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Microsoft’s Business Mix Is Changing

Posted on Wednesday, Aug 3rd 2011

According to Gartner, during the previous quarter, global PC shipments grew only 2.3% over the year to 85 million units. Gartner had earlier estimated sales growth of 6.7%. Netbooks and tablets continued to eat into traditional PC sales. iPad sales doubled last quarter to 9.25 million units, and an estimated 20% of buyers who would have otherwise bought a Windows PC bought the iPad instead. Declining PC sales hurt Windows revenue, which fell for a third consecutive quarter. Yet, Microsoft (NASDAQ:MSFT) continued to surpass market expectations as it pushed forward in other segments.

Microsoft’s Financials
Q4 revenues grew 6% over the year to $17.37 billion, marginally ahead of the Street’s expectations of $17.25 billion. EPS of $0.69 grew 30% over the year and beat the market’s projections of $0.58. Microsoft ended the year with revenue of $69.94 billion and EPS of $2.69. A year ago, they had reported revenue of $62.5 billion with EPS of $2.10.

For the quarter, Windows segment revenues fell 1% over the year to $4.74 billion. Microsoft has not yet released a Windows OS for the tablet, a move that is hurting their OS revenue. The market had earlier expected a Windows tablet version to be available by this fall. However, Microsoft has denied such a possibility.

Office continued to drive growth for Business Division revenues, which grew 8% over the year to $5.78 billion. They also launched the cloud-based Office 365 last quarter after a successful beta launch. Server & Tools segment brought in 27% of revenue and grew 12% over the year. Entertainment & Devices generated 9% of revenue and grew 30% over the year driven by strong sales of their Xbox 360 units. Within the U.S., Xbox 360 is the top-selling game console over the past year. Online business revenues grew 17% over the year and contributed 4% revenues for the quarter.

Microsoft’s Acquisitions and Alliances
Last quarter, Microsoft made one of their bigger acquisitions in the last decade. They bought Skype, eBay’s Internet-based communications offshoot, for $8.5 billion in cash. Last year, Skype had 170 million connected users, more than 207 billion minutes of voice and video conversations with revenue of $860 million and a net loss of $7 million.

Microsoft is working on using Skype to support devices like Xbox and Kinect and to connect Skype users with Lync, Outlook, Xbox Live, and their other communities. Many believe that with Microsoft, Skype may become the communications standard as it gets integrated into Outlook and Exchange. Additionally, following the acquisition, it is more likely that companies will build Skype support into their HD TVs for home video conferencing.

Last month, they acquired enterprise risk management software vendor Prodiance, for an undisclosed amount. Prodiance is expected to bring in compliance functionality within Microsoft Office and SharePoint. The acquisition will help add increased security and control over business information in spreadsheets through audit trails, document monitoring and improved compliance through automated risk assessment.

Earlier last quarter, they tied up with Baidu to help them expand their English-language search efforts in the international markets. Meanwhile, Microsoft will benefit through the agreement by Baidu helping promote its presence in the Chinese online search market by labeling search results originating from Bing on Baidu’s results page.

Microsoft’s Mobile Focus
As part of their mobile focus Microsoft is working on launching their next version of Windows Phone 7, code-named Mango, by September this year. Mango is expected to have multiple feature upgrades over the existing version in the form of improving multitasking, social media integration, and improved browsing through a mobile version of Internet Explorer 9. Apart from Nokia, Mango will be used in phones manufactured by Samsung, Acer, China’s ZTE, HTC, and Fujitsu.

The stock is trading at $26.80 with a market capitalization of $224.54 billion. It touched a 52-week high of $29.46 earlier this year.

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