2013's Underdog: Microsoft
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently Microsoft (NASDAQ: MSFT) released their earnings for the quarter ending June 30th. For the first time since Microsoft went public in the 1980’s, the tech giant posted a quarterly loss, of $492 million. This was mainly due to the $6.2 billion write off of Microsoft's 2007 acquisition of aQuantive Inc. At the time the $6.3 billion purchase of aQuantive was the largest acquisition the company had ever made, though that has now been surpassed by the $8 billion purchase of Skype. Microsoft has built up its online advertising, but stated that their purchase of aQuantive didn’t "accelerate growth to the degree anticipated." Microsoft spun off a small part of aQuantive, named Razorfish for $530 million in 2009. Beyond this large, one time write off Microsoft stated that they expect the Online Services Division to continue to grow, though they lowered their estimate for profitability.
Other than the write off, Microsoft had record revenue of $18.06 billion for the quarter and $73.72 billion in revenue for the fiscal year. The Windows and Windows Live Division saw quarterly revenue drop by 13% and dropped 3% compared to fiscal 2011. This in large part could be attributed to people waiting for Windows 8. Windows 7 is the current desktop and laptop operating system from Microsoft but with the release of Windows 8 set for October 26th customers may be holding off purchasing a computer until Windows 8 launches. PC sales growth is also projected to be tepid at best which would slow the Windows division.
Microsoft's Server division had 13% quarter over quarter growth and 12% for the year. The Business division, which is home to Microsoft's Office Suite, posted 7% quarterly growth. This division will likely pick up in 2013 with the just announced Office 2013. The Entertainment division, home to the Xbox, was another bright spot for Microsoft with revenue rising 20% in the quarter and 8% for the fiscal year. The rumored Xbox 360 successor could boost future Entertainment Division revenue, though the new console is not expected very soon.
CEO Steve Ballmer stated that “We delivered record fourth quarter and annual revenue, and we’re fast approaching the most exciting launch season in Microsoft history.” These launces are largely centered on Windows 8, which will be launching in October. Windows 8 will feature the Metro interface that is already present in Windows Phone as well as being completely touch and tablet optimized. There will in fact be a separate version of Windows 8 designed specifically for tablets that have ARM based processors. This tablet version of Windows 8 is called Windows RT.
Windows RT will enter an already highly competitive tablet market. Apple (NASDAQ: AAPL) has sold over 80 million iPads since its launch in 2010. The iPad at one time captured over 70% of the tablet market and it still has over 60% market share. There are rumors that Apple is prepping a smaller 7.85 inch version of the iPad with a lower price that would no doubt increase iPad sales. Google (NASDAQ: GOOG) is also jumping into the tablet market with their newly announced Nexus 7 tablet. The Nexus 7 is a seven inch tablet running the latest Android operating system Android 4.1 Jelly Bean and directly supported by Google. The Nexus 7 also has a price of $199, a price that neither the iPad or Windows RT tablets are likely to match.
In June, Microsoft announced two of their own tablets, the Surface tablets. One of these will run Windows 8 and the other will run Windows RT. Though a release date for these tablets was not announced, one of them is launching alongside Windows 8 and the other is launching three months later. Microsoft also announced that these Surface tablets would be comparable priced to current tablets and ultra-books. Thus much more expensive than the Nexus 7, and comperable to the iPad.
The other Windows 8 branded product set to launch later this year is Windows Phone 8. Windows Phone has not caught on like Microsoft had hoped and Windows Mobile, the predecessor to Windows Phone still has more US market share than Windows Phone does. Windows Phone 8 is almost a re-boot of Windows Phone. It features an upgraded user interface and a common core with the Windows 8 and Windows RT. This will make developing applications to run on all of Microsoft's operating systems much easier. The downside of this is that Windows Phone 8 will not be coming to any current Windows Phone device.
Apple recently announced iOS 6, and a new iPhone will likely be launching later this year. Google also announced Android 4.1 Jelly Bean, which will be rolling out in the coming months. Even BlackBerry has an upgrade coming to their operating system coming, eventually.
Microsoft has a lot of big launches coming later this year and into 2013. Windows 8, Windows Phone 8, Office 2013 and the surface tablets. The aspect of these launches to watch is that Microsoft is not already a dominant player in many of these markets. In the smartphone market they are well behind every major player (and even some smaller players like BlackBerry), and in the tablet market they are not even a player. While their established businesses will continue to be cash cows, namely Windows, Office, and their business solutions, it remains to be seen if Microsoft can turn Windows Phone, Windows RT and the Surface tablets into successes.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.