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Microsoft, Masterful Maneuverings

Posted on Wednesday, Feb 6th 2008

Microsoft has been on the roll, lately. First it froze Facebook, and now it has made an unstoppable bid for Yahoo! while the latter is struggling to regain its stride. To finance this high value Yahoo! deal, Microsoft is expected to borrow money for the first time in its history. And recession worries and subprime crisis notwithstanding, lenders will be falling all over themselves to provide them with this debt financing. Masterful maneuverings from Redmond’s strategists!

While other tech Companies were reporting disappointing results, Microsoft came out with solid fiscal 2Q07 results and guidance for the next couple of quarters. Revenues grew to $16.37 billion, increasing 30% y-o-y, boosted by strong computer sales which drove the sales of its Vista operating system and Office software. Net profit grew by 79% y-o-y, to $4.7 billion. Profit per share was $0.50 compared to $0.26 per diluted share in the year-ago period. This surpassed the Street’s estimates of $0.46 a share.

Microsoft’s business division revenue was $4.8 billion, up 37%.The client division, dealing with Microsoft’s OS for PCs, posted a 68% increase in sales to $4.34 billion. Revenue from business customers was up 23% in the quarter. Server and tools revenue increased 15% to $3.3 billion, driven by double digit revenue growth in each of the Windows Server and SQL Server businesses.

Online services business revenue grew 38% to $863 million, including $154 million from the addition of aQuantive. Online advertising growth for the quarter was also 38%, up 26% (excluding aQuantive).

Microsoft raised its revenue guidance for the fiscal year ending in June to $59.9 – $60.5 billion, up from $58.8 – $59.7 billion a year before. Further, it raised the net income per share to $1.85-$1.88, an increase of $0.07 cents from its earlier guidance. For PC hardware units, growth is expected to be 11-13% and online advertising is expected to grow approximately 35% for the full year.

Taking into account the slow US economy, it was a pleasantly surprising quarter for the Microsoft investors. Quite significantly, revenues were up across all the businesses. Going forward, the Company doesn’t foresee any major impact of the slowdown as the majority of its revenue comes from International markets, which is good enough to compensate for any losses in North America.

With the successful acquisition of aQuantive, the Company is continuing with its strategy of focusing on increasing the number of online advertising bets in its portfolio. The aQuantive move has been clever as well as logical.

Microsoft astonished many by announcing its $44.6 billion hostile bid for Yahoo, at a premium of 62% over the pre-announcement closing day stock price. Till now, there has been a lot of debate on this deal, but it would be very interesting to see how this would benefit the shareholders of Microsoft. I don’t see any significant impact on Google’s horizontal search market if this deal goes through, but AdSense is definitely a vulnerable piece of Google’s portfolio that Microsoft should go after aggressively. Other opportunities for striking Google where it is weak are in Vertical Search, Vertical Portals, and Vertical Personalization.

Moving to its core business, the Company is expected to continue its growth .The Vista launch has also raised lots of expectations. Growth will continue to be driven by strength in emerging markets but Microsoft expects growth rate of the consumer segment to outpace that of the business segment. I have to say, though, that Vista is very slow, and I would like Apple to be more aggressive on challenging its adoption.

For 2008, Microsoft sure looks like the technology industry outperformer.

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