New Strategy Shift Will Boost Microsoft

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Microsoft (NASDAQ: MSFT) may have started a shift that will result in major releases of Windows operating system every twelve months rather than once in two or three years. According to the report, the policy is to position Microsoft for effective competition with Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). The next Windows, if the news reports are to be believed, will roll out mid-2013, and it will be very cheap. Historically, Microsoft's growth declines until a new Windows operating system is released or when Windows is not doing well in the market. Consequently, I believe Microsoft's declining stock justifies an upgrade of Windows every year for the health of the software giant.

Revenues for Q2 were $20.89 billion, a 5% increase from the prior-year period. However, operating and net income declined in the quarter with $7.99 billion and $6.62 billion, compared with $8.17 billion and $6.63 billion, respectively, in the prior-year period.

Why did sales growth slow down? The situation was blamed to the decline of personal computers in the market and the geometric increase in the use of mobile devices. Although most of the decline in income was attributed to the low demand in personal computers and Netbook, there was also talk that sales slowed down because no new windows was launched and Windows 7 performed poorly.

Microsoft announced third quarter revenues of $17.41 billion for the quarter ended March 31, a 6% increase from the prior-year period. Operating income was $6.37 billion, up 17% from the prior-year period. Net income and diluted earnings per share for the quarter were $5.11 billion and $0.60 per share, compared with $5.23 billion and $0.61 per share respectively in the prior-year period. "We're driving toward exciting launches across the entire company while delivering strong financial results," said Steve Ballmer, CEO of Microsoft. "With the upcoming release of new Windows 8 PCs and tablets, we will be delivering exceptional value to all our customers in the years ahead." The Windows live division posted revenues of $4.62 billion, a 4% increase from the prior-year period.

Why did Microsoft post such impressive figures? Strong Window 7 adoption was said to be responsible for it, going up to 40% worldwide.

News reports announced that Microsoft suffered its first quarterly loss in its 26 years as a public company in the quarter four earnings report. Microsoft was said to have posted just $192 million, a decrease of 97%, in operating income before taxes, and earnings per share of minus $0.06. However, this figure did not include Windows 8 upgrade deferral and a write-down of Microsoft's failed aQuantive acquisition. Microsoft included them in its own announcement, reporting total revenues at $18.6 billion, up 7%, operating income at $6.9 billion, up 11%, and EPS of 73 cents, up 6%. "We delivered record fourth quarter and annual revenue, and we're fast approaching the most exciting launch season in Microsoft history," said Ballmer.

Microsoft launched Windows 8 in October, and its fortunes changed. The company has sold 40 million licenses of the operating system since its launch. "We believe Windows 8 is shaping up as one of the company's most successful products," said Tami Reller, Microsoft's chief marketing officer. "When people experience Windows 8, they find it easy to get started and fun to learn."

If we categorize Microsoft's divisions, here is what we get: Windows and Windows Live, Servers and Tools, Online Services, Business, Entertainment, and Unallocated and others. It is noticeable that had Microsoft included Windows 8 upgrade deferral in the fourth quarter report, the company would have recorded its highest revenue in history. It is also noted that strong Windows adoption improves Microsoft's performance. So when Windows is launched every year instead of once every two to three years, we can expect much from the company.

Now let's look at how Microsoft is faring in relation to the other companies. With an operating margin of 0.36, compared to 0.35 for Apple, 0.01 for Amazon (AMZN), and 0.28 for Google, and price-to-sales of 3.10, compared to 3.52 for Apple, 4.83 for Google, and 4.20 for Oracle (ORCL), Microsoft does seem to be ahead of its rivals in certain respects. And it must be noted that Microsoft is one of the biggest companies in its niche. Looking at the performance of Windows in the market and the margins, I believe Microsoft will be improved if it upgrades its Windows every year. When this becomes a reality, Microsoft will be an even more solid investment.


StockCroc1 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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