Microsoft After Windows 8

IDC’s PC shipment report continues to suggest an imploding PC market. Globally, PC shipments fell 14% over the year to 76.3 million units, a much bigger reduction than the 8% decline that the researcher had estimated earlier. IDC attributed the higher-than-anticipated fall to the weak market response for Windows 8 and the growth of tablets and smartphones. The U.S. market reported a 13% reduction to 14.2 million units, reporting its lowest level since 2006.

Microsoft’s Financials
Despite declining PC sales, Microsoft (NASDAQ:MSFT) delivered a better than expected performance. Q3 revenues grew 18% over the year to $20.5 billion falling in line with market expectations. EPS of $0.72 was 19% higher than the previous year’s and managed to surpass the Street’s target of $0.68.

The Windows and Windows Live Segment revenues grew 23% over the year to $5.7 billion. The Microsoft Business Division saw revenues rise 8% over the year to $6.3 billion, and the Server & Tools segment grew 11% over the year to $5.04 billion. Revenues from the Entertainment & Devices segment grew 56% to $2.53 billion.

Microsoft did not give any predictions for the current quarter, but analysts estimate that the company will report revenues of $21.12 billion during the quarter with EPS of $0.78.

Microsoft’s Product Direction
After a weaker-than-anticipated response to Windows 8, they are now rumored to be working on Windows 8.1 under the code name Windows Blue. The new release is expected to address some of the issues that their customers are facing, including the reintroduction of the Start button, and will introduce new features, such as a direct boot to the traditional desktop. Windows Blue is also expected to be able to support smaller tablet devices.

Microsoft has been rather late in entering the fast-growing mobile device market. Last year, they launched Surface, their touchscreen tablet, but the product failed to deliver. According to IHS iSuppli Microsoft managed to sell more than 1 million Surface tablets sold during the fourth quarter last year, compared with 22.9 million iPads. Microsoft is looking to change this trend with a new device. They are working on releasing a 7-inch Windows based tablet before in the “coming months.” The Windows tablet is expected to cost between $300 and $400 per unit, and if successful, may be able to offer some competition to the iPad. However, its price range is still above some of the other tablets, such as Kindle Fire and other Android-based devices.

Microsoft’s Success Stories

While Microsoft may have got some of their product releases wrong, they have also seen some big successes. They are expanding their market presence through the increased adoption of Office 365, the cloud-based Office suite offering. Microsoft had released Office 365 to compete with the growing presence of Google Apps and has remained silent regarding to the product’s performance. However, recently, they reported that nearly 25% of their enterprise customers have switched to Office 365. The numbers translate to a $1 billion annual run rate in revenues and also suggest that they seem to have successfully warded off Google’s threat of getting 90% of Microsoft’s enterprise business under their wing.

They are also seeing strong traction in their $1.2 billion acquisition of enterprise social networking service, Yammer. Microsoft has integrated Yammer into their Office product. Yammer has seen their sales grow more than three times for the year ended January this year and also crossed the 7 million registered users mark. Yammer’s customers now include GlaxoSmithKline and Woolworths to name a few. In view of Yammer’s success, Microsoft plans to create an integrated offering that would include Office, Yammer, Skype, and Lync to release “Facebook of the business world.”

Microsoft’s stock is trading at $30.83 with a market capitalization of $257.40 billion. It touched a 52-week high of $32.52 in April of last year.