Surface Leads and Lumia Fades (Big) in Penultimate 2016 Quarter – Microsoft Earnings

Apr 24, 2016

Microsoft released its Q3 FY16 earnings statements last Thursday, 21 April. In the consumer electronics realm, the segment that Microsoft calls “More Personal Computing”, the quarter was defined by greater than expected sales of the Microsoft Surface line of products, including the Surface Pro 4 and Surface Book. On the negative side of the equation, the Lumia line, Microsoft’s mobile phone offering, is putting the hurt on the Redmond, WA company, and CEO Satya Nadella expects that to continue into Q4. Here’s the breakdown of the Microsoft stuff that matters most to the GWW Hardware crew.

Windows-10_Product-FamilySales of Windows to OEM’s was a loser, but Microsoft was up on the product area, claiming that sales lost less than the overall PC market due to consumers purchasing more premium devices. I guess this indicates that Windows licenses are sold as some percentage of the unit price of the device they are sold with? Windows PC’s maintain a healthy product diversity at the bottom end of pricing, and those low priced PCs are popular amongst the majority of PC buyers. However, people are also replacing their desktops and laptops less frequently these days. I wonder if more people are paying attention to the advice that I’ve often given which is to spend more on a device the longer you plan on keeping it. If you are only going to replace your desktop or laptop once ever 3 – 5 years, make sure it is a damned good one so that it has the best chance of meeting your needs for the longest time.

Microsoft’s Surface Pro 4 and Surface Book led the way in the Surface line of products, which overall grew 61% in total revenue. It is interesting that en-INTL-L-Surface-Book-CR9-00001-RM5-mnco Microsoft tracks this product group, and reports on it, separately from its other device categories. It’s also a bit surprising that the Surface Book is in the earnings driver mix, as many Internet personalities, including TWiT’s Leo Laporte and our own CEO, Joe Barhoum, have reported serious issues with the Surface Book. I wonder if MS only talked about the upside of this product group in sales, and did not speak to the losses from returns during the earnings call.

lumia 950xlThe big loser was Microsoft’s phone category, which lost 46%. With only two phone releases of any note over the last year, those being the Lumia 950 and 950XL, neither of which has garnered huge carrier support and advertising in the US, this news was not surprising, but disappointing.  I was a staunch Windows Mobile/Phone user between 2007 and 2014 (HTC HD7, Nokia Lumia 920, HTC Titan, AT&T Tilt, HTC Touch Pro, Samsung Omnia II, and Lumia 928). But since my last Windows Phone (the 928 on Verizon), Microsoft has struggled to stick to a winning strategy, releasing a string of market-bloating mid- to low-end phones that were not appealing to power-users and therefore drove little buzz that might have made the Lumia line notable in consumer awareness. I know that Microsoft is known for sticking in a market and throwing money at a product area and turning it around. But I’m not sure how they get out of this, despite Windows 10 for Phones finally being available in a relatively final state.

Most notably, Microsoft’s Games Division, headed my Phil Spencer, grew its monthly user-base to 46 million users. That, combined with increased gears-of-war-ultimate-edition-for-xbox-one-gc-sale-01DLC and microtransactions drove the division to solid financials. With only about 21 million XBox One’s in the wild, I assume that having more than twice as many users on XBL is made up of multiple account households ganged to one XBox One, and a healthy amount of XBox 360 owners who still play online, despite Microsoft officially retiring manufacturing of that console this month. Microsoft Game Studios also showed revenue growth. With releases like Quantum Break, Killer Instinct DLC, and Gears of War: Ultimate Edition, things are on an upswing for Microsoft Games Studios, currently showing an average Metacritic score increase of +9 over last year. Console sales earnings are not a rosy picture, however, with declining revenue, no more XBox 360’s to sell, and the XBox One price lowered to compete with the PS4. It does look like Microsoft is turning a profit on the console, however, which is always a good point to reach in a console’s life-cycle.

For the most part, Nadella and crew reported that they expect all of these trends to continue, failing to illuminate any changing dynamic or new product releases for us to salivate over. The outlook is bleak for the Lumia line of phones. Microsoft now has a backlog and overly high channel inventory to sell through. Maybe we can expect some deep discounts, similar to what Blackberry and carriers should be doing with the Blackberry Priv. But aren’t.