B was the biggest tech deal ever). The lack of execution and multiple missed markets for over a decade forced MSFT from master of the universe with revenue and earnings growth, to an aging lady dividend yield play paying out its cash.

Indeed the old lady showed signs of life with Office 365 up 100%, commercial cloud 101% and Azure up 150% during Q3:14. And as Nadella also committed to “What you can expect of Microsoft is courage in the face of reality.” Balmer Leadership Microsoft was never a leading technology company, rather a follower who entered later, but leveraged its sales muscle though its ownership of the desktop. Under Balmer MSFT missed the mark on most new market opportunities.

During Q3:14 Microsoft core business showed some resurgence in customer acceptance of its product offering especially in the cloud:
• Commercial Other revenue grew 31%, to $1.90 billion, driven by Commercial Cloud revenue
• Commercial cloud rose 101% and Azure increased 150%
• SQL Server revenue grew more than 15%
• Combined revenue from Office 365 Home and Office Consumer, grew 28%.
• Office 365 revenue grew over 100%, and seats nearly doubled
• SQL Server revenue grew more than 15%
• Bing search revenue grew 38%
BmEk1K1CEAA5JLn.png-large Unearned revenue was up 14% YoY and flat QoQ, above seasonality as annuity mix was higher with customers selecting subscriptions and multi-year agreements. Contracted not billed balance exceeded $22.0 billion, up over $1 billion from a year ago, and total bookings increased 6%. Cash grew 12% to $88.4 billion.

The recent quarterly results beat forecasts, and Nadella’s transition to re-focus the strategy on open platform cloud and mobile give glimmers of hope that the company will face the reality of its underdog position with more than 50% of its revenues still rooted in its older PC base. Indeed, there is a long trek before cloud and mobile will represent a significant part of the revenue and operating profit story. With $3.00 in earnings, $11 per share in cash and 2.81% yield, the stock is still an value play similar to Apple, but the downside risk is probably $39+/- and upside to $45.

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