Seriously I have no idea if Microsoft will come in below, at, or above expectations. It’s pretty clear that Windows 8 hasn’t done something “magical” to earnings, but that doesn’t mean the Windows and Windows Live Division’s revenue won’t be relatively healthy. So, just a few observations on Microsoft’s various business segments.
Let’s start with STB. For over a decade STB has usually been the star of the show as it’s revenue grew from being a distant third to about equal to Microsoft’s other two big divisions. It’s less profitable than either Windows or MBD (nee, Office), but quite healthy. And it likely did well this last quarter. SQL Server 2012 is hitting its stride. The reaction to Windows Server 2012 is almost the exact opposite of Windows 8, with WS2012 getting near universal praise. The stream of announcements around great new Azure capabilities has been dizzying, and I keep hearing that it’s finally hit its stride on the business front as well. So I expect STB results will be good.
Entertainment and Devices is now a rather confusing business segment because it doesn’t correspond to an organization. But we know that XBox spent last quarter in the number one position in the gaming console market, despite Nintendo having a next generation console on the market. Since R&D expenses are high, with work on the next generation console (and a more narrowly focused home entertainment device) around their peak, and no growth in the market for current consoles, one can’t expect much from this business. Except for no negative surprises.
Windows Phone rolls up into E&D, but is still financially immaterial. What will start to be confirmed is that WP is beginning to turn away from being a significant financial drain to something more neutral. We know handset sales are way up. And Nokia just confirmed that their royalty payments to Microsoft now exceeds the support payments that Microsoft was kicking back. Again, probably not yet material to Microsoft’s bottom line but a very good trend. And it likely means that overall E&D will come in around expectations.
Microsoft Business Division is likely to be weak, but no weaker than expected. The weakness comes from Office 2013 and the corresponding version of Office 365 not yet being in the market last quarter.
Online Services Division will be interesting to see, particularly given my post last week about its losses and strategy. If I’m right then we should continue to see expenses drop in year over year comparisons. So the only question is how fast did revenue grow. I don’t have a clue. While differences in growth rates (in either direction) won’t have a material impact on overall earnings per share, OSD’s performance will be closely watches as a bellweather of how Microsoft is doing.
With all other businesses probably reporting in line with expectations, or not so out of line that the impact is material, that leaves Windows and Windows Live Division as the wildcard. My guess is that with information that has already been disclosed, such as Windows 8 ramp being in line with Windows 7’s ramp, that the division’s performance will also be in line with Microsoft’s previous guidance. So financially it won’t be much below or above expectations. But this is the business where analysts and investors will focus their attention, hanging on every word as they try to predict Microsoft’s future.
Everyone wants to know how many Surfaces were sold, but Microsoft will not disclose this. Surface sales are not yet material to the business so Microsoft won’t be under any obligation to report details. When and how they start reporting on details of the hardware business is something we’ll have to wait a few quarters to really find out.
My own bottom line on today’s announcement is that Microsoft is likely to report numbers in line with their previous guidance, and give us little real news. Expect much Microsoft-bashing in the press as a result.
Surface may not yet be material to the financial results, but it should become material in this current. Just 1 million Surface RT sales would generate about $500 million in extra revenue (plus covers, minus wholesale discount = a wash). This is already a 3% boost to quarterly revenue — and it doesn’t even include the higher-priced Surface Pro.
The Nokia situation is more puzzling. Microsoft’s quarterly platform payment is $250 MM. At $25 per license, Nokia would have to sell 10 million phones to get into a situation where it’s paying more to Microsoft than it’s taking in. But Nokia sold only 4.4 million Lumias in Q4 2012. Either: (1) the platform payments are decreasing over time (2) Nokia is hitting the minimum sales commitment. Either way, Microsoft is doing pretty well out of the deal.
MS’s payments to Nokia are fixed over the term of the initial agreement ($250MM/Q) I think the answer to your puzzle is that Nokia is hitting the “minimum annual software royalty commitment”, which likely ramps over the term. The deal was apparently structured so that MS’s payments would only slightly exceed Nokia’s minimum royalty obligation by agreement’s end. Since MS’s payments have greatly exceeded that so far, there has to be a reversal in order to end up correctly. That further suggests that Nokia’s minimum royalty commitment ramps each year. I don’t think that means MS’s is doing pretty well out of the deal. I’m sure both parties hoped to be much further ahead at this time and that unit royalties due far exceeded any minimum guarantee. But yes, it’s minimizes the financial hit to MS in the absence of that hoped for success.
Thanks for article. I think Windows 8sales might be in line with 7″but at much lower price. Hence revenue shouldn’t be great for 8 but 7 is still healthy whereas when they launched 7 Vista was very weak. All in all i think that 7+8>Vista+7
and i hope it is healthy
Not a lower price at all, at least for new systems.
Well, WIndows revenue looked pretty healthy. Everything else was as I’d predicted, except Xbox being soft. I think the general slowdown in the gaming console market combined with the Xbox 360 being near the end of its life showed up in these results, but not in a way that was really harmful to the bottom line. If we really are seeing a next-generation Xbox this year then it is going to cause a huge bump in 2013 holiday sales. So for now Xbox is basically in a holding pattern, with explosive growth to return later.
You were pretty much bang on!