Microsoft Chugs Along, But Online Is Its Achilles' Heel

Microsoft announced earnings yesterday for the third quarter. (See conference call transcript.) Overall revenues for the quarter came in at $15 billion, growing a decent 9 percent annually. But its net profits of $4.37 billion rose only 1.9 percent. As usual, Microsoft’s stability came from its Windows client, server, and Office businesses.

The company’s online revenues, which includes MSN, search and its advertising networks, grew 15 percent to $770 million in the quarter. However, the online business posted an operating loss of $480 million, nearly double the $267 million loss it posted a year ago. On the conference call, Microsoft boasted about its Silverlight partnership with NBC during the Beijing Olympics in which 70 million videos were streamed. You’ve got to wonder how much that partnership ended up costing Microsoft.

Total online advertising revenues were up 15 percent in the quarter, with search growing faster than display. The company expects online revenue growth to slow to 6 to 10 percent next quarter, with display advertising being more sensitive to the recessionary environment.

The company will be taking $400 to $500 million out of costs by slowing its hiring, spending less on data centers, and cutting back on marketing and travel expenses. But Microsoft still has plenty of cash: $21 billion, and that was after buying back $6 billion in stock and paying out $1 billion in dividends during the quarter. To put that $7 billion Microsoft handed back to shareholders into perspective, Yahoo’s entire market cap is now only $17.5 billion.

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Comments

[Alex Filonov:]

I am buyer of MSFT when (if) it declares spin-off of non-core businesses.

2008 Oct 24 12:45 PM

[Chris B:]

Rule of investing:

Never buy a company with an inferior or obsolete product.

This one rule could have ruled out investments in now-failing companies like GM, F, all newspapers, AOL, YHOO, and many more bottomless money pits.

MS Windows/Office/IE/Serv... is inherently insecure and commonly hacked because of the lack of file-level permissions. It is inherently bloated because of all the patches and security fixes required to remedy this. It costs an arm and a leg, yet competes with free and compatable open-source software such as Linux, OpenOffice, and Firefox on one end, and the reliable and secure Apple on the other end. MSN is best for entertainment news, and much like YHOO, lack's Google's search usefulness. Heck, even AOL has a website like that. MSNBC is so crappy that it always locks up my Internet Explorer browser! For MSFT to fix all of these problems, they would have to start from scratch with the fundamental design of the OS.

GM, like MSFT, has a few billion in cash. Nonetheless, they are both doomed by the poor products they produce, and are therefore poor investments.

2008 Oct 28 02:25 PM