Microsoft Earnings: 5 Questions

Apr 18, 2013 (08:04 AM EDT)

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Office 2013: 10 Questions To Ask
Office 2013: 10 Questions To Ask
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Microsoft is scheduled to announce its quarterly earnings Thursday afternoon, following months of negativity from both Wall Street and the media. The barrage of bad press has included investment powerhouse Goldman Sachs downgrading Microsoft's stock to "sell" status, Windows 8's lackluster debut, and the PC market's continued decline, all factors that have led Microsoft's shares to appreciate at less than the stock market average since the software giant's ambitious Windows refresh launched in October.

Given all the doom and gloom, it might be surprising that analysts expect Microsoft to post year-over-year gains. British bank Barclays, for example, projects the company's revenue will rise to $20.51 billion, up from $17.41 billion during the same period last year, on the strength of strong server and business division sales. More bullish prognosticators have pegged Microsoft's revenue at as much as $21.65 billion. These estimates, though, don't detract from Windows 8's uncertain future. Some of Microsoft's divisions are performing well, but given that a quarter of its earnings come from its operating system, it's hard to know if the company is trending up or down.

Wall Street isn't always the best evaluator of tech prospects; Apple partisans would no doubt agree, for example, that investors' fickle attitude is a bit misplaced, given that Apple commands a disproportionately huge chunk of PC profits relative to OS X's comparatively modest market share. Nevertheless, Microsoft's relationship to the slumping PC sales has been a fixture in recent tech news, so there will be pressure on CEO Steve Ballmer to explain to stockholders how his company will weather the storm. Ballmer is famous for divulging no more than he intends, so time will tell how transparent company officials are feeling about the recent struggles.

[ How can Microsoft's next operating system win back fans? Read Windows Blue: Restoring The Start Button Isn't Enough. ]

Will Thursday's earnings be a celebration of Microsoft's increasingly diversified business, or another portent that its dynasty is ending? Here are five story lines to watch.

1. Will Microsoft Acknowledge That Windows 8 Has Underperformed?

Microsoft officials have stalwartly maintained that Windows 8's debut has been roughly on par with that of its record-setting predecessor, Windows 7. This assertion contradicts essentially every third-party appraisal out there; IDC and Gartner have both implicated Windows 8 in declining PC sales, for example, and there is evidence that the new OS's market penetration is not only worse than Windows 7's was at the same point but also losing steam.

The longer Microsoft takes to reconcile its statements with those of other parties, the more credibility Microsoft stands to lose among investors, developers and users. With both the TechEd and BUILD conferences coming in June, Microsoft will have additional opportunities to clarify its position and intentions, and to cultivate enthusiasm for its future plans -- but the longer the company waits, the more it cedes control of the Win8 narrative to outside observers.

2. How Is Surface Doing?

Microsoft isn't expected to drill down into specific sales data for its Surface Pro and Surface RT devices, an anticipation that, if borne out, tacitly affirms reports that the tablets have not sold particularly well. It would be particularly surprising if Redmond deviates from this expectation -- and even more surprising if it somehow asserts that Surface models have achieved widespread success. It's a bit more likely, however, that Microsoft might differentiate sales of touch-enabled devices from those of traditional PCs, or sales of Windows 8 from those of Windows 7.

Microsoft could, of course, remain mostly mum on this subject. But such data could be spun in many directions, making it a bit more palatable for Microsoft from a PR perspective. The data could also validate claims that a dearth of touch-friendly models contributed to Win8's weak holiday sales, and that the forthcoming variety of tactile-focused ultrabooks and tablets could lead the OS to rebound. That's assuming, though, that such favorable statistics are there to be gleaned in the first place.

