Microsoft profit rises to $3 billion

IJ Reilly

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These numbers sound mammoth, but what's interesting are the forecasts for growth opportunities in the future, which appear to be dim, the number of unprofitable businesses Microsoft has taken on, and the erosion of their core business. Is it too soon to call Microsoft "beleaguered?"

The software giant manages a 7% rise in its fourth-quarter earnings despite a $1-billion charge to repair its game consoles.

Microsoft Corp.'s profit climbed 7% in the fiscal fourth quarter even after being hammered by a $1-billion charge to fix defective Xbox game consoles.

But the world's largest software company, in reporting earnings Thursday, gave modest projections for sales of its new Vista operating system, raising concerns about where Microsoft will be getting its most profitable growth in the future.

"It's reverting back to historical trend lines, which suggests that we're not going to see a material bump in revenue" from the long-awaited system for running computers that went into wide release in January, Lehman Bros. analyst Israel Hernandez said.

Overall profit in the three months through June 30 rose to $3 billion, or 31 cents a share, from $2.8 billion, or 28 cents, a year earlier. Revenue increased 13% to $13.4 billion.

In the fiscal year just ended, Microsoft reported profit of $14.1 billion, or $1.42 a share, up from $12.6 billion, or $1.20.

Microsoft forecast that all of its major divisions would show revenue increases of about 10% or more in the fiscal year that began three weeks ago.

But the largest unit by sales, the one that sells personal operating systems, was on the low end, with projected revenue gains of 9% to 10%.

During a conference call with analysts, Microsoft Chief Financial Officer Chris Liddell said the company had recently lowered its expectations for the number of businesses and consumers choosing Vista over the previous operating system, Windows XP.

Partly because more computer programs work on XP than Vista, Microsoft now thinks only 78% of Windows computer buyers will pick Vista this year, instead of 85%.

That reduction helped fuel a debate about where Microsoft is headed, Sanford C. Bernstein & Co. analyst Charles Di Bona said.

"There's a controversy here, and it's about whether Vista is a last hurrah or if there's something big after that," Di Bona said.

Shares of Microsoft rose 59 cents, or 1.9%, to $31.51 before the news and dropped 61 cents to $30.90 in after-hours trading.

In the meantime, Microsoft is continuing to invest heavily in money-losing divisions that support gaming and online services.

Losses on those two divisions combined exceed $1.4 billion in the quarter, more than double the figure from a year earlier and enough to wipe out half of Microsoft's profit from selling operating systems.

Most of the recent loss stems from the $1.06-billion charge to fix malfunctioning consoles, extend warranty coverage and write down inventory.

Xbox shipments fell to 700,000 in the quarter from 1.8 million a year earlier.

At its annual conference for analysts next week, Microsoft will spell out more of its long-term plans. Lehman Bros. analyst Hernandez said he expected to hear about a wide range of initiatives rather than a dramatic change in emphasis.

"They need to prepare and invest," he said. "They're seeing increasing competition on a lot of different flanks."
http://www.latimes.com/business/la-fi-microsoft20jul20,1,656625.story
 

nbs2

macrumors 68030
Mar 31, 2004
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A geographical oddity
These numbers sound mammoth, but what's interesting are the forecasts for growth opportunities in the future, which appear to be dim, the number of unprofitable businesses Microsoft has taken on, and the erosion of their core business. Is it too soon to call Microsoft "beleaguered?"
The question is whether or not the unprofitable will become profitable. I think that this may be a smarter move - saturation and rampant piracy of their OS is going to limit growth in the future, but investing in hardware development and other industries that are more difficult to duplicate, that are losing them money now, should pay off down the road. I wouldn't call them beleagured, but I do think we will see a core shift to something more Apple-like with more vertical integration.
 

IJ Reilly

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Jul 16, 2002
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The question is whether or not the unprofitable will become profitable. I think that this may be a smarter move - saturation and rampant piracy of their OS is going to limit growth in the future, but investing in hardware development and other industries that are more difficult to duplicate, that are losing them money now, should pay off down the road. I wouldn't call them beleagured, but I do think we will see a core shift to something more Apple-like with more vertical integration.
It hasn't happened yet, and they've been pursuing this strategy for 15 years, at least. There's only so much money even Microsoft can afford to throw down rat-holes. Just look at the year-over-year Xbox sales. Not exactly a triumph, is it?

As a comparison we all can easily understand, look at how Apple has expanded their business beyond their core -- each time, profitably. This is how businesses grow, not by creating one money-losing initiative after another with hopes and plans that some day some way they will eventually become profitable.

If not beleaguered, at the very least, Microsoft's best days appear to be behind them. They leveraged the OS for all it was worth, and are now left with few places to turn for growth.
 

nbs2

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Mar 31, 2004
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A geographical oddity
If not beleaguered, at the very least, Microsoft's best days appear to be behind them. They leveraged the OS for all it was worth, and are now left with few places to turn for growth.
As a software maker, yes, I have to agree with you.

