Global slump, strong dollar taking toll on tech

January 27, 2015 09:28 AM

Satya Nadella, a year into his turnaround of Microsoft Corp., is being tripped up in overseas markets as a slump in China and Japan and a stronger U.S. dollar curbed sales of business-software licenses.

Commercial-licensing revenue fell to $10.7 billion in the period that ended Dec. 31, the world’s largest software maker said Monday in a statement. Analysts on average had projected $10.9 billion, based on a survey conducted by Bloomberg. Unearned revenue, a measure of future sales, was $21.2 billion, compared with estimates of $21.8 billion. The shares fell as much as 8.8% in early trading.

As Nadella approaches his first anniversary as chief executive officer, Microsoft’s traditional business-software unit is being hurt as customers switch from licensed programs to its Internet-based products, and as a corporate push to replace Windows XP tapers off. The disappointing sales in the company’s biggest division marred a quarter in which total revenue topped estimates, helped by strong growth in its cloud software and Xbox video-game console.

“Even though they beat on consumer and devices, it was a slight miss on the commercial side,” said Daniel Ives, an analyst at FBR Capital Markets & Co. “That gives you a B-plus quarter where some investors were looking for an A-minus.”

Xbox sales and the shift to cloud products are also pinching margins, the Redmond, Washington-based company said. Gross margin, or the%age of sales left after subtracting production costs, was 61.7%, while analysts were looking for 62.9%, on average, Ives said.

“Where there are execution issues, we will address them,” Nadella said on a conference call to discuss results. “Where there are macroeconomic issues, we will weather them.”

Overseas Impact

Microsoft declined 8.4% to $43.07 at 8:51 a.m. New York time, after its earnings release yesterday and a lower- than-projected earnings forecasts. Earlier the shares traded as low as $42.85. Through yesterday’s close, the stock had gained 1.2% for the year so far.

The company said currency fluctuations would lower revenue 4 percentage points in the fiscal third-quarter and the issues that plagued commercial licensing sales would also persist, including weaker spending in Japan after the country raised its sales tax. Microsoft forecast sales declines in China, Russia and Japan.

The strong dollar relative to currencies such as the euro hurt sales because it cuts the value of sales made overseas when they are converted to dollars to bring revenue back to the U.S.

In the call with analysts, Nadella wasn’t specific on what was ailing Chinese demand, citing “geopolitical issues.” To analysts such as Mark Moerdler at Sanford C. Bernstein & Co., that’s code for the Chinese antitrust investigation of Microsoft and the country’s government avoiding Microsoft software purchases.

China is aiming to purge most foreign technology from banks, the military, state-owned enterprises and key government agencies by 2020, people familiar with the plan told Bloomberg News in December. In July, Chinese regulators raided Microsoft offices in the country and opened an anti-monopoly investigation.

Microsoft also didn’t specify what’s hurting sales in Russia.

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