Earnings Redux: Microsoft Makes Less Money, But Why?
It's the
incontrovertible
rule of RCPU: No matter what happens, Microsoft makes more...Wait, what's
this? Microsoft
didn't
make more money in its most recent fiscal quarter? Well, not compared to
the year-ago quarter, it didn't -- but you know that by now.
Yes, by now, you've seen the results of Microsoft's third fiscal quarter of
2008 (but here
they are again, in case you haven't). And, by now, you've read
the news
stories, the blogs
and the commentaries
about how the software industry's money machine, which had been racking up massive
quarters as far back as we can remember -- or at least for the last couple of
years or so -- finally hit a wall.
Profit fell 11 percent in Q3 '08 compared to the year-ago quarter, and although
Redmond beat analysts' expectations, the first reaction the market had late
last week was to punish Microsoft's stock price. Especially weak were the company's
client division (basically Windows and Office) as well as -- to our surprise
here at RCPU -- the Microsoft Business Division, which is mostly made up of
the Dynamics enterprise software line. Both divisions reported revenue shortfalls
year over year. Microsoft's beleaguered Online Services Business (search, MSN,
various "Live" things and stuff like that) showed a bit of revenue
growth but also reported a bigger operating loss than what it had racked up
in Q3 '07.
The disappointing news unleashed a flurry of theories as to why Microsoft didn't,
after all, make more money in Q3. (On top of everything else, a
little helpful accounting actually gave the numbers a bit of a boost, something
that suggests that they could have actually been worse.) After scanning a slew
of online offerings, we found that most observers pegged Microsoft's shortfall
on one (or several) of a few simple factors:
- The end of Microsoft as we know it. Well, actually, maybe not; although
we read a bunch of blog entries that referred to "reports of Microsoft's
demise" and so forth being premature or inaccurate, we found that very
few pundits, if any, actually reported Redmond's demise. Probably the closest
thing we found to that sort of thing was here,
and it's pretty innocuous. And, no, we didn't search the open source or Mac
blogs. So, as often happens in the blogosphere, reports of the reports of
Microsoft's demise were, um, over-reported. Or something like that.
- Vista. The weakness in the Client division had a few commentators pointing
the revenue-shortfall finger at Vista, which is still failing to impress
in the enterprise. There might be something to this -- Microsoft keeps claiming
that it has sold 140 million Vista licenses, but as one
intra-Microsoft blogger mentions, we've been hearing that figure for a
while now. Are Vista sales slowing or stalled? Everything we hear and read
suggests that they are...and that could be a big reason why the client division's
numbers fell.
- Piracy.
Microsoft has struggled to rein in piracy in developing markets such
as China, and that semi-failure has led to all sorts of repercussions.
For one thing, in an effort to fight both piracy and open source competition,
Microsoft has been selling Windows and other software at discount rates in
some foreign markets, meaning (duh) that it makes less money on those sales
than it used to. Plus, Microsoft CFO Chris Liddell said himself that piracy
is hurting Microsoft's sales worldwide. It seems to be playing at least some
sort of negative role.
- The
economy. Could this be the first sign of the slowdown we've all feared
and dreaded and assumed we were already in? Maybe. That would certainly make
for a convenient explanation for Redmond, and IDC has been making noise about
IT budgets
dropping. Of course, we're not convinced that IT folks would spend money
on Vista even in good times.
- Yahoo. Mary Jo Foley cites
a lack of focus on Windows and Office -- caused by Microsoft's obsessive-compulsive
behavior toward Yahoo -- as a possible cause of Redmond's shortfall. This
makes sense to us, not only because Mary Jo says it but because as followers
of Microsoft news, we've been struck by how little Redmond has had to say
lately that didn't have the word "Yahoo" in it somewhere.
Whatever Microsoft's problem was, or is, it's not time for partners or anybody
else to panic. Some huge products are on the way -- think Windows Server 2008
and its buddies -- that should get everybody's cash registers ringing again.
What will be interesting to track is the trend of Windows sales; did Microsoft
have a revenue shortfall because of Vista or because Windows as an operating
system really is going out of style? Or was there some other reason? Stay tuned;
the next earnings report (Q4 and fiscal year 2008) is a big one.
Oh, and we're through making laws here at RCPU, just for the record.
Send your take on Microsoft's earnings, its future and all things Microsoft
to [email protected].
Posted by Lee Pender on April 29, 2008