But, I can't see MS going down in flames to the dustbin of history. With the cash that they produce, even another 15 years of lost ventures may be survivable. But, I do expect that somewhere among the legions of MS supporters there is someone with basic leadership skills. I don't think that MS will ever be able to innovate, but they will become something of a omnipresent mainstay - something like 3M. 3M makes a lot of good products and has solid earnings, but what major products have they developed since Post-Its?
 

IJ Reilly

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As a software maker, yes, I have to agree with you.

But, I can't see MS going down in flames to the dustbin of history. With the cash that they produce, even another 15 years of lost ventures may be survivable. But, I do expect that somewhere among the legions of MS supporters there is someone with basic leadership skills. I don't think that MS will ever be able to innovate, but they will become something of a omnipresent mainstay - something like 3M. 3M makes a lot of good products and has solid earnings, but what major products have they developed since Post-Its?
That's a good analogy. Maybe better yet is General Motors. Like GM, Microsoft can continue to generate cash and survive, but with limited growth. A contraction of their core business might even be ahead, which would make them even more like GM, struggling to figure out how to replace the cash flow with new products. The problem is, I don't think anyone at Microsoft has any comprehensive vision for the direction of the company. They've been too spoiled by the amount of cash they've historically be able to generate from their OS and software businesses to think long-term and strategically. Their new products seem reactive and all over the map, not to mention, unprofitable.
 

nbs2

macrumors 68030
Mar 31, 2004
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A geographical oddity
That's a good analogy. Maybe better yet is General Motors. Like GM, Microsoft can continue to generate cash and survive, but with limited growth. A contraction of their core business might even be ahead, which would make them even more like GM, struggling to figure out how to replace the cash flow with new products. The problem is, I don't think anyone at Microsoft has any comprehensive vision for the direction of the company. They've been too spoiled by the amount of cash they've historically be able to generate from their OS and software businesses to think long-term and strategically. Their new products seem reactive and all over the map, not to mention, unprofitable.
Your comparison to GM brings an interesting similarity to mind. During each company's heydey, you saw employees being treated almost royally. GM overextended with the UAW, and is paying for it now. I wonder it MS (along with Google, etc) will get burnt. Clearly GM made commitments that were based on future earnings while the techs are funding with current, but I wonder if the expectation of a certain level of treatment will cause issues. Anyway, sorry about wondering off.

As much as I hate the people that constantly bring him up, I think that Steve Balmer is poorly placed. He seems to be a strong operator when given a vision and a command, but he doesn't seem to think outside of convention. That thinking will keep MS going forever - Office isn't going anywhere. But his reactionary nature may be to blame for what you point out is wrong with their product line. It's going to take some internal anger to cut down the poor performers and focus on strengths.

I'm trying to figure out which pies MS is involved in:
  • OS
  • productivity software
  • gaming software
  • utility software
  • internet software (Live, Hotmail/MSN, etc)
  • direct PC accessories (mice, keyboards, etc)
  • indirect PC accessories (Zune, etc)
  • console hardware
  • what am I forgetting?
 

TheBobcat

macrumors 6502
Nov 1, 2006
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East Lansing, Michigan
I'm trying to figure out which pies MS is involved in:
  • OS
  • productivity software
  • gaming software
  • utility software
  • internet software (Live, Hotmail/MSN, etc)
  • direct PC accessories (mice, keyboards, etc)
  • indirect PC accessories (Zune, etc)
  • console hardware
  • what am I forgetting?
While it might fall under OS, I think MS has been pushing Windows Mobile hard, as well as things like CE and XPE for other consumer devices. As more complex small specific devices emerge, having strong footholds in those areas will be key, as Apple has apparently recognized recently with its OSX-based devices.
 

IJ Reilly

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Original poster
Jul 16, 2002
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Palookaville
Your comparison to GM brings an interesting similarity to mind. During each company's heydey, you saw employees being treated almost royally. GM overextended with the UAW, and is paying for it now. I wonder it MS (along with Google, etc) will get burnt. Clearly GM made commitments that were based on future earnings while the techs are funding with current, but I wonder if the expectation of a certain level of treatment will cause issues. Anyway, sorry about wondering off.
Good points. By the 1950s GM was viewed as the most important company in the United States and hugely dominant within their industry. They were a virtual monopoly, and in large part responsible for the shakeout in the auto industry during the '50s and early '60s which resulted in the "big three" auto companies, of which GM was easily the biggest. They didn't need to do much innovating to compete, so they didn't much try.

I think Microsoft today is historically where GM was during the late 1960s. They're coasting. Probably Microsoft isn't going to face the kind of sea-change crisis GM faced during the '70s with the gas shortages and the Japanese car invasion but in a way they already seem more desperate to find new markets.

I agree, Ballmer doesn't cut it as a CEO. His main qualification for the job is being an old FOB. Inherited leadership is another sign of a failing corporate culture.
 

