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Microsoft’s Troubles Persist

Posted on Tuesday, Jul 23rd 2013

There seems to be no relief in sight for the PC market. IDC’s PC shipment report saw second quarter shipments continue to decline, with total units shipped falling 11% over the year to 75.63 million units. Within the U.S. conditions were better, with PC shipment falling 2% to 15.65 million units.

Microsoft’s Financials
The depressed conditions of the PC market continue to hurt technology giant Microsoft (NASDAQ:MSFT). Q4 revenues grew 10% to $19.9 billion, missing the market’s expectations of $20.7 billion. EPS of $0.66 fell significantly short of the Street’s target of $0.75 for the quarter.

By segment, Business Division revenues grew 14% over the year to $7.2 billion, with Office 365 now trending at a $1.5 billion annual revenue run rate and more than one million subscribers. Server & Tools revenue grew 9% to $5.5 billion driven by strong growth in SQL Server and System Center. Windows Division revenues were the biggest disappointment despite 6% growth: revenues of $4.4 billion fell $0.4 billion short of expectations due to declining PC sales. Revenues from online services grew 9% to $0.8 billion and entertainment, and Devices Division saw revenues grow 8% over the year to $1.9 billion.

The company ended the year with revenues growing from $73.72 billion a year ago to $77.85 billion. EPS grew from $0.80 to $0.92 for the year.

Microsoft’s Disappointing Product Lineup
Microsoft is counting on its product upgrades to help pull it back into a strong growth position. Unfortunately, the much-awaited Windows 8 did not do much for performance as the OS failed to drive growth in the PC and laptop segment.

Microsoft also hoped to make a mark in the tablet market with the release of Surface, its touchscreen tablet, last year. But Surface did not fare well, either. During the current quarter, Microsoft tried to push inventory of the tablet by slashing prices down from $500 to $350. As a result, it took a hit of $900 million in its financials. Despite the weak response and the current poor performance of their machine, Microsoft remains committed to the tablet industry and plans to release an upgrade by fall this year. The new machines are expected to be Intel powered, thinner, and will boast a higher battery life.

Microsoft’s Gaming Win
Within the gaming industry, the market is waiting for Xbox One, the upgraded Xbox offering. Some analysts believe that Microsoft has failed to deliver a strong hardware offering. While that may be true within the PC and tablet market, I think they have a winner in the gaming market with XBox. Microsoft’s XBox 360 has been the market leader in the console games market for the past 30 months. They have, however, recently lost the head of XBox to Zynga.

Microsoft has also been able to push its subscription-based offering of XBox Live successfully as well. As of last quarter, they had more than 45 million XBox Live subscribers, and internal reports showed that these users were even willing to spend money within the gaming platform. During the quarter, transactional revenues within Xbox Live grew 20%.

XBox One, slated for launch later this year, will offer services beyond gaming. The console comes with ports that will allow it to function as a cable TV box and will eliminate the need for viewing TV from the console through apps. XBox One also boasts of a much better sensor that can process 2GB of data per second and track up to six people at a time, making it one of the much-awaited consoles.

Earlier this year, Microsoft bought Israel-based Pando Networks for an estimated $11 million. Pando offers peer-to-peer file sharing technology that lets users share content through social networks, IMs or email. In addition, it is a content delivery network that can host assets for websites and is used by players like NBC to power HD TV streaming. Analysts believe that Microsoft will leverage Pando Networks’ capabilities to enable file sharing and content streaming through XBox One.

Microsoft’s Acquisitions
Microsoft continues to build its portfolio through acquisitions. Recently it announced the acquisition of release management solution, InRelease from software provider, InCycle Software. InCycle is among the market leaders of application life cycle management (ALM) market. The business acquired by Microsoft, InRelease, is a release management solution that helps developers, especially those of .NET websites, oversee the complete production of an app. Microsoft hopes to strengthen its own developer offerings through the acquisition to simplify build of more apps for its digital properties. Terms of the deal were not disclosed.

To enhance Azure, its cloud service, Microsoft acquired MetricsHub. MetricsHub is a cloud management company that improves the efficiency of the cloud by automating performance management. It enables users to rescale their service based on need and displays alerts and notification in case of any issues with the cloud service. Microsoft released MetricHub’s Active Cloud Monitoring application as a pre-release, no-charge version through the Windows Azure store.

Despite this continuous asset building, the market is not pleased with Microsoft’s performance. The stock fell 12% after the results announcement on concerns about Windows’ performance and the write-off on Surface. The stock is trading at $31.40 with a market capitalization of $262.22 billion. It touched a 52-week high of $36.43 earlier last week.


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