Amazing how earning $3 billion in a quarter is bad... :)
Microsoft announced their quarterly results today, and they "only" made close to $3 billion and missed estimates. The stock got hammered after hours, too. I think some of the news story quotes are enlightening, however...
Some customers held back purchases amid delays in Microsoft's new Windows and Office products. Chief Executive Officer Steve Ballmer relies on the two products for more than 50 percent of Redmond, Washington-based Microsoft's revenue and nearly all its profit. Growth in both products has been less than 10 percent for three quarters in a row.
That's scary that with all the "stuff" Microsoft is doing, Windows and Office still are the only things keeping Microsoft afloat.
Microsoft has decided to forgo profitability in favor of heavy investments in its video-game business, online advertising and other areas the company deems high growth.
The "strategic decision," as CFO Chris Liddell calls it, explains the company's surprisingly weak bottom-line performance in the just-completed third quarter and the disappointing earnings guidance for the fourth quarter and fiscal 2007.
In the third quarter, the cost of revenue increase by 53% from $1.3 billion a year ago to $2 billion. Sales and marketing increased by about 14% in the quarter and R&D was up nearly 9%.
One big culprit: spending on the Xbox 360. Sales have gone up significantly, but because Microsoft loses money on every unit sold, the company's profitability suffers. Liddell said the delay of Sony's PlayStation 3 as an opportunity for Microsoft to grab share, and he forecast heavy spending on the console throughout the rest of the fiscal year, but not into 2007.
The company's Home and Entertainment segment, which makes the Xbox 360, increased revenue by 80% to $1.1 billion due to strong demand for the console. But the division's loss grew even faster, ballooning by 121% to $388 million.
The company's Client division, which sells Windows, grew by nearly 8% to $3.19 billion in sales while making a profit of $2.5 billion. The Information Worker business, which sells Office and other products, grew by 5% to $2.95 billion in sales and earned a profit of $2.1 billion.
Growth in other areas was more dynamic. Business Solutions, which runs Microsoft's fledgling enterprise applications business, grew revenue 20.7% to $216 million while narrowing its loss to $13 million from $39 million a year ago.
For as much as Microsoft wants to be in every software market out there, the reality is that without Office and Windows, they'd be hemorraging money. Even with the built-in monopoly they have in the OS market, they still are not dominant from a financial standpoint in any other area.
I know that many have talked about Microsoft needing to split themselves up to be more agile and responsive in today's market. But if they did that, the only part that would survive would be Windows and Office. How long can you build game consoles as a stand-alone company and lose money on each unit you ship? Nice to know every purchase of Word and Excel is making it possible for someone to play the latest Xbox 360 game...
Numbers like this also explain why Ballmer and company fear Linux and OpenOffice so much. When 100% of your product profit comes from software that has viable free alternatives, you probably don't sleep well at night...