It is not that long ago that The Justice Department suggested that Microsoft (MSFT) was so powerful that it needed to be broken into pieces. In 2000, Justice hired famous banker Bob Greenhill to do the analysis. The antitrust case faltered, and nothing was done.
Steve Ballmer has probably figured out that Wall St. hates his company. The headlines say that he is no Bill Gates. He has done nothing to make his company special again. It is a big software operation which will eventually be brought down by Google (GOOG) and open source junk like Linux.
Ballmer wanted to make his internet operation bigger, but the Yahoo! (YHOO) deal never got off the ground. He is probably happy. Yahoo!’s earnings proved that it is one the way to the file marked “dead meat”.
What was extremely clear from Microsoft’s earnings yesterday is the company is not one firm but two. Going into a recession and stock market downturn, that is not going to help the share price. The company has already put up a huge stock buyback. That lifted the shares for one day.
Leaving aside the fact that Microsoft’s guidance was OK, the division between it device and online businesses and software operations was as pronounced as it ever has been.
The performance of the business software, server products, and operating system parts of the company was extraordinary. All three posted significant improvements in revenue. In some cases, operating profits in these businesses rose in double digits
At the company’s online operation, revenue rose $100 million to $770 million, but the operating loss was up to $480 million. With a recession in advertising well under way and Microsoft’s piece of the critical search business well below 10%, there is absolutely no way this business can recover. Ever.
In the part of Microsoft called “devices”, mostly is Xbox and failed Zune product, revenue actually dropped slightly to $1.8 billion. Operating income was flat at $180 million. In other words, discounting is bring down sales and the device business has a 10% operating margin compared to the firm’s software operations which, in some cases, have margins of over 60%.
If Ballmer wants to have any legacy, the answer is right in front of him.
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Douglas A. McIntyre
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