Originally Posted by gordy
IBM makes its money in enterprise solutions--it gave up on the PC a while ago. In that realm, IBM (TM1, et al), Oracle (Essbase, et al), HP (HPSC, et al), and Microsoft (...) are the big dogs, and Apple isn't even on the radar.
That being said, this news is great validation for us old heads here on AI. Next up, toppling Dell in Desktop market share.
One more thing: We keep hearing about Windows 'licenses'. That number includes millions of PCs sitting on docks anywhere between here an Hong Kong which aren't being sold. I'd like to hear web stats on the installed operatings systems surfing the web. While I realize Microsoft made their money regardless, to me that's a better barometer of how well 7 is doing in the market.
Well (rubs hands together), discussing MS's financial situation is a very interesting topic, and is actually what this thread is about.
I haven't read the AI article for days now, so if what I say repeats some of it, I'm sorry.
But, here it goes.
MS got pounded for a number of reasons. I'm reading articles from those in the financial industry, and from some analysts who are long in MS, or who report on them on a regular basis. In other words, MS is their beat. Mostly, they don't seem to understand why the stock was beaten down. They point out all the good things that occurred, and somehow, either minimize, or misunderstand the bad, or indifferent.
So what is actually happening to MS?
They've got several divisions, as does Apple and other companies. They break their sales and profits out according to those divisions. Just like Apple and others, those divisions may include areas that are just lumped in for no apparent reason. Sometimes they are lumped in to make some losses disappear, and sometimes because they are so small, that they are put with other small areas for convenience.
So, how did they do on the breakdown, and why does each matter to the company on the whole? Some divisions are much more basic to MS than others. In other words, MS could divest themselves of some of it, and not be affected as a company as a whole, while divesting themselves of others would change the company entirely.
Basically, MS is an operating system company, and a supplier of office software and software tools. All the rest is peripheral to them. That includes the online search, and consumer, entertainment and products divisions.
We can start with the smallest first, to get it out of the way. That's the Consumer, Entertainment and Products division. That's one division, and by far, the smallest. It includes a lot of stuff. Parts are the XBox and licensing and royalties from games and accessories (licensed controllers, etc., and including the Kinect). It includes the Products subdivision, which manufacturers keyboards, mice, cables, etc. The Consumer subdivision includes the Microsoft Marketplace, and all of the sales of music, Movies, Tv shows, and their game network. They move some of that stuff around from time to time, and so not all of it may be where I'm saying it is right now.
All of this came to a sales total of $1.9 billion the past quarter. We don't know exactly how this broke down, but it can be estimated. Estimates for the Products area are about $200 to $300 million. Estimates for the Consumer area are between $150 and $250 million.
Going by that, the Entertainment subdivision which includes the XBox and all that surrounds that would be between $1.350 and $1.550 billion. You know, with all the hype surrounding XBox sales recently, and especially Kinect sales, that's not a lot. In fact it's below 10% of their quarterly sales. In other words, not enough to affect the finances of the company much, one way or the other. Therefor the entire division's profits of $225 million are trivial. Subtract out some profits for the Consumer and Products areas, and the entire XBox area becomes little more than a rounding error in MS's $5.23 billion in profit for the quarter. The other areas in the division wouldn't even be missed if they were discontinued. Sort of like aTv and the areas surrounding that.
Next, we can look to their online initiatives. What's happening there? Well, not much. It's doing very poorly. They lost $726 million on $648 million in sales last quarter, and those losses are increasing. They pay for search results, and pay out much more than they take in. We hear that their search is now up to 30%, and that's looked at as being great growth. But actually, it's not. Why? Because two thirds of that is Yahoo search that's being included with the just over 10% Bing search. This is just not something MS has skill in, and investors are screaming for them to get rid of it. If they did, their profits would jump. But Ballmer (bless his heart), insists they will make a success of it.
Then we have Server OS and Tools. MS did well there. They sold $4.1 billion, very slightly ahead of estimates. Profits were good at $1.4 billion. Services are included in this division, so profits aren't as high as down below.
The Business division, which mostly consists of Office, sold $5.25 billion, while estimates were just $4.9. As we can see with pure software, profits are high, at $3.1 billion. $305 million came from deferred income from the previous quarter from promotions.
But sales in the Windows OS division were $4.4 billiondown 4%, while profits, at $2.8 billion, were down 10%. this is the second quarter in a row where Windows sales and profits were down. Windows 7 was supposed to move Windows sales up a great deal. They didn't. When it first came out, there was a bounce from two sources. The first was the bounce from the receding recession, which took computer sales down with it. The second was Vista, which was also responsible for people putting computer purchases into the future. Well, the ending recession and Windows 7 arrived at about the same time, so we saw a bounce from that. But the bounce seems to have flattened out, as bounces do. Now, the balling is rolling downhill.
So, what can we make from all of this? One thing is that the entertainment division, even though it's now making a profit, isn't accounting for much of the company's sales and profits. No real cheer there, therefor. And it's thought in the gaming industry that console sales may slump from the increased sales of tablets, and their increasingly sophisticated gaming
possibilities. The fact that you will be able to carry your gaming console (the tablet) everywhere you go, and use it where there is no power, is not something traditional consoles can match.
Their online activities are bombing. There really is no other word for it. They've been at this for many years, and in only two did they ever eke out a small profit. And losses are increasing at an alarming rate, $2.5 billion last year, with this year's prospects looking worse, from the first quarter's result. No joy there either.
They did well with server and Tools, but it's not a high growth area, but a modest to medium growth area of about 12% profit increase YOY.
The Business division did the best. Their growth was about 21% YOY, with profits increasing 25%. Office is the biggest monopoly they have (over 95% of office software), with, at this time, no real competition. So this looks really goodso far, but....
The Windows Division, as mentioned, is down again. The truth is that Windows is the driver of every major product for MS. If Windows is going to be flat, or even worse, down for the year, then we've got a lagging indicator to look at. That indicator is Office. While Mac users use Office, it's used to a lessor extent by them. So far, there's no indication that Office will be available for tablets (other than Windows tablets, that is). If that's going to be the case going forward, and it's also true that 30% of tablet sales are coming at the direct expense of a computer sale, as is thought, then with Windows sales down, sometime after, Office sales will follow.
In the longer term, this could even effect the Server and Tools Division. The tools area serves Windows and Server. If Windows is down, so goes tools sales. Eventually, Server sales could be affected as well.
But their profits were higher than expected, doesn't that count for something? As for their profits being over the market expectations of 56 cents a share at 61 cents, well, that's bunk as well. It's true it did come in at 61 cents, but that was because of a 5 cent, one time tax rebate, which the market properly discounted.
I haven't even discussed WP 7!
The problem with evaluating how well a company does is to understand what's important, and what's not. I've followed MS since I bought their stock when the IPO first came out. But I sold it in the latter 1990's, and haven't bothered with it since. It seems that many of those who are talking about how they are startled at the drop in the shares after their report, don't understand the company at all, no matter who they are. This is one time the financial community is right.
Now, Apple, well, that a whole 'nother story!