Wait a minute honey, I'm gonna add it up
-- "Add It Up" (The Violent Femmes)
Following Friday's surprising revelation that
) CEO Steve Ballmer would be stepping down within 12 months, it's
time to take a fresh look at exactly where this company is.
So we're stepping in with a mountain of numbers to assess
Microsoft's position in a rapidly-changing world marked by
growing domination of inexpensive mobile devices and Internet
If you came to see every number you need to know about Microsoft,
you're in the right place.
Let's get down.
Microsoft has aggressively pushed into the mobile operating
system and devices businesses.
As of the second quarter of 2013, the company's mobile operating
systems held 3.3% of the global market for smartphones, according
to Gartner. That's miniscule compared to
) Android and
) iOS, which held 79% and 14.2% of the market, respectively:
Microsoft-powered smartphones are actually the fastest growing in
the market. At 83% year-over-year unit growth, they are slightly
outpacing Android's 80% mark.
However, given that they are coming off such a small base (just
2.6% of the market the year before), should they be growing even
On the tablet side, Microsoft's market share is also creeping up.
As with smartphones, Android is in the lead, with Apple in second
and Microsoft in third place. Note that I have combined Windows
and Windows RT for the purposes of this comparison:
As with smartphones, Microsoft is seeing high unit growth (527%
year-over-year vs. 59.6% of the industry), but its market share
is still very small at 4.5%, according to IDC.
And obviously, the recent
$900 million write-down on the Surface RT
indicates that this is not yet a healthy business for Microsoft.
For the second quarter of 2013, Gartner said global PC unit sales
fell by 10.9%, marking a record fifth straight quarter of
declining shipments. .
Gartner blamed inexpensive tablets for replacing low-end PCs,
particularly in emerging markets.
Note that Microsoft's Windows division accounts for a whopping
25% of revenues:
The Windows division is also a major driver of operating income:
As you can see, for all the attention newer products like Bing
and the Xbox gaming consoles get, virtually all of Microsoft's
profits come from legacy lines like Business (90% of which is
Microsoft Office) and Windows.
Now let's take a look at revenue growth by segment:
Windows grew by 5% last year, which seems weird given the
collapse of the PC market. Note two things, though:
The Windows division includes the Surface tablet, which could
have easily accounted for the 5% growth, which in dollar terms
was $839 million. So that 5% growth number overstates the true
momentum of Windows, which incidentally, was down 5% last
Furthermore, the Surface unit was a major drag on profitability,
courtesy of the $900 million write-down and its manufacturing
And since we're on the profitability front, we must take a look
at two widely-discussed drags on the company's P&L -- the
Online Services Division and R&D Spending.
In fiscal 2013, OSD, which includes the Bing search business and
MSN, generated $3.2 billion in revenue, up 12% year-over-year.
That made it the fastest growing Microsoft business unit.
However, it posted a whopping $1.3 billion operating loss.
The year before, the division actually lost $8.1 billion,
including a $6.2 billion noncash write-down of its 2007
acquisition of aQuantive.
However, while OSD isn't a profitability powerhouse like
standalone Internet companies such as Google and
), the drag isn't particularly large -- about 4% in terms of net
income, or $0.09 per diluted share for fiscal 2013.
That may actually not be a bad deal if Microsoft gains strategic
benefits, like data collection.
On to R&D. Microsoft is often criticized for overspending
here, primarily because of a somewhat unfair comparison to the
For the past three years, Microsoft has spent 13% of revenues on
Research and Development, breaking the $10 billion mark last
By comparison, in the first three quarters of its current fiscal
year, Apple has spent a relatively paltry 2.5% of revenues on
R&D. The year before, that number was just 2.2%.
Google actually spends just a bit more than Microsoft. In the
first half of the current year, Google has spent 13.6% of its
revenues on R&D, which is in line with its practices over the
past three years.
) spends about 13% of revenues on R&D, while
(IBM) is at about 7%
On the high-growth front, cloud pioneer
(CRM) is at 14%, and Facebook drops a whopping 19%.
Therefore, while I'm sure Microsoft's R&D spending can be
made more efficient by eliminating some wasteful projects, there
may not be a huge actual difference in bottom-line profitability.
If Microsoft cut $2 billion in annual R&D spending, it would
increase EPS by $0.17, or 6.2%. It's not easy to say whether this
modest increase in earnings would be worth the potential risks,
like not being able to enter emerging software markets. For
example, Microsoft has poured a mountain of money into its Azure
cloud platform, without which it may be giving away a lot of
business to the likes of
(AMZN) and Google.
The Xbox line of gaming consoles is often lauded as a key
Microsoft success within consumer products, having gained a
seriously passionate fan base and playing a major role in
(SNE) perch atop the gaming business.
The original Xbox sold about 24 million units, which pales in
comparison to sales of the Sony PlayStation 2, which sold over
155 million units. However, the Xbox 360 turned the tables,
moving 78 million units to the PS3's 75 million.
That's a big catch-up, and with
(OTCMKTS:NTDOY) Wii U not yet looking like it's going to make an
impact, Microsoft is heading for a one-on-one battle with Sony.
The Xbox 360 caught Sony flat-footed by launching early with a
That's not the case this time. News reports indicate each
company's next console will launch around the same time in
November, with Sony's PS4 carrying a $100 lower price tag.
Clearly, the playing field is more level, and in fact somewhat
tilted toward Sony.
Additionally, remember that the Entertainment and Devices
Division, within which the Xbox business lives, has never been a
major profit driver for Microsoft. It lost money up until 2008,
and its best year was 2011, when it contributed 4.6% of operating
Both Microsoft and Sony are likely to gain market share from
Nintendo, but it's not clear what that means for the bottom line.
Adding It Up
The numbers bear out the following: Microsoft's Windows Business
is coming under pressure courtesy of the slowdown in traditional
PCs as tablets and smartphones take over -- markets in which it
has minimal share.
The Office business is solid on the enterprise side, but consumer
sales are waning courtesy of the PC slowdown.
And in terms of the potentially emerging markets, losses in
Online Services more than wipe out profits from the Xbox and
other Entertainment business lines.
This isn't a pretty picture.
However, that's not to say that Microsoft is completely down and
out. Even with the challenges the core PC market is facing,
Microsoft is an enormously profitable company, and its enterprise
businesses like Server and Tools are performing fairly well.
Plus, while we may actually be getting to the point where calls
for the death of the PC are coming true, Microsoft is nothing if
not a survivor.
And it is fighting back, moving toward a subscription model for
its software, as well as investing aggressively in cloud
There's also the possibility that Microsoft goes on an IBM- or
Oracle-like acquisition spree to beef up recurring revenues.
So while things look dark for Redmond, it's still in the game.
Do you have a thought? Let us know in the comment section below.