Microsoft Can Still Get Better RRS feed

  • Question


    Microsoft (Nasdaq: MSFT) reported earnings last Thursday, and it was a very good quarter. Sales grew 27% over the year-ago period, and a generous share buyback program kept earnings per share on a slightly faster track than that. In fact, the positives were so plentiful and so exhaustively covered elsewhere that I'd like to take this opportunity to pick a few nits.

    The online segment sticks out like a sore thumb. It's by far the smallest revenue generator in Microsoft's arsenal, pulling in just $670 million in sales this quarter. Keep in mind that the recently closed aQuantive deal contributed about $80 million for half a quarter's worth of business. The next-smallest unit is the entertainment and devices segment, with $1.93 billion in sales this time.

    More importantly, those two divisions are also the weakest profit centers in Redmond. Entertainment just pulled out of the red sea thanks to a massive hit with Halo 3, while online services doubled its operating losses to $264 million.

    Entertainment should get a second profitable quarter in a row thanks to the upcoming holiday season, but after that, the Halo effect will have worn off and it's back to fending off Sony's (NYSE: SNE) PS3 advances while casting envious glances at Nintendo's back.

    As for the online division formerly known as MSN, aQuantive will certainly help Mr. Softy stay competitive with the ad revenue machines of Yahoo! (Nasdaq: YHOO) and Google (Nasdaq: GOOG), but it won't be enough to leapfrog the big Y! into second place anytime soon. And the Facebook investment is just a small ($240 million) financing round that cemented the ad-serving relationship between the companies, but not much more.

    The entertainment business, centered on the Xbox 360, has matured a bit and looks ready to make some money, as the installed user base grows and fat-margined license revenue from game sales comes into its own over the next couple of years. But management still doesn't see any drivers for the online division right now, and is till trying to figure out how to make it profitable.

    Microsoft doesn't need either of these operations to make serious money today, because (in Andalusian accent) the rest of the business is strong like bull. Like I said, this is a nitpick of epic proportions.

    But the Internet is getting old, and Microsoft has been around for a while. When the market share of its Internet Explorer peaked around 90% in 1999, Yahoo! had already shown that you could do business online, and its shares were about to peak at $108 a stub. Google was a mere pup still running on a handful of cobbled-together systems. You'd think Microsoft could have figured out a way to make money by now.

    Tuesday, October 30, 2007 11:24 AM

All replies

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