Microsoft Is Selling More Phones Than Ever, but It Isn’t Nearly Enough

The outlook is not so good.

Photo by Justin Sullivan/Getty Images

This afternoon, Microsoft reported its second-quarter earnings for fiscal year 2015. The results were mostly in line with what analysts expected: Revenue increased to $26.5 billion, and earnings per share came in at $0.71. Despite that, shares are slipping. The stock initially declined about 2 percent,  then kept sliding after the company’s chief financial officer said she expected revenue growth in the third quarter to fall 4 percent because of poor currency exchange rates.

The report wasn’t without its bright spots: Microsoft’s cloud business continued to grow; Surface revenue was up 24 percent to $1.1 billion; and search advertising revenue grew 23 percent as Bing increased its market share. And the company sold 10.5 million Lumia phones. This last one was a big mark to hit. Microsoft had sold 9.3 million phones the quarter before this one, and topping the 10-million mark, as TechCrunch put it, was a “big psychological win.”

But was it big enough? On the one hand, 10.5 million phones is nothing to discount. On the other, Microsoft’s revenue from Windows Phones fell 61 percent in the current quarter. The company says this is mostly because of its terminated commercial agreement with Nokia—Microsoft acquired Nokia’s handset division in early 2014 and has faced ongoing costs from that, in addition to losing its biggest licensee. Windows Phones’ already small market share also dwindled in 2014, from 3.3 percent to 3.1 percent, according to estimates from eMarketer.

Compare that to the figures Apple and Samsung are posting in mobile. Samsung, the biggest smartphone-maker since late 2011, sold about 78 million smartphones in its third quarter. Apple, which reports results on Tuesday, is expected by analysts to have sold 66.5 million iPhones in its latest quarter.

Of course, it’s hard to take too much away from any single earnings report. Microsoft also recently premiered Windows 10, a surprisingly fresh operating system designed to work across all Windows devices—computers, tablets, phones, and even Xbox. But since the second quarter ended on Dec. 31, 2014, and the product doesn’t even have a set release date yet, the company can’t really expect to see any impact from that on its financials for a while.

Microsoft faces an uphill struggle in the phone business. People don’t buy Windows Phones because all the good apps are on Android and iOS devices. But all the good apps are on Android and iOS devices because people don’t buy Windows Phones. Perhaps Windows 10 will finally break that cycle. If it doesn’t, Microsoft will have a hard time making its Nokia acquisition pay off.