Microsoft Excites by Doing the Unexciting
But there's also an overlooked -- and far more more pedestrian -- reason for Microsoft's new hotness: prudence on costs. (Please don't yawn.)
Regardless of the reason, the warm glow of investor love is a nice thing. After a strong financial report on Thursday, Microsoft's share price passed its dot-com-era intraday high of $59.97. The company's market value, however, remains about 25 percent below its $613 billion peak in 1999. It's been a steady march back to 1999 stock levels since Satya Nadella took over as CEO nearly three years ago and single-handedly reversed bad feelings about his company.
But while Microsoft has found its mojo under Nadella, it's not because the company's top line has sizzled. Microsoft's reported revenue had fallen for seven consecutive quarters 1 before the company reported a 0.4 percent revenue gain for the three months ended Sept. 30.
Yes, under Nadella the company is growing in the places Wall Street cares about. But overall, Microsoft for now remains tied to the PC business for its Windows, Office and server software franchises. The company's trailing 12-month revenue is only about 6 percent higher than the comparable figure three years ago despite absorbing a once-large mobile phone company, Nokia, over that period. 2
Microsoft, though, has kept a tight grip on its checkbook under Nadella and his financial lieutenant Amy Hood. Over the last three years when revenue has risen 6 percent, trailing 12-month core operating expenses 3 have fallen 0.3 percent.
It's basically a miracle that Microsoft survived its acquisition of Nokia without taking a body blow to the bottom line. Microsoft essentially had to fire every able-bodied person in Finland, and then some, to turn Nokia from a profligate asset that lost money on each phone to a business Microsoft says is financially stable although a shrunken shell of its former self.
It's hard to imagine what Microsoft's finances would look like without that slashing and burning as the company de-emphasized the mobile business and the PC business showed few signs of ever growing again, at least not significantly.
Microsoft has also focused spending where it counts while paring back corporate general and administrative costs. In the fiscal first quarter ended in September, operating expenses in the segment including its Azure cloud business rose by 21 percent, the company said, to pay for engineers, sales staff and outreach to software developers. That's the kind of spending that can generate revenue growth.
On the other hand, in Microsoft's declining segment with Windows software and the Xbox video game system, Microsoft said operating costs fell 13 percent from a year earlier as it slashed spending on its sad smartphone business and splurged less on marketing. General and administrative operating costs were $4.5 billion in the last 12 months, about 10 percent below levels three years ago.
Trimming marketing costs and corporate spending are not the feats that generate tech genius biographies. But that's exactly the kind of unexciting work that has helped make Microsoft cool again. It's boring but beautiful news to Microsoft investors.
I stripped out the revenue from Microsoft's acquired Nokia business for the first five quarters after the deal closed in April 2014. And Microsoft's reported revenue has been tamped down in the last year by changes in how it accounts for revenue from its Windows 10 operating system. Directionally, though, the picture is a slow-growing top line at best.
Nokia accounted for $2.6 billion in revenue, or 11 percent of Microsoft's total sales, in the first full quarter after the acquisition closed in April 2014. In the most recent quarter, the smartphone and other mobile businesses Microsoft bought from Nokia generated somewhere in the neighborhood of $310 million, or 1.5 percent of the company's total revenue. Remind me why Microsoft is still in the smartphone business?
I excluded from my calculations all costs for integration, restructuring and other non-core expenses.
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