Is this really a whole new Microsoft?
Yesterday, Microsoft reported a year over year (YoY) revenue decline of 8%. But accounting rules being what they are, the Redmond giant deferred $1.36 billion in revenue coming from Windows 8, which hasn’t yet been released. Things like pre-sales are not counted as revenue yet because Microsoft hasn’t launched the product yet. It’s an accounting thing, and it’s normal. So from a business perspective, Microsoft revenues are essentially flat.
Looking at the various segments of their business, it is the Server & Tools business that is showing the best growth (8% YoY), driven by SQL Server and System Center. The Business Division (Microsoft Office and other software) is down 2%. The Windows & Windows Live Division was down a whopping 33% though. This is where the revenue deferral happened, so if you adjust for the timing or revenue recognition, the business was down only 9%.
“Only” 9%? That’s still sort of a big deal, no? If I was an investor in Microsoft (I’m not), I’d be worried about this. They already started to pre-sell their latest and greatest OS and they’re still shrinking?
At least their Online Business Division grew 9% YoY. Online advertising revenue grew 15%, which is nice, but less than Google’s growth rate (19%) as discussed in my post on Android Central.
When I look at financial results I’m looking for signs of change in the big picture view. With Microsoft, I don’t see any changes. The business is fairly stable when it comes to serving the enterprise, but facing huge risk when serving the consumer. It’s an unchanged story. That said, Microsoft spit off $8.5 billion in operating cash flow this quarter. This is a business with an enormous capacity to keep competing and never quitting. That’s what makes Microsoft a scary competitor.
Windows 8 and Windows Phone 8 are going to be hugely important to the future of the company (and the stock). And while not too many people talk about it, I think their acquisition of Skype could prove to be the most brilliant thing they’ve done in a long time. As the PC world shifts to one of mobile computing, Skype is Microsoft’s sleeper. We all think of it as an important app, but it could be an important factor in establishing carrier deals down the road. With 40 million user online during peak times, the network value of Skype’s customer base is immense. Combine that with a mobile computing platform, a solid app experience, and great integration across the cloud and you have a recipe for success.
But as always, it comes down to execution. And for years (and years), Microsoft has brilliantly lacked execution in mobile. It’s almost like they had to try extra hard to come up essentially empty handed after all these years.
Before too long Microsoft will kick all of the variations of Windows 8 out the door and OEM partners will be selling them on multiple form factors, including Microsoft’s own Surface tablet. Is this the start of a new Microsoft? We’ll see.