Audacious Goals Will Thrust Microsoft Higher

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In its Annual Report, Microsoft (NASDAQ: MSFT) CEO Steve Ballmer outlines a section called “Our Future: Big Opportunity.”

There’s a remarkable amount of opportunity ahead for Microsoft in both the next year and the next decade.  As we enter this new era, there are several distinct areas of technology that we are focused on driving forward – all of which start to show up in the devices and services launching this year.

Among the key focal points, Ballmer addresses two items:

  1. Building and running cloud services in ways that unleash incredible new experiences and opportunities for businesses and individuals.
  2. Firmly establishing one platform, Windows, across the PC, tablet, phone, server and cloud to drive a thriving ecosystem of developers, unify the cross-device user experience, and increase agility when bringing new advancements to market.

Below are Microsoft’s three biggest businesses by revenue.  I will address two of the businesses and explain why each could propose upside for Microsoft.

<table> <tbody> <tr> <td> <p><strong>Business Unit</strong></p> </td> <td> <p><strong>2012 Growth</strong></p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>2011 Growth</strong></p> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2010</strong></p> </td> </tr> <tr> <td> <p>Windows and Windows Live Division</p> </td> <td> <p>0.17%</p> </td> <td> <p> $ 18,818</p> </td> <td> <p>-0.01%</p> </td> <td> <p> $ 18,787</p> </td> <td> <p> $ 18,789</p> </td> </tr> <tr> <td> <p>Server and Tools</p> </td> <td> <p>12.01%</p> </td> <td> <p> $ 18,696</p> </td> <td> <p>10.38%</p> </td> <td> <p> $ 16,691</p> </td> <td> <p> $ 15,121</p> </td> </tr> <tr> <td> <p>Microsoft Business Division</p> </td> <td> <p>7.39%</p> </td> <td> <p> $ 23,963</p> </td> <td> <p>14.28%</p> </td> <td> <p> $ 22,314</p> </td> <td> <p> $ 19,525</p> </td> </tr> </tbody> </table>

*Data from 2012 Microsoft Annual Report

**Numbers in millions

Windows & Windows Live Division

Windows & Windows Live is the business unit that sells Microsoft’s operating system, software, and services through Windows Live hardware products, which are mostly created by other companies.  Despite stagnate returns over the past couple years, Microsoft’s new Windows 8 product could deliver strength to this segment because companies that upgrade would bolster Microsoft’s revenue.

Also, I do not believe that Apple (NASDAQ: AAPL) is quite the desktop competitor that some make it out to be.  Apple’s desktop computer growth far lags Microsoft’s growth in the commercial space. 

Further, Apple’s total sales in the desktop space are about one-third of Microsoft’s.  And surprisingly, Apple’s desktop sales stagnated.  Last year's sales were $6.44 billion, according to Apple's annual report, compared to $6.2 billion the year before, a gain of just 4%.  Unit sales did not fare much better.  Apple sold 4.67 million desktop units last year, versus 4.63 million the prior year, a gain of just 1%.  While Apple creates a compelling product, I expect most businesses to migrate to Windows 8 for their commercial needs instead of shifting to Apple.

Server and Tools Division

Microsoft’s Server and Tools unit has a smattering of products. These include enterprise services, like premier product support and Microsoft consulting services; Windows server; Microsoft SQL server; Windows Azure; Silverlight; Visual Studio; and Windows embedded device platforms, according to Microsoft’s 2012 annual report.

As customers customize and learn to use Microsoft’s products, like Windows 8 and its server systems, the premier and consulting groups will earn revenue from providing training and customization.  Also, the Server and Tools business unit grew 10.4% in 2011 and 12.0% in 2012, a reflection of the current trend towards virtualization and cloud computing.

Microsoft is not without heavy competition, however.  IBM (NYSE: IBM), Oracle (NYSE: ORCL), and VMWare (NYSE: VMW) are forces in the server and cloud space.  According to the Annual Report:

IBM and Oracle lead a group of companies focused on the Java Platform Enterprise Edition that compete with our enterprise-wide computing solutions.  Commercial competitors for our server applications for PC-based distributed client/server environments include CA Technologies, IBM, and Oracle.

IBM and Oracle are leaders in the server space, and Microsoft must strengthen its product offering if it hopes to steal share.

In the virtualization and cloud-based businesses, VMWare and IBM are both fierce competitors.  All of the Fortune 100 and Fortune Global 100 and 98% of the Fortune 500 firms use VMWare’s products.  Its Virtualization page explains its offering in detail.

IBM also competes with Windows Azure, one of Microsoft’s cloud offerings – you can see the different Azure products here.  Also, IBM sells high-end business intelligence and data warehousing products, which you can see here.  An example is IBM’s Cognos product, which allows users to merge, compile, and analyze data on desktop and mobile devices.

Despite competition, Microsoft can continue its growth in this segment.  Large, mid-sized, and small businesses are learning of the cost savings of virtualization, bringing more customers into the game.  Further, companies who have field workers – for example oil and gas service companies like Halliburton – are moving towards virtualization because it allows them to interact with their offices and update information in real-time. 


In two of Microsoft’s largest businesses – Windows and Servers and Tools – Microsoft can seize the opportunity to continue to grow.  Microsoft should also see continued growth in its Microsoft Business Division because of additional sales and updates to Microsoft Office. 

In all, Microsoft has set ambitious goals for itself within its largest businesses, creating new products like the Surface tablet and Windows 8.  And growth in these businesses – along with the entire macro landscape – will push Microsoft to new highs in 2013.




ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, International Business Machines, Microsoft, Oracle, and VMware. Motley Fool newsletter services recommend Apple, International Business Machines, Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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