Shadow

macrumors 68000
Feb 17, 2006
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They need to drop everything except Windows and Office (very profitable) and Xbox (its utter popularity, and I heard that the Xbox 360 just became profitable). Everything else is unneeded.
 

zap2

macrumors 604
Mar 8, 2005
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MS is going to be around for a long time.....if they fall on hard times, they can drop anything not pulling in a profit....Zune, Xbox 360...and they will be fine.


I doubt MS is going to get in over its head, with new products that don't bring in money. They can try something, and if it still is not working in a few years drop it.
 

IJ Reilly

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Jul 16, 2002
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Palookaville
MS is going to be around for a long time.....if they fall on hard times, they can drop anything not pulling in a profit....Zune, Xbox 360...and they will be fine.


I doubt MS is going to get in over its head, with new products that don't bring in money. They can try something, and if it still is not working in a few years drop it.
They could drop Windows and Office and everything else tomorrow, and start manufacturing wood pulp and sausages, and still survive for decades. They've got that much cash.

For years, Microsoft's strategy has been to place bets on every horse. About ten years ago, they were buying up products and companies left and right. They were already starting to look desperate. How many of them paid off?
 

CalBoy

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May 21, 2007
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MS is going to be around for a long time.....if they fall on hard times, they can drop anything not pulling in a profit....Zune, Xbox 360...and they will be fine.


I doubt MS is going to get in over its head, with new products that don't bring in money. They can try something, and if it still is not working in a few years drop it.
At the moment, they can go on for quite some time without making much money, but it can't last long. All it takes is a few quarters of losses, and the stock will plummet. A loss of market cap can hurt a business as much as a loss in profits.

Even if Microsoft stops making Zune and XBox tomorrow, there are still liabilities they have to be prepared for. In addition, what happens when the federal case reopens (once Bush is out of office)? Imagine if Microsoft was slapped with a 3-5 billion dollar fine.

Microsoft is currently at its zenith (it may have even fallen from its zenith already). The thing about mighty empires is that it isn't obvious that they're falling until they've already fallen.
 

sushi

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Jul 19, 2002
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I'm trying to figure out which pies MS is involved in:
  • OS
  • productivity software
  • gaming software
  • utility software
  • internet software (Live, Hotmail/MSN, etc)
  • direct PC accessories (mice, keyboards, etc)
  • indirect PC accessories (Zune, etc)
  • console hardware
  • what am I forgetting?
Back Office
Exchange Server Software
Server OS (Currently Windows Server 2003)
 

IJ Reilly

macrumors P6
Original poster
Jul 16, 2002
17,892
1,466
Palookaville
In addition, what happens when the federal case reopens (once Bush is out of office)? Imagine if Microsoft was slapped with a 3-5 billion dollar fine.
Not going to happen. The antitrust case is long since settled. The only way it could conceivably be reopened is if a competitor charged them with violations of the settlement, or some entirely new violations, which the DOJ decided to make into a new case. Not very likely, no matter who is in charge at the Justice Department. Now the EU is another story. I don't think Microsoft ever squared themselves entirely with the EU.
 

CalBoy

macrumors 604
May 21, 2007
7,849
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Not going to happen. The antitrust case is long since settled. The only way it could conceivably be reopened is if a competitor charged them with violations of the settlement, or some entirely new violations, which the DOJ decided to make into a new case. Not very likely, no matter who is in charge at the Justice Department. Now the EU is another story. I don't think Microsoft ever squared themselves entirely with the EU.
Ah well...I'm sure we can find something to charge Microsoft with;) Cheating their way out of justice...how American (writes an American). The Eu and China are going to be a very different case. I put faith in Chinese tacticts to tame Microsoft, esspecially since they were the only country to force Walmart to accept unionized employees.
 

Maui

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May 18, 2007
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I think the real question for MS (and Apple and everyone else too) is what software is going to use all of the power of the 8-core cpu's that are going to be common in entry-level desktops within a few years. Email and Word hardly need to get much faster (unless someone figures out a new way to type). Virtualization? 3D? Voice recognition? "They" are going to need something or the PC upgrade cycle will to an even greater degree grind more slowly.
 

IJ Reilly

macrumors P6
Original poster
Jul 16, 2002
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Palookaville
Ah well...I'm sure we can find something to charge Microsoft with;) Cheating their way out of justice...how American (writes an American). The Eu and China are going to be a very different case. I put faith in Chinese tacticts to tame Microsoft, esspecially since they were the only country to force Walmart to accept unionized employees.
I charge them with a lack of imagination, bad management, and generally being as dull as paste. Is that a crime? :)

Well it should be.
 

CalBoy

macrumors 604
May 21, 2007
7,849
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I charge them with a lack of imagination, bad management, and generally being as dull as paste. Is that a crime? :)

Well it should be.
It's not a victimless crime. Microsoft gets away with charging high prices for poor products. I'd love to see Office seperated from Microsoft, and its price drop by about 50%.