In an interview, Gartner VP Stephen Kleynhans said there is "no question" the PC slowdown will hurt Windows. He countered, however, that Microsoft could dissect how its Windows 8 licenses have been dispersed. "The question is how many Windows license sales have been tied to OEM hardware sales," he said, adding, "Usually, it's been a high percentage." He predicted that Microsoft's willingness to increase the number of licenses sold without OEMs is "critical for [the company's] long-term health." Such a shift could yield many changes; given the directions Microsoft has gone with Office 365 and SkyDrive, for example, it's not impossible that Windows might one day be delivered via the cloud. Such predictions are speculative, but that could change if Microsoft officials are in a forthcoming mood.

3. Windows Revenue Doesn't Tell The Whole Story.

Even though Windows revenue is likely to be down, the decline won't necessarily constitute a referendum on Windows 8's success or failure. In an emailed statement, Forrester analyst Chris Voce noted that a substantial portion of Windows revenue comes from Microsoft's Software Assurance program, which grants a company the right to deploy any new versions of software as long as the program is active. "Whether or not a company deploys Windows 7 or 8 is irrelevant" because the company ends up paying Microsoft either way, he said. As a result, if companies decide to skip a version of Windows, the revenue impact is somewhat diminished. Voce noted that companies will pay the same Software Assurance costs whether they stick with Windows 7 for the next few years or elect to upgrade. "Microsoft books that revenue every quarter," he noted.

4. What Is Office 365's Future?

Office 365 is winning fans in both large institutions and the enterprise, where it has provided better collaboration, more flexible budgeting, and increased worker productivity. But despite these pockets of success, the product line still faces resistance. Many users, consumers and businesspeople alike, find aging versions of Office to be acceptable, and it's not clear if any of the newer features -- cloud synching, integrated Bing apps, social media hooks, etc. -- will actually compel upgrades. There also might have been fallout related to Microsoft's initially inflexible Office 2013 licensing policies. Some customers took umbrage that the standalone licenses were unattractively priced, a tactic ostensibly intended to push customers toward the subscription-based Office 365. Microsoft has since revised its user agreements to address this criticism.

According to Gartner analyst Kleynhans, if Microsoft reports that it has moved a substantial number of organizations to Office 365, "that will be a really good sign for the future." If Office revenue underwhelms, however, it could be a sign that Redmond's flagship productivity products -- the legacy apps to end all legacy apps -- could be oversaturated. Much like the people who opted not to buy new PCs because their current models are "good enough," many customers might feel that Office's recent improvements aren't worth the effort and cost.

In an email, Forrester analyst David Johnson brought up another risk: Google Apps, QuickOfficeHD, and Apple's iWork are making progress on non-Windows tablets. Microsoft appears to be withholding an iOS or Android version of Office in order to let Windows RT models find their footing, with recent rumors suggesting these cross-platform versions of Word, Excel et al will not launch until late 2014. The value of Windows RT has been hotly debated, with some analysts saying the lightweight OS should be abandoned so Microsoft can focus on its more robust sibling. Thursday's earnings won't settle this matter, but they could provide more insight into Redmond's decision-making.

5. What About Windows Blue?

Details about Windows 8.1, allegedly the official name for Windows Blue, might wait until June, when a public preview is alleged to be available, and when Microsoft will be putting on a show at its aforementioned conferences. Still, outgoing Intel CEO Paul Otellini let slip that $200 Windows 8 tablets are on the horizon, a statement that squares with previous rumors that Microsoft is focused on not only expanding its mobile presence but also competing in the 7-inch tablet market currently dominated by Apple and Samsung. Microsoft has declined to confirm that rumor.

Windows Blue could hold great potential: a unified Microsoft ecosystem could allow both internal and external developers to be more nimble; alleged new features could permit users to seamlessly carry online experiences from device to device; the desktop and Modern UIs could be more harmoniously integrated. Then again, the update could be a series of incremental improvements that enhance usability but do little to sway the unconverted. Microsoft faces considerable uncertainty regarding how it will maintain its huge base of legacy business users while also aggressively pursuing the increasingly important consumer market. Microsoft is unlikely to go into detail about all this, but it could reassure shareholders by at least filling in some of the broad strokes of its vision.

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