2014 Overview: Mobile a Disaster for Microsoft

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Source: Thinkstock

In recent years, Microsoft (NASDAQ:MSFT) — as the world’s largest software company — has somehow been associated with the terms “disaster,” “debacle,” “embarrassment,” and “failure.” Last September, Mark Hachman of PC World dismissed the Microsoft and Nokia combination as “fail plus fail equals more fail.” Web 2.0 and its 24/7/365 news cycle of hyperbole have largely left behind Microsoft. For now, Web 2.0 begins and ends with the smartphone, as even Facebook (NASDAQ:FB) has already declared itself a “mobile company.” Unfortunately for Microsoft shareholders, however, Microsoft will still remain stonewalled on the outside looking in by the end of 2014. The Apple (NASDAQ:AAPL) iOS-Google (NASDAQ:GOOG) Android duopoly will be ever more entrenched above the mobile market over the course of the next year.

The Apple iPhone Pace Setter

2009

2010

2011

2012

2013

Q1 2013

Q1 2014

Apple Revenue

$42.9B

$65.2B

$108.2B

$156.5B

$170.9B

$54.5B

$57.6B

iPhone Revenue

$13.0B

$25.2B

$46.0B

$78.7B

$91.3B

$30.7B

$32.5B

iPhone Unit Sales

20.7M

40.0M

72.3M

125.0M

150.3M

47.8M

51.0M

iPhone Revenue Per Unit Sold

$628.00

$630.00

$636.24

$629.60

$607.45

$642.26

$636.90

iPhone % of Apple Revenue

30.3%

38.7%

42.5%

50.3%

53.4%

56.3%

56.4%

Source: Apple Earnings Releases and SEC Filings

Ironically, a haughty Steve Ballmer once incredulously jeered Steve Jobs’ iPhone as simply a “$500 phone” upon its 2007 launch. At that time, Ballmer dismissed an iPhone that “does not appeal to business customers.” Ballmer also went on to opine that Microsoft was selling “millions upon millions” of phones per year, while Apple was obviously starting off from ground zero. On August 23, 2013, Steve Ballmer announced that he would be stepping down from his CEO post within the next twelve months. Microsoft shares gapped up to $34.49, for a 7.3 percent gain, immediately upon Ballmer’s resignation announcement. Going forward, Ballmer’s awkward and hysterical laughter directed at the original iPhone will always haunt Microsoft shareholders.

On January 28, 2014, Apple filed its first quarterly report of 2014 with the U.S. Securities and Exchange Commission. This latest report summarized Apple’s financial information for the quarterly period ended December 28, 2013, which largely coincided with the critical holiday season. Apple generated $32.5 billion in revenue off a record 51 million Q1 2014 iPhone unit sales. This performance broke down further to $636.90 in iPhone revenue per unit sold. On average, Apple consumers were purchasing the equivalent of the 16GB iPhone 5S, which retailed for $649.00 last quarter. Research firm IHS iSuppli recently performed a teardown of the 16GB iPhone 5S and estimated bill of materials and manufacturing costs of $198.70 for the handset. In all, Apple is likely generating roughly 70 percent gross margins off its smartphone portfolio.

For the sake of making comparisons, be advised that Nokia fiscal years parallel calendar time, while Microsoft ends its fiscal years on June 30. The IRS’ 0.783 euros-to-dollar ($1.28 dollars-to-euro) 2013 average exchange rate will be used to convert Nokia financials into dollar amounts. Nokia has suggested that it will complete the sale of “substantially all” of its Devices and Services operating segment to Microsoft by the end Q1 2014.

Nokia categorized its Devices and Services division as Discontinued Operations within its latest 2013 annual report. Nokia Discontinued Operations racked up $753.5 million in losses upon $13.7 billion in segment revenue for 2013. Nokia Discontinued Operations also burned through $1.4 billion in operational cash flow through this same time frame. Year-over-year segment revenue actually deteriorated sharply from $19.4 billion to $13.7 billion between 2012 and 2013. Interestingly, Nokia operating losses declined alongside the contraction in revenue. Going forward, Microsoft may be poised to take over a unit that bleeds additional cash upon each marginal handset sold. Nokia blamed the collapse in Discontinued Operations sales upon “competitive industry dynamics” and “intense competition at the low end of [the] product portfolio.”

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