Microsoft & Google– 2 for 2

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Strong US$ masks good fundamental developments.

• Microsoft and Google produced good results that were marred by the problems caused by the strong US$.
• Both saw good developments in the core businesses, justifying their position as my top choices in the digital mobile ecosystem.

Microsoft

• Microsoft reported strong numbers as adoption of its cloud offering and Office 365 continued to outpace expectations.
• Q31 15A revenues / adj-EPS were $21.7bn / $0.64 compared to consensus at $21.1bn / $0.53.
• Although the PC market has continued to be weak during the quarter, growth in Office 365 users and enterprise adoption of Azure has more than offset that weakness.
• Furthermore, revenues from Windows being sold to corporates has stabilised after the bump caused by the end of support of Windows XP.
• This is good news as with this revenue stream stable, Microsoft can concentrate on delivering growth from its new businesses.
• Unfortunately there are danger signs when it comes to smartphones.
• With 8.6m units shipped during Q1, RFM estimates that Microsoft has lost share again to just 2.6% globally.
• Some of this is due to its tighter geographic focus when compared to its peers, but Microsoft cannot afford to continue losing share.
• RFM research indicates that the smartphone is at the heart of the ecosystem and it is upon this device that most users make their choice.
• Whatever the circumstances, the problem is that falling market share damages the credibility of the platform and will dissuade third parties from supporting it and consumers from buying it.
• Financially, this is an insignificant blot on a good set of results from Microsoft, but without a credible smartphone platform, winning users over to its ecosystem will much more difficult than it already is.

Google

• Google reported a fair set of Q1 15A results as revenues were just shy of expectations but stripping out the FX effect reveals a strong underlying performance.
• Q1 15A revenues-exTAC / EPS were $12.9bn / $6.57 compared to estimates of $14.0bn / $6.63.
• During Q1 15A Google suffered as many of its peers have suffered from the strong US$ which it estimates held back revenues by about 5%.
• Without the impact of the US$ growth would have been 17% which would have put both revenues and profits nicely ahead of expectations.
• Mobile continued to be the engine of growth where RFM sees most of the growth coming from Android devices.
• The market was expecting a harder hit from the strong US$ which combined with some progress on OPEX was met with a relief rally.
• Google has been more efficient on its marketing spend but at 8.1% of revenues its General and Administrative expenses remain way too high.
• That combined with the poor corporate governance continue to spoil what it is an excellent story.
• Fortunately, investors continue to be well compensated for these shortcomings and I still see some upside in Google in the medium term.