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Is this really a whole new Microsoft?

 

Yesterday, Microsoft reported a year over year (YoY) revenue decline of 8%.  But accounting rules being what they are, the Redmond giant deferred $1.36 billion in revenue coming from Windows 8, which hasn’t yet been released. Things like pre-sales are not counted as revenue yet because Microsoft hasn’t launched the product yet.  It’s an accounting thing, and it’s normal.  So from a business perspective, Microsoft revenues are essentially flat.  
 
Looking at the various segments of their business, it is the Server & Tools business that is showing the best growth (8% YoY), driven by SQL Server and System Center.  The Business Division (Microsoft Office and other software) is down 2%.  The Windows & Windows Live Division was down a whopping 33% though.  This is where the revenue deferral happened, so if you adjust for the timing or revenue recognition, the business was down only 9%.
 
 
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“Only” 9%?  That’s still sort of a big deal, no?  If I was an investor in Microsoft (I’m not), I’d be worried about this.  They already started to pre-sell their latest and greatest OS and they’re still shrinking?  
 
At least their Online Business Division grew 9% YoY.  Online advertising revenue grew 15%, which is nice, but less than Google’s growth rate (19%) as discussed in my post on Android Central.  
 
When I look at financial results I’m looking for signs of change in the big picture view.  With Microsoft, I don’t see any changes.  The business is fairly stable when it comes to serving the enterprise, but facing huge risk when serving the consumer.  It’s an unchanged story.  That said, Microsoft spit off $8.5 billion in operating cash flow this quarter.  This is a business with an enormous capacity to keep competing and never quitting.  That’s what makes Microsoft a scary competitor.
 
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Windows 8 and Windows Phone 8 are going to be hugely important to the future of the company (and the stock).  And while not too many people talk about it, I think their acquisition of Skype could prove to be the most brilliant thing they’ve done in a long time.  As the PC world shifts to one of mobile computing, Skype is Microsoft’s sleeper.  We all think of it as an important app, but it could be an important factor in establishing carrier deals down the road.  With 40 million user online during peak times, the network value of Skype’s customer base is immense.  Combine that with a mobile computing platform, a solid app experience, and great integration across the cloud and you have a recipe for success.  
 
But as always, it comes down to execution.  And for years (and years), Microsoft has brilliantly lacked execution in mobile.  It’s almost like they had to try extra hard to come up essentially empty handed after all these years. 
 
Before too long Microsoft will kick all of the variations of Windows 8 out the door and OEM partners will be selling them on multiple form factors, including Microsoft’s own Surface tablet.  Is this the start of a new Microsoft?  We’ll see.
 
(Chris Umiastowski is a contributing financial writer to the Mobile Nation network. You can see the rest of his posts here at AndroidCentraliMore and CrackBerry.)
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Reader comments

Is this really a whole new Microsoft?

28 Comments

Excatly or I think that they will be left behind in the long run, but I think they know this now, hence they are building their own tablet and phone and spending a bunch of $$$ Personally I think that they  will do just fine provided that they don't blow WP 8 and Windows 8.... if so it would be really really bad for them.

There is nothing to worry about for MS.
The bit most people forget, is that Windows 8 is not Metro.
Its a clear direction, the big change, but underneath Windows 8 is more advanced than Windows 7. If Metro is so rejected (which I don't think it will) they could realse Windows 8.1 with Metro tomorrow and still have a better OS than Windows 7 and OSX :)
 
Enterprise is going from strength to strength. Due to Moores law, SQL can replace Oracle / DB2 and other big data installs from other companies for x86 money. Exchange is massive, and Office 365 is viable cloud option. Windows Server 2012 is awesome, and Hyper-V is catching up ESX - but why oh why do they persist with System Centre which is OVER ENGINEERED!
No really, MS can only lose out on Phone and Tablet markets by poor execution. But I've used an RT tablet and its actually pretty good. And I am here primarily as I am a Windows Phone user - and that also is a really fine phone OS. It will not go anywhere, and actually with the common core stands a good chance of being brilliant.
 
I certainly wouldn't lose sleep over Microsoft's health. Its such a resilient, broadly risked company with so many ingrained enterprise relationships and up against nothing on the PC side (OSX/Mac is twice the price, and Linux is no good for normal consumers) No, nothing to worry about at all.
 

I agree about Skype. As the country gets blanketed in Wifi, there will be even less of a reason to have anything but the absolute bare number of minutes for most users. Sorry, overpriced carriers. 

Carriers and broadcast companies have been fighting the open internet for a decade now trying to prevent this.  They won't openly admit it, but it is obvious.  Anticompetitive behavior started with data caps.  Then when companies like Rogers offer streaming to customers at no data charge (Rogers on Demand does not count towards your data use) while charging for data for other similar services (Netflix), then it went overboard.
 
If I could completely replace my cable with internet services I would, the problem is that I cannot get enough data.  I'm looking into switching to Teksavvy as they still offer an unlimited internet plan once I get settled in my new job next week.  I'll love it when I can give Rogers the big middle finger.

Question, since Skype is now Microsoft, the public who bought Skype stocks prior to acquisition, are there stocks changed to Microsoft?

This is a new Microsoft for sure. But as far as Skype is concerned, they really should think about using it to bypass the carriers. Hopefully that is the future. 

Well you would need wifi for Skype, so if you had Skype running your data would be wifi as well.

Skype runs on 4G. and if your not around a WiFi signal, you would have no calls out or in? You can do that now. Just buy the smallest package available and only use your phone when on wifi, but that won't remove the need for carriers.

MS has had the option to bypass the carriers with OCS and Lync for almost 6 years but haven't even included audio communications in those clients because they didn't want to compete with the carriers.  It will surely be a new MS if they take on the carriers this way.

I'm surprised there is no comment on the Entertainment division's results.  IIRC it saw an increase in business, and IIRC, the Entertainment division includes Windows Phone.

Well, with the $1.8B deferral, and the recent news of Intel and AMD losing value, I'd say it's inline with the entire industry.  Is this entirely Microsoft's fault?  No, but they have a huge stake in this, and I know that OEM's will come out swinging on the 26th.  I for one am not panicking, and hope to see very good numbers in 2 quarters.

Its WAAAYYY to early to think you'd see any changes due to W8/WP8/Surface. It hasn't even been released yet. And then it will take some time to gain traction. As an investor, I'm not looking to see positive movement until this time next year.

@soundweb
That is kind of late isn't it? This time next year?
How about late winter or early spring 2013? It gives people some time to get accustomed to W8 format at work, home, school etc... Then they will recognize WP8 and buy them...

They've been on a roll for the past years. With Windows phone 7-8. The amazing functional windows 8. The partnership with Nokia, the surface tablet. Microsoft has been killing it alot lately.