Short Takes: Special Microsoft Earnings Edition, July 19, 2013

Short Takes: Special Microsoft Earnings Edition, July 19, 2013

An often irreverent look at this week's other Microsoft earnings announcement news

An often irreverent look at this week's other news ...

Note: Much of the focus of this week’s Short Takes is on Microsoft’s just-announced quarterly financial results. Please refer to "Microsoft Announces Quarterly, Annual Financial Results" for more information.

Microsoft Earnings Call Tidbit: $900 Million Surface RT Write-Down Directly Tied to Current Sale

When Microsoft announced new low-ball pricing for the Surface RT last week, it was pretty clear that something was wrong. And in a separate editorial, I cautioned readers not to buy into what is, at best, a struggling platform and, at worst, a dying product. This week, we found out exactly how ugly it is: Microsoft is immediately taking a $900 million charge to account for money lost on Surface RT, both with regards to the $150 savings on the current inventory and to unsold parts and accessories. In its post-earnings announcement conference call, Microsoft didn’t explicitly state what it will do about Surface RT, which has been a disaster, and Windows RT, which is a pointless, ego-driven technology experiment. Instead, it said that “Surface is part of a journey” and that “with each step, we analyze our progress and fine-tune our action plan as needed.” Oddly, the rest of the call was pretty positive in tone when it comes to Surface, suggesting either that this one-time charge doesn’t impact Microsoft’s plans for Surface RT long-term or that Surface Pro is performing better than we believe.

Microsoft Earnings Call Tidbit: There Are Now More Than 1.5 Billion Windows Users

Every once in a while, Microsoft will casually toss out a figure indicating the size of the Windows user base. Most recently, it was 1.3 billion. But thanks to this week’s earnings conference call, the official tally is now much higher, at “1.5 billion Windows users around the world.” I suspect this number was foisted to take the emphasis away from all the bad news around Windows and the PC market these days. But it is worth remembering that as traditional PC sales slow and Windows evolves for the devices market, there is a huge audience that Microsoft would love to take with it.

Microsoft Earnings Call Tidbit: Financials Are Still Incredibly Solid

For all the hand-wringing over Microsoft’s bad news around Surface RT in particular, it’s worth putting something else in perspective: This company is a cash cow with an incredible number of $1+ billion businesses. In the previous quarter—Microsoft’s fiscal fourth quarter—the firm delivered operating income of $6.2 billion on revenues of $19.2 billion. And although the income was down 11 percent year over year, revenues were actually up by 3 percent. Not too shabby.

Microsoft Earnings Call Tidbit: The x86 PC Market Continues to Decline

I don’t believe Microsoft’s description about the traditional PC market—or what it calls the “x86 PC market”—has ever been as stark as it was in this conference call. “The x86 PC market continued to decline,” Chris Suh, Microsoft’s general manager of investor relations, said. “While business PCs showed modest growth, we estimate consumer PCs declined more than 20 percent.” PC maker revenues declined 15 percent, but “non-OEM revenues, driven by sales of Surface,” grew 22 percent.

Microsoft Earnings Call Tidbit: Transition from Windows XP Continues

With the April 2014 end-of-life date for Windows XP looming, many are wondering whether Microsoft will be forced to extend the support date out yet again to accommodate slow-moving business customers. Not so, Microsoft says. And in this week’s call, the firm noted that “almost three-quarters of enterprise desktops are running Windows 7,” not XP. The rest have 9 months to get their acts together.

Microsoft Earnings Call Tidbit: Windows Azure Usage in the Fortune 500

Speaking of milestones, Microsoft also reported that “over 50 percent of the Fortune 500 are using Windows Azure.”

Microsoft Earnings Call Tidbit: Mostly Positive Results for Office During Transition to Cloud

Microsoft pushed Office into the cloud this year with a new generation of Office 365 services for both consumers and businesses of all sizes, most of which also include access to new liberally licensed versions of Office 2013. An Office launch year always triggers a big round of revenue gains in the Microsoft Business Division, and in the most recent quarter, Office business growth jumped 7 percent overall. But consumer revenue declined 27 percent, which Microsoft attributed to declines in the consumer x86 PC market and its shift to a subscription model. As customers latch on to the new way of doing things, Microsoft expects revenue to grow, and to become more recurring and predictable. Best of all, Office 365 is huge: It’s now a $1.5 billion business, with more “net seat adds” in the quarter than in all of 2012 combined.

Microsoft Earnings Call Tidbit: Looking Ahead

Microsoft CFO Amy Hood provided some insight into Microsoft’s new quarter. She expects Windows to continue to be “negatively impacted” by declines in the consumer x86 PC market, with PC maker revenues dropping from a historical 75 percent of all Windows revenues down to 65 percent. The other 35 percent? Volume licensing and Surface, including Surface RT at its new price point. (Yes, Microsoft really is being positive about this thing.) Server and Tools and Business (Office) will both grow, by high single-digits and mid-single-digits, respectively. Xbox will tank as consumers wait for the new Xbox One console. And Online Services will continue to be the laughingstock of the company. (That's not the way Ms. Hood put it.)

Microsoft Earnings Call Tidbit: Looking Back

Hood described the past year—what Microsoft calls its fiscal 2013—as a “pivotal time for Microsoft.” Windows 8 sets up the company for the new general-purpose computing markets of the future. Partners delivered wide new ranges of phones, tablets, and new PCs. It delivered its first-ever computers with Surface and announced its first new video game console in eight years. It pushed Office to the cloud with Office 365 and dramatically expanded Windows Azure, while continuing to help customers deliver private cloud solutions with Windows Server, System Center, SQL Server, and other products. You know, it wasn’t all horrible.

Oh, and Google Announced Its Quarterly Results as Well

Microsoft wasn’t the only tech giant to report quarterly financial results on Thursday: Google did as well. And though Google doesn’t have the same concerns as does Microsoft, oddly enough it too is having a tough time making the transition to mobile. Net income was $3.23 billion on revenues of $14.11 billion, and as with Microsoft, the firm missed on profits but grew revenues. The issue? Ads, of course, since that’s the only form of revenue Google actually has. And as consumers move to mobile devices, the ad space just isn’t keeping up: Mobile ads are too expensive because it’s so hard to monetize them. Boring! But for those who wish the discussion around Google had more to do with tech than advertising, there’s this: Google's mobile phone business, Motorola Mobility, posted an operating loss of $342 million in the quarter. So they’ve got that going for them.

But Wait, There's More

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