Microsoft Has a Lot of ‘Splainin’ to Do

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Heinz-Peter Bader / REUTERS

When Microsoft reports its quarterly earnings on Thursday, the Street will be watching closely. The company will not only be among the first tech giants to report on its financial performance in an earnings season that could set the market’s direction for some time, it will have a chance to answer a lot of big questions hanging over the company.

Among those questions: Are signs emerging that the decline in PC-software sales is stabilizing? How strongly is the new Xbox selling? What’s the progress on the acquisition of Nokia? And most of all, who is going to succeed Steve Ballmer as CEO?

The most pressing question—the one about a new CEO—may not get an answer this week. In an interview with Bloomberg, Chairman Bill Gates was as vague on who would lead Microsoft as he was on the announcement’s timing. At Re/code, Kara Swisher heard a successor won’t be named until the end of January at the earliest.

Among the leading candidates: Microsoft’s own Satya Nadella, who heads the cloud and enterprise group; former Nokia CEO Stephen Elop; Anthony Bates, who oversees Microsoft’s business development group; and Ericcson CEO Hans Vestberg. Each has different management styles and different areas of expertise, so which one is named will indicate where Microsoft is likely to move in the future.

One thing that could prompt Microsoft to make an early, unexpected CEO announcement on Thursday is if the last three months of 2013 were particularly disappointing. Companies often combine big announcements with terrible earnings to persuade investors they are serious about moving forward. Barring that, there will still be some big questions that Microsoft can answer. Here are a few to watch for:

How’s the PC market doing? In the second half of 2013, PC sales showed signs of stabilizing after years of falling 10% or more as tablets became popular. Last week, Intel‘s earnings added hope that the market is in fact stabilizing—not recovering, mind you, but not getting worse. If Microsoft’s earnings add to the data, it could remove a drain on a key part of its business.

How is the Nokia deal progressing, and what about mobile devices in general? Last September, Microsoft said it would buy Nokia for $7.2 billion. The deal could close as early as Thursday now that Nokia has altered its financial reporting. Analysts will have plenty of questions of how the remaining parts of Nokia will fit into Microsoft overall strategy for mobile devices.

In addition to long-term mobile strategies, investors will be looking for near-term mobile growth. Thanks in part to Nokia, Windows Phone’s market share has been growing quickly in the US and Western Europe. That market share is still small, but if Microsoft is seeing PC-software sales stabilize just as mobile is taking off, it could bode well for the consumer business.

How big of a hit will the Xbox One be? Microsoft began selling the Xbox One on November 22 and sold 3 million units by the end of the year. With that much known, analysts may turn to the future of the console given that many gamers are opting to wait until the price drops and that some marketing campaigns on YouTube appear to be back-firing.

Will the enterprise business keep driving growth? After the CEO question, this may be the most important for Microsoft’s future. Despite the money Microsoft pours into advertising the Xbox, Windows 8 and its Bing search engine, the company has been morphing into an enterprise software company.

Last quarter, Microsoft’s commercial revenue grew 10% to $11 billion, dwarfing both the consumer segment’s $7.5 billion revenue and its 4% growth rate. Microsoft’s early place on this season’s earnings calendar will make its comments on IT spending closely watched.

Increasingly, Microsoft’s revenue is coming from the cloud, making this a particular area of investor focus in the earnings report. With its Azure cloud platform, Microsoft has been taking on Amazon, Google, VMWare and others in cloud services. Last quarter, thanks largely to Azure and Office365, cloud revenue more than doubled.

A quarter ago, after Microsoft reported earnings that were stronger than expected in most of its business segments, the stock rallied 16% to reach a 13-year high of $38.98. But there were concerns that Microsoft is growing in markets, like mobile devices, that will weigh down margins. That worry, and the uncertainty over future leadership, have brought the stock back down to $36.17 at Tuesday’s close.

All that leaves Microsoft with a lot to talk about. The company is active in several key areas and nearly all of them—PC software, mobile, game consoles, cloud software—are in a state of transition.

3 comments
cbanswer22
cbanswer22

I am curious what the author thinks now that it has been revealed that the "splainin" consisted of record earnings beyond any expectation.

tiger-ye
tiger-ye

spending 7.2 billion dollar on Nokia's deal ,it is a big bargain