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.