Microsoft: Is Windows 8 Good Enough?
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft (NASDAQ: MSFT), the software and server behemoth, has long been criticized for not being innovative enough to take on market leaders such as Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) in the software & firmware arena. After being a money spinner for decades, the company has started to lose pace, mostly due to decreasing PC sales as people are drifting towards new and exciting technologies. The company’s foray into the smartphone market with Windows operating systems in collaboration with Nokia has not exactly been a turnaround. The company is placing high hopes on its new generation Windows 8 operating system and its recently launched tablet, the Surface.
Microsoft recently declared its earnings for the quarter ended Dec. 31, with a slight decline in net income. Net revenue rose by 3% to $21.46 billion from $20.89 billion during the same quarter last year. However, earnings have reduced slightly to $6.4 billion from $6.6 billion in the corresponding quarter. These figures are in contrast with past results when new operating system launches generated excitement in the market, which usually led to a jump in Microsoft stock.
If we delve deeper into the results, some interesting observations can be made. First of all, the Windows division sales are up by 24%, which can be attributed to sales of the newly launched Windows 8 operating system. But the key thing to note here is that this growth in revenue is not necessarily due to the actual sales of the operating system alone, but it also contains deferred revenues from a likely future shift to Windows 8. The exact estimation of the amount of revenue generated through shifting can be tricky given that the future trend is towards new and smarter devices. Hence, these earnings don’t project a very reliable picture and may not be very encouraging to investors.
The Bright Side
From recent developments, it is evident that Microsoft has finally acknowledged the challenges it is facing. The company has recently replaced its Windows business unit head Steven Sinofsky and has brought two new executives to take charge of the underperforming unit. The company can benefit greatly if it is able to create integration across its products and services, which was a key concern in the Sinofsky era, failing which may lead to a loss in market share. This move also signifies the efforts put forth by the company to successfully launch Windows 8 in the market.
Another step in the right direction is the launch of Office 365, which is a cloud based version of the Office software suit and is aligned to compete with cloud based services offered by competitors such as Google. One more strong point is the deep rooted connection of Microsoft products with the enterprise, which the company has been able to manage well with continuous product improvements and new launches.
The Concerns
It is quite clear from the reception of Windows 8 so far that it will not play the role of business savior for the company. Sales of Surface tablets, touted as the next major revolution from Microsoft, have also been sluggish to say the least. The major problem in my opinion has been the shift from trend-setter to follower of competition. R&D expenses have grown over the years but have not yielded on company expectations. Another major area of concern is the speed with which the competitors like Google are catching up with Microsoft in its stronghold enterprise business. Google has come in a big way with its Google Apps, which offer low cost solutions and are cloud based. Its cost effectiveness and operational simplicity are becoming difficult for Microsoft to match. In my opinion, the future will belong to cloud based services, and Microsoft still needs to cover a long distance in this frontier.
Competitor Scenario
Microsoft is facing stiff competition from many competitors across all its business segments, but two major competitors that have grown to become the biggest threat for the future are Apple and Google.
Apple has disappointed investors with its FY13 Q2 results showing decline in iPhone sales for the first time. Shares tumbled by more than 12% on Thursday's trading session, which is the biggest percentage drop for the company in the last four years. Various brokerage firms including Barclays Capital have reduced the price target for Apple amidst fears of loss in market share in the smartphone market. These results are bound to have a negative impact on the entire industry, including Microsoft.
Google, on the other hand, recently posted strong results for the last quarter of 2012, with a 36% jump in revenues over the corresponding quarter last year to $14.42 billion on a consolidated basis. The company has finally reversed the trend of slowing revenue in its core business of online advertising, signaling that it has finally begun to get hold of the shift towards mobile devices.
Conclusion
Microsoft’s partnership with PC vendors and handset makers such as Nokia to distribute the Windows 8 operating system does not seem to be enough to ensure its future dominance in the computing market. Their inability to counter-attack Apple and Android-based devices is a cause of concern for the near future, as the company does not seem to have a plan in place to handle this issue. Surely the launch of the Surface tablet and products such as Office 365 shows some tendency towards a more competitive Microsoft, but the key to getting the glory days back is to lead, and not follow. In my opinion, the stock will remain stable in the near term as a lot will depend on next quarter's results, which will portray a better picture of the launch of Windows 8.
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