Stan Beer
Saturday, 29 April 2006 18:10
Opinion and Analysis
Page 1 of 2
The announcement yesterday that sent Microsoft shares sliding by 11% is an indication that the company no longer has confidence in its current business model to generate the sort of growth shareholders have come to expect. What's more, neither does the market.
A plan to increase spending on services, including advertising funded
web services, and a frantic push to get its loss making Xbox 360
consoles into the hands of consumers, comes in a year when Microsoft is
about to launch new versions of its core money-spinning software
products Windows and Office. This appears to indicate that the company
no longer has confidence that sales of either Vista or Office 2007
will generate the sort of growth that the company has been able to
achieve in past years.
In a conference call on Thursday, CFO Chris Liddell outlined plans to
spend $2 billion more on fast growth area investments, sacrificing
earnings growth in the short term for a hoped for long term pay-off. As
a result, Microsoft's earnings guidance for 2007 of $1.36 to $1.41 per
share came in well below the market's expectation of around $1.53 as
previously proposed by analysts.
Microsoft has forecast revenue for 2007 of $49.5 billion to $50.5
billion, which would be a return to double digit revenue growth after a
meagre 8% growth in 2005. However, most of the revenue growth for the
first three quarters of 2006 has been from the unprofitable Home
Entertainment and Business Solutions segments, as well as the
profitable Windows Server segment.
Meanwhile revenue and earnings growth in by far the two largest and
most profitable business segments Client (which includes Windows) and
Information Worker (which includes Office) have been meagre. For the
first three quarters of 2006, Client revenue grew by a modest 7.6%,
while Information Worker growth was a flat 4.8%. Earnings growth was
even less impressive with Client operating earnings for the nine months
growing a mere 5.8%, while Information Worker earnings practically
stalled with just a 2% increase.
Together Information Worker and Client (that is Windows and Office)
comprise the lion's share of profits for Microsoft and more than half
of its revenues, the only other significant contributor being the
Server and Tools segment. The segments containing Windows and Office
have contributed revenues of $18.456 billion or nearly 57% of
Microsoft's total top line in the first three quarters.
The two major product groups dominate the bottom line even more,
contributing $13.854 billion of operating earnings for the nine months,
which was higher than Microsoft's total operating earnings of $12.951
billion.Other than the Server and Tools segment, which contributed
operating earnings of $3.074 billion, and MSN, which is declining
rapidly, the bottom line was dragged down by losses or miniscule
earnings in other areas such as the Home Entertainment segment (largely
Xbox 360), Business Solutions, and Mobile and Embedded Devices.
