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Microsoft reshuffles into 3 businesses for financial reporting

Gregg Keizer | Oct. 1, 2015
Will make it easier to mask hardware's hard road to profit, says analyst.

Microsoft will no longer regularly provide unit sales of its Xbox video game console or its Lumia smartphone, for instance. Teasing out such basics as Windows' performance will be much more difficult, and by combining multiple groups -- some which traditionally boast high gross margins, others that may bring in revenue but are either not profitable or barely so -- Microsoft will make it tougher for outsiders to parse the difference.

"It looks like we'll get less granular visibility into the performance of individual parts of the business, especially in hardware," said Jan Dawson, chief analyst at Jackdaw Research, in an email. "Bundling Windows with phone, Xbox, and Surface will mask the underperformance of the hardware divisions, although it'll also take some of the shine off Windows."

Microsoft will also ditch reporting of gross margin, a measurement of revenue minus the cost of goods (COG), and instead focus on highlighting operating income, the amount of profit after deducting operating expenses, which include not only COG but also sales costs, wages and depreciation.

That change will make it harder to pry hard data from some segments. Under the earlier reporting format, for instance, the Computing and Gaming Hardware group -- Xbox and Surface, primarily -- recorded revenue of $1.9 billion in the June quarter for a gross margin of 22%, signaling the difficulty of producing profit on devices. By tossing that into the same bin as the high-margin Windows business, it will be impossible to get a sense of whether, say, the Surface line is making or losing money.

But Microsoft will not be able to disguise its bigger problems with the new format, Dawson said. "The only part of the business that's seeing increasing margins is Intelligent Cloud, which is on track to become the most profitable segment sometime in the next year or two. [Meanwhile,] margins in Productivity and More Personal Computing shrink steadily," Dawson said after reviewing the new reporting.

Overall, Dawson wasn't much impressed with the changes. "The new segments feel like something of an over-simplification of the real structure of the business, with Office lumped in with Dynamics, search and Windows lumped in with hardware, and enterprise services lumped in with server products," he said.

Microsoft will hold its next call with Wall Street on Oct. 22 starting at 2:30 p.m. PT, when it will use the changed reporting to present its earnings.

 

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