It goes without saying that Wall Street does not care much for the management team at Microsoft (MSFT). Some might even suggest that I have grossly understated what has become a foregone conclusion over the past decade. As a long time Microsoft shareholder, I will concede that it is a perception that is justified. However, it begs the question, is it now time to expect better performances from Microsoft - at least to the extent where it is no longer "considered dead," - a notion credited solely due to the dominance of Apple (AAPL)?
I will say this - I'm not holding my breath for Microsoft to (again) be the dominant power that it was in the mid-to-late 90s. But that is far from suggesting that the proud software titan has reached its end. I think a bit of perspective is more than warranted for any skeptic thinking that this is the case. The reality is, Microsoft has shown that it is still relevant in the software and server markets for both consumers as well as corporate environments. And it proved this yet again in during its recent earnings announcement.
The quarter That Was
Microsoft reported better than expected numbers, much to the surprise of many. In addition to topping analysts' estimates, the company reported revenue that met forecasts despite its previous warnings of slower PC growth - a warning that followed an analyst downgrade of Intel (INTC) due to similar concerns. But in spite of that, the company posted fiscal second quarter earnings excluding items of 78 cents per share, up from 77 cents in the year-earlier period. Net income was $6.62 billion, down slightly from the $6.63 billion a year ago. Revenue was $20.9 billion, a 5% increase from $19.95 billion a year ago, helped by its Office, server software as well as Xbox businesses.
The figure was also boosted by the first inclusion of revenue from Skype, the online phone firm that the company acquired last year, and a one-time gain of $225 million from favorable foreign currency rates. Investors loved this report and sent shares higher in after-hours trading. This affirms what I have been saying for quite some time which is, although the company is no longer growing to the extent of the late 90s, it still clearly remains a technology force.
Implications of the Post-PC Era
IBM (IBM) is credited for having transitioned our culture and lives from the pre-computer way of doing business to mainframes. Microsoft took it a step further and transitioned the world from mainframes to PCs. Now it appears that other companies will pick up the legacy and transition the world to the post-PC era. But just as Microsoft's rise left little room for IBM to grow in its traditional businesses, IBM is still here today and more than just surviving. So it is not out of the realm of possibility that Microsoft can also re-establish and reinvent itself in the post PC era.
It seems there are very few analysts who share my optimistic view in terms of the company's long term prospects. There is growing evidence that Wall Street does not give Microsoft enough credit for being able to transition itself with time accordingly. But I think this is where a mistake is being made. The company understands and appreciates this reality and has been working to adjust accordingly - particularly with its efforts to make a more workable platform for mobile devices.
To that end, it has partnered with ARM Holdings (ARMH) to license its chip technology which is a different architecture than what it has been comfortable with Intel. All of this is on top of its Windows8 launch as well as its position for the cloud - something for which I feel the company is not sufficiently credited in the same breath as database giant Oracle (ORCL) and the aforementioned IBM as well as Google (GOOG).
For Microsoft, I don't know if restoring its empire as many have suggested should be the immediate focus. One can look at the company today and see some similarities with IBM - that is to say, Microsoft is now more of a services company. If the company can find ways to spin off some of its businesses, I suspect not only will this allow investors to have more realistic expectations, but it may surprise investors by showing that it can once again grow.
I continue to feel that the value of the segmented pieces could ultimately exceed that of the current business. Though it may not immediately dispel the notions of the company's perceived irrelevance, it may however display growth qualities that it had not shown for quite some time. This makes the company a great contrarian play for investors who are willing to be patient as the company transitions itself from a PC-centered approach to new